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EironBreaker

FET - constructive sale price

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Awhile back we had the discussion about the Federal Excise Tax and how it should be applied to sales.  Based on my first and only face to face discussion with an IRS field agent who came to my workshop to look over my lure making process, she said FET was based on my sales price.  Ok, I took that to mean my retail price and for many years I have been paying quarterly FET based on that information.  I guess Uncle Sam got more out of me then I should have been paying.

Recently someone here on TU brought up only paying FET on the wholesale price even though they sell directly retail.  I questioned it based on what I knew at that time.  Well I know more now and I have been wrong with what I was doing.  At least it was overpaying, I'm sure if the IRS found me to be underpaying, they would have knocked on the door years ago.

I hit my sister up to find out what I should be paying.  Yes, she is my sister but she is also a CPA with a MBA and about 25 years of experience in the field of accounting and taxes.  She did some digging and found the IRS information needed to know how to pay the FET.  For manufactures who sell direct retail, the FET on those sales should be based on the constructive sale price and that is 60% of your retail price.  Below is what she emailed me with links to pertinent IRS  information:

 

IRS Field directive, see “Determination of Sales Price”

 
Here is the tax code document regarding constructive sales price determination:
 
 
It has a modification at IRS Rev Ruling 81-226 to indicate that 60% is what to use when not regularly selling at wholesale.  
 
“Revenue Ruling 81-226, 1981-2 C.B. 213, modifying Revenue Ruling 80-273, 1980-2 C.B. 350, provides that the constructive sale price for computing the manufacturers excise tax imposed by § 4161(a), when the articles are sold at retail by manufacturers who do not sell like articles to wholesale distributors, is 60 percent of the actual selling price.”
 
 
So now I know and don't plan to send in more FET then I'm supposed to in the future.  I hope this was helpful to others on here who submit their FET to the IRS.
 
Matt Eisenbacher
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Good info:yes:

I'm with you, don't want to pay any more than I have to but maybe  it was for a good cause. the way I understand it all the FET collected goes back to the states at a formula based on how many fishing licenses sold.

Here is where some of the money went in Missouri for a fish hatchery.

https://www.fws.gov/fieldnotes/regmap.cfm?arskey=10370

another place says they  "producing nearly 15 million fish per year."

the way I understand it, they provide/sell fish to other surrounding states also.

so this helps promote fishing.

 

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lol, well they didn't get millions from me by any means!  I know where it goes so a little extra didn't hurt anything.

My sister said that there must be some poor lobbyists in DC as she compared what entities have to pay FET and why lure/arrow etc. manufactures fell into this.  I explained that most of what we put in comes back to the states for wildlife management and I was good with that.  I like to have outdoor opportunities and no rivers that catch on fire from pollution.

Edited by EironBreaker

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Glad that you found the information needed to make everyone feel secure about paying the way I do. You guys almost had me wondering if I was doing it right. 

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Hey guys, another new guy here!

Sorry to drag up an old post but I came across it while googling the FET tax. Is this tax stacked on top of whatever local sales tax that we have? So, if we have a FET of %10 and we also have a local sales tax of %8.25, they stack, right?

It's just going to get rolled into the cost of the product but I'm just trying to wrap my head around it all before we get off the ground.

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On 10/3/2018 at 11:23 AM, s1rGr1nG0 said:

Hey guys, another new guy here!

Sorry to drag up an old post but I came across it while googling the FET tax. Is this tax stacked on top of whatever local sales tax that we have? So, if we have a FET of %10 and we also have a local sales tax of %8.25, they stack, right?

It's just going to get rolled into the cost of the product but I'm just trying to wrap my head around it all before we get off the ground.

 

You pay the FET to the Feds.  You pay sales tax to the local/state taxing authority.  The sales tax is figured AFTER the FET is rolled into the price.

 

On a side note, let's say you build 100 lures and donate them to a fishing club as a prize or auction item.  You still have to pay the FET on those lures, but in most states you wouldn't have to pay the sales tax since no "sale" has taken place.

Make sure you keep detailed records on EVERY lure you make.  If the Feds decide to audit and you've purchased 10k hooks, have 1k on hand but have only paid FET on 5k lures you're going to have a problem.

Edited by LimpNoodle

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Do yourself a favor and talk to an accountant who specializes in small businesses, to get the info you really need, before you start.  Even if you wind up having to pay them for their time (that's fair), you will save yourself a lot of headaches, and go into business with your eyes open, so there are no nasty surprises.  If you let them know you are going to need an accountant, they may give you a price break if you agree to use them if and when you do go into business.

Edited by mark poulson

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4 hours ago, smallmouthaholic said:

Many accountants and even CPA's are unaware of the FET on fishing lures

Good point.

It is important to know which questions to ask.

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FET related question. 

I outsource 100% of the manufacturing and packaging of my jigs to a reputable firm that charges me 10%. FET and it is his firm’s responsibility to pay that tax quarterly.  

I sell wholesale only. No web sales, no retail sales.  Strictly to brick & mortar tackle shops.  I am confident, based on reading the IRS guidelines that I don’t owe any FET, as it is clearly due on the first sale of the item - manufacturer to wholesaler, and must be paid by that seller.  

Q: Do I need proof of FET payment from vendor? Is a return required of me that shows that proof?

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This from the IRS Guide

Who is Liable for the Federal Excise Tax (FET)?

IRC 4161 imposes an excise tax on the sale of sport fishing equipment, bows, archery equipment and arrow shafts (exception for certain wooden arrows designed for children effective October 4, 2008).  This tax is imposed on the manufacturers (a term which includes producers and importers) of these products.  In order to determine the proper taxpayer we must understand how the code defines these terms.

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.

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20 hours ago, Painter1 said:

FET related question. 

I outsource 100% of the manufacturing and packaging of my jigs to a reputable firm that charges me 10%. FET and it is his firm’s responsibility to pay that tax quarterly.  

I sell wholesale only. No web sales, no retail sales.  Strictly to brick & mortar tackle shops.  I am confident, based on reading the IRS guidelines that I don’t owe any FET, as it is clearly due on the first sale of the item - manufacturer to wholesaler, and must be paid by that seller.  

Q: Do I need proof of FET payment from vendor? Is a return required of me that shows that proof?

 

I think you may have a problem.

 

If I buy all my parts from Hagen's and pay the extra 10% FET to them I still owe the 10% FET for the difference in price for the finished lure.

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I did talk to an ex- IRS agent, now in privatepractice, today and I’m good.  She took a lot of information, and came back with the news I hoped for and reinforced my understanding.  FET is being paid by the company making the jigs in Arkansas based on the price they charge me. 

 If I bought parts, assembled and or fabricated the product FET would be due based on actual “arms-length” price, but someone else is doing that and it does not require a regular filing on my part.   If i did that and sold them to the end user I would also owe Sales or Use Tax to either the state it is sold in or the state shipped to.  But I sell only wholesale so only need deal with income taxes, Fed & State. 

i’m paying to have that put in writing. 

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On 10/8/2018 at 8:13 PM, m.t.pockets said:

This is true but, but i believe you can deduct the amount you paid as a business expense at the end of the year when you file your Federal Income tax

That is incorrect. And also against the law. I would suggest you talk to your field agent. If you don't give a exemption to a vendor they are required to charge excise and you cannot by law deduct that excise if you pay it. 

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