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Painter1

Excise Tax Issue

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First, let me say, in descending order, the 3 things I am most afraid of and therefore strive always to stay on the good side of are;

1) My Wife

2) The IRS

3] Electricity

Jig Detail & Question

I spent several years working on a jig, for a specific purpose, on a specific lake and had multiple guides and tournament folks work with it, helping me “tune” it along the way.  Finally convinced  it is marketable in  that geographic area I have committed to getting the jigs on  tackle store shelves very soon. 

A  deal was reached with a domestic manufacturer who will produce, package and direct ship the jigs to stores.  I have  gotten the graphics, packaging cards, and UPC labels taken care of.  The manufacturer is paying the excise tax (and providing me documentation of same) built into the price I’m paying.   They are making 5K of these jigs (the minimum) and 3,500 are pre-sold, so I think we are on the right road. 

With respect the jigs and excise taxes it my understanding that I only need file an annual return that documents the payment of the taxes by the manufacturer.  

Q1) Do you have any different understanding or experience in that regard? 

 

Plastic Bait Detail

I also plan to self-manufacture a small amount of soft plastic baits and test market them in the same stores, under a different brand name.  I understand that I will need to pay and file all excise taxes on these products.  I am  currently at a crossroads regarding a decision to make the plastic company a separate LLC, strictly to avoid any confusion over the excise taxes between the jig brand and the plastics brand.  I could leave everything in one company, with separate brands, or have each brand stand alone as an LLC. 

Income taxes are not a troubling issue as everything will be consolidated on a single personal return. We have no annual fees for LLC’s in my State and I’m proficient at the process. 

I don’t know if the plastics brand will be a success, as I have not done the R&D that I did with the jig.  This argues for the simplicity of a stand alone company for plastics.  If it fails, a notice of dissolution to the State and final returns to taxing authorities shuts it down.  

Q2) Do you have any experience or thoughts on this? 

Your assistance and thoughts are most welcome and appreciated. 

Respectfully,

M. Knight

Edited by Painter1
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I'd say you are on the right track.  Producer of the jig pays ET.  You show that you bought finished product from them with receipt you will be good to go.

I'd keep the two brands separated until you know you if you will continue selling because there is a demand for the plastics.  Seems easiest to close it down if it doesn't turn out the way you wanted it to.  Just my opinion though.

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I believe you are ok but I'd still consult a CPA or lawyer just to make sure. The reason you should be fine is because you aren't manufacturing them, most of the talk you hear about taxes has to do with us tackle makers buying our material and then making and selling our product. In your case you aren't doing anything other than supplying the design and the manufacturer is doing you a big service.  As for the plastics, well since you are self manufacturing and I assume you are buying your materials wholesale without the excise tax already applied, you will most likely need to file a quarterly report.  I may be wrong but if I were you I'd have both products under one LLC and then file your quarterly and you should be ok, separating them just creates another set of paperwork but this is purely speculation as I'm not familiar with creating 2 distinct brands.

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Call the IRS.  It took me a while to get through to somebody who could help, but then they were very helpful.  A few investigative field agents may want to make that big score, but the people in the office just want to get paid.  The best way to get paid for them is to make sure you know how to do your part.  Like I said they were very helpful. 

Big scores might make a field agents career, but the vast bulk of revenue is self reported and voluntarily paid by people who just want to stay on the good side of the law.  

Edited by CNC Molds N Stuff
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Your manufacture cant pay the FET Tax for you because you have a custom mold build by them. You can check with the IRS but i have ran across this several times. You will have to pay this quarterly.

Caster

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55 minutes ago, caster said:

Your manufacture cant pay the FET Tax for you because you have a custom mold build by them. You can check with the IRS but i have ran across this several times. You will have to pay this quarterly.

Caster

 

I think you misunderstood what he posted. The manufacturer is making, packaging, and distributing to stores direct so yes, they can pay the FET tax since they are basically doing everything.  My guess would be that it is working as a licensing deal in that they use his brand name and design and for that he gets a share of profit.

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Maybe I'm wrong about how I see the issue of FET and who pays in the OP's first question.  I guess a call to the IRS would give you the final answer.

Who owns the mold is immaterial.  I just talked to a company that would own the mold technically but because of agreement, wouldn't make said lure for any other company.  Proprietary.  The mold is a piece of equipment to make a product.  The FET applies to the finished product and the process of turning materials into a final product is what makes it taxable.  This is from the IRS website:

Manufacturer:

Regulation Section 48.0-2(a)(4)(i) defines a “manufacturer” to include any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles.  The term also includes a “producer” and an “importer.”

Regulation Section 48.0-2(a)(4)(ii) states that under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person who actually manufactures or produces it, will be considered the manufacturer.

I think the second paragraph is what Caster is talking about.  How I read the second paragraph is the person (like the OP) would have to provide the company making the jig all of the "raw" materials to produce the finished product and keep title to the finished product.  Then the production company is only providing the labor to make the jig.   Which isn't taxable because labor isn't a finished product.  Furnishing materials should be key.   If the OP owns the mold but doesn't provide the raw materials for the finished jigs, that seems to be a gray area.  But I guess that is open to interpretation by the IRS. 

So there you go, could be/could not be.  Call a local IRS agent and find out.

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Just one warning.  A phone call to the IRS is useful, but not legally binding.  If they give you wrong information, it is still your fault.  

In other words, get it right, by getting it in writing.  

If you have an accountant, ask the question of them, and "get it in writing".  

Don't you just LOVE the IRS?

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Just trying to keep you out of trouble and yes it matters who owns the mold for the FET Tax. I have been fined for this issue, If who ever owns the mold and the Manufacture can not make it for any other customer then the person or company that owns the mold is responsible for the FET.  All you have to do to confirm this is call The IRS they have agents that will answer your questions.

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CPa tell me that as long as the FET is paid from producer of the baits the IRS are happy.  This is reinforced by the years-long practice of this large manufacturer who provides me a quarterly statement of FET paid on our baits.

He says the mold ownership is a whole direct set of circumstances and essentially moot for us because they can’t be used except on/in their proprietary system .  He showed me a letter that is quite clear about who the IRS wants payment from .  

if we fire them we will need to have new mold built

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