ATF Ruling 93-1

Manufacturers and importers of firearms, shells, and cartridges have asked several questions regarding the exclusion of insurance costs from the taxable sale price of these articles. These questions relate to the exclusion of that portion of the actual sales price attributable to product liability insurance purchased on the articles, the cost of unemployment, life, and health insurance for employees working in a warehouse preparing articles for shipment, and the cost of insurance against loss or damage of articles during shipment.

Section 4181 of the Internal Revenue Code imposes a tax upon the sale by the manufacturer, producer, or importer of firearms, shells, or cartridges. Section 4216(a) permits the taxpayer to exclude from the taxable sale price a transportation, delivery, insurance, installation, or other charge if the amount thereof is established to the satisfaction of the Secretary in accordance with regulations. Section 4216(a) also provides that there shall be included in the taxable sales price any charge incident to placing the article in condition packed ready for shipment.

The provisions of 27 CFR 53.92(b)(1) and (2) allow manufacturers and importers of firearms or ammunition to exclude certain charges from the sale price in computing the tax if actually incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale. Section 53.92(b)(1) provides, in part:

Such charges include all items of transportation, delivery, insurance, installation and similar expense incurred after shipment to a customer begins, in response to the customer's order, pursuant to a bona fide sale. However, costs of such nature incurred by a manufacturer, producer, or importer in transporting, in the normal course of business and for its benefit and convenience, articles from a factory or port of entry to a warehouse or other facility (regardless of the location of such warehouse or facility) are not considered as being incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale, and charges therefor cannot be excluded from the sale price in computing tax liability.

Section 53.92(b)(3) also provides that expenses incurred in placing an article packed, ready for shipment on the loading dock at the manufacturer's factory, are not excludable transportation or delivery expenses.

Two rulings issued by the Internal Revenue Service (IRS) Rev. Rul. 68509, 1968-2 C.B. 508, and Rev. Rul. 68-673, 1968-2 C.B. 512, addressed several questions as to whether certain repackaging, transportation, delivery, and other charges are includable in the price for which an article is sold for purposes of the manufacturers excise tax. In response to question (6) of Rev. Rul. 68-509, it was held that:

The items of "transportation, delivery, insurance, installation, or other charge" as used in section 4216(a) of the Code belong to the same general class of deductions. The described items of transportation, delivery, insurance, and installation have relation to events occurring after the goods leave the factory or the warehouse for delivery to the customer in connection with a sale. Accordingly, amounts representing these expenses may be excluded from the sale price. They may not be excluded, however, when incurred by the manufacturer for his own use or benefit before the goods leave the factory or warehouse for delivery to the customer in connection with a sale. For example, the cost of insuring articles at the factory or warehouse is attributable to the manufacturer and should be reflected in the selling price.

Product Liability Insurance

Some manufacturers believe the cost of product liability insurance should be excludable under section 4216(a) since the insurance serves the purpose of protecting their customers from any claims which might be brought against them for incidents arising from the use of the manufacturer's products. These manufacturers allege that their customers will not purchase firearms from them unless product liability insurance is obtained on the products. Therefore, they argue that without incurring the insurance expense, delivery could not be accomplished and no "taxable event," i.e., sale, would take place. The manufacturers thus characterize the product liability expense as a "delivery" expense, since customers will not accept delivery of the firearms without evidence that the manufacturer has obtained such insurance.

Product liability insurance contracts insure the manufacturer or importer and any vendor in the chain of title against claims for damages for bodily injury or property damage resulting from the manufacturer's products or completed work which is caused by an accident. Intentional bodily injury or property damage that is expected or intended by the insured or any vendor is excluded from coverage. Also excluded from coverage are liability of the insured or any vendor for injury or damage assumed under any contract or agreement and any obligation the insured or any vendor has under workers' compensation, disability benefits, unemployment compensation law, or any similar law. Additionally, such insurance contracts provide that the insurance company will not cover bodily injury to an employee arising out of and in the course of his or her employment by the insured or any vendor.

As held in Rev. Rul. 68-509, "transportation, delivery, insurance, installation, or other charges" as used in section 4216(a) belong to the same general class of deductions and have relation to events occurring after the goods leave the factory or the warehouse for delivery to the customer in connection with a sale. However, as discussed above, product liability insurance is purchased by a manufacturer before the products leave the factory or warehouse for delivery to a customer in connection with a sale. The fact that customers will not accept delivery of firearms unless the manufacturer has obtained product liability insurance does not result in such expense being an excludable transportation or delivery expense within the meaning of section 4216(a). Vendors may require manufacturers to incur any number of expenses before they will purchase the manufacturer's goods and such expenses are not automatically "delivery" expenses merely because vendors will not accept delivery unless such expenses are incurred.

Product liability insurance is purchased for the benefit of the manufacturer and his vendors and is not a charge incurred in connection with the transportation or delivery of an article to a purchaser. Therefore, expenses incurred in purchasing product liability insurance are a cost of production or sale which cannot be excluded from the taxable sale price of firearms, shells, and cartridges.

Employment Related Insurance

Some manufacturers also believe that unemployment insurance, life insurance, and health insurance costs for employees who prepare the manufacturer's products for shipment to customers can be excluded from the taxable sales price of firearms and ammunition. Manufacturers who have taken exclusions for these insurance costs use a common carrier for delivery of their products to their customers.

Section 4216(a) and the regulations make a distinction between charges incident to placing a taxable article in condition packed ready for shipment, which are includable in the taxable sale price, and transportation, delivery, insurance, installation, or other charges, which are excludable from the taxable sale price. Insurance expenses incurred by an employer in employing warehouse workers who prepare the manufacturer's products for shipment to customers are includable in the sale price pursuant to section 4216(a). Since the workers are not involved in the actual delivery of the products to customers, such charges cannot be characterized as a transportation, delivery, or insurance expense. Rather, such expenses are charges incident to placing a taxable article packed, ready for shipment on the loading dock at the manufacturer's factory which may not be excluded from the sale price.

Insurance Against Loss or Damage In Transit

Manufacturers often incur charges for insurance against loss or damage occurring during transportation or delivery of the article to a customer after a bona fide sale. Such insurance charges are clearly related to transportation or delivery of a taxable article to a customer and may be excluded pursuant to section 4216(a) and 27 CFR 53.92(b).

Held: Charges incurred by a manufacturer for product liability insurance which insures the manufacturer and its vendors against claims for damages for bodily injury or property damage resulting from the manufacturer's products which is caused by an accident are not excludable from the taxable sale price pursuant to 26 U.S.C. 4216(a).

Held further: Charges incurred by a manufacturer for unemployment insurance, life insurance, and health insurance for warehouse employees who prepare the manufacturer's products for shipment to customers but do not actually deliver the products to customers are not excludable from the taxable sale price pursuant to 26 U.S.C. 4216(a).

Held further: Charges incurred by a manufacturer for insurance that insures taxable articles against loss or damage occurring during transportation or delivery of the article to a customer after a bona fide sale are excludable from the taxable sale price pursuant to 26 U.S.C. 4216(a).

26 U.S.C. 4216(a) and 27 CFR 53.93(b): Insurance Exclusions from Sale Price