For the Tackle Shop:
Either, the manufacturer pays the excise tax or you could be the one left holding the bag (this is also true for Charter Boats who buy ‘cut-rate lures’ directly from the manufacturer too). We had the owner of a mid-sized tackle shop come to us recently and asked if we knew anything about federal excise tax on fishing lure sales.
In fact, we know a great deal when it comes to Part II of IRS form 720. IRS No. 41. That form reads, in part, ‘Sport fishing equipment (other than fishing rods and fishing poles).’ Well, Sport fishing equipment other than fishing rods, is of course, right in our wheel-house. Quite literally it’s our business to know a lot about federal excise tax on fishing equipment generally, and on fishing lures in particular. Sport Fishing equipment also includes decoys (i.e. Salmon Flashers and Hardwater Pike setups)
As a tackle shop you are either doing business with wholesalers/manufacturers who file an annual IRS 720 (or otherwise pay excise taxes to their vendors), or you’re the one on the hook for doing business with suppliers who may be unintentionally (or intentionally) avoiding tax obligations. Not to put too fine a point on the topic; your supplier can either show you a chain of custody with taxes accounted for in their entirety, or, if they cannot show you this, it’s possible they have implicated their clients in the evasion of said taxes. If reading the words ‘tax evasion’ makes you feel uneasy, makes the hair stand up on the nap of your neck, well frankly, it should. It’s in no one's best interest to be implicated with unscrupulous activities such as this, irrespective of whether their involvement was intentional.
It is well known that the IRS employs over 70,000 full-time workers. That’s more than 5 times the number of people working for Wendy’s and almost double the number of people who work for Sam’s Club world-wide. For those of us who have been audited by the IRS, and who have emerged from said audit with flying colors, we know a couple things worth mentioning. It doesn’t take much to kick off an IRS audit. While most audits result from mathematical errors or failing to report income, the second and third most common reasons for an IRS audit are a.) owning your own business, and/or b.) being in an industry with additional tax obligations. Check and check.
If you’re like so many acquaintances of ours who own their own tackle shops this advice is for you. Regardless if you are online with ecommerce only, or brick and mortar, or more likely a blend of both, the bottom-line is this: If you’re unsure whether your Federal excise tax obligations are being paid before you take ownership of the merchandise, then you should ask. The buck stops with you. Stay informed, protect yourselves, your livelihood, your employees, and your legacy.
For the Lure Manufacturer:
- Path #1 involves filing IRS form 637. Should you choose this option (assuming your supplier is also registered) you would be able to make 'tax free' purchases from them. This is not a tax discount, this is you not paying excise tax to your supplier. What's important to know here is, you would then be responsible for 100% of the excise tax obligation when you sell your products (assuming all of your products are of course excise tax eligible).
- Path #2 involves continuing to pay your supplies the excise tax they are already charging you AND also paying the difference in excise tax when you sell the item. Let's say you pay $1 for a component of your lure. That dollar was 91 cents for the product and 9 cents (or 10% excise tax). When you sell your product for $6, you are now only obligated to cover the difference in tax that was not already paid.
- Lastly, how the math works: When you sell an item for $5, you do not pay 50 cents (10%) on the $5, you pay 45 cents. Here's why, when you sell an item for $5 the excise tax amount is already baked into the total of $5. What this means is, a $5 item you are required to pay the IRS 45 cents (payments are made quarterly). We run the risk of getting into the weeds here, but you need to reverse engineer the total amount so you're not over-paying, which is a mistake many people make when they're starting out. Here's the breakdown. A $5 item is $4.55. $4.55 plus the 10% excise tax of 45 cents = $5 ($4.55 x .1 = 45 cents).
A little more History:
FDR (Franklin Delano Roosevelt) signed into law the Federal Aid in Wildlife Restoration Act (aka Pittman-Robertson Act) in 1937. The Pittman-Robertson Act is credited for single-handedly saving many species from the brink of extinction, these include, white-tailed deer, wood duck, and the wild turkey to name a few. Tax monies collected are pooled federally and distributed annually to each state according to the number of licensed hunters.
Similar to the aforementioned wildlife act, the Dingell-Johnson Sport Fish Restoration Act of 1950 legally enforces tax revenues on boating and fishing alike. These revenues are then allocated to each state based on 1.) the number of licensed anglers, and 2.) area of water and land. Revenues must be spent on sport fishing and boating activities such as access to waterways, and fish stocking to name only a few initiatives. Of particular importance for those of us in the lure manufacturing trades, included in the list of taxable items is fishing tackle, most notably, lures and artificial baits.
I am not an attorney (nor do I play one on TV). This information is for demonstrative purposes only and should not be considered legal advice. Each situation is unique and should be considered on an individual basis.
This article has been updated (after receiving several inquiring emails) to reflect specific exams of applicable excise tax obligations.
Stay informed, stay Safe, stay Frosty,
Article written by Mike Hiller