Published since 1946
Evolving Business Models and an Antiquated Excise Tax Collection Model - Part 2
Today’s business model for manufacturing and distributing fishing and archery equipment is much more complex than the traditional business models that were in place when the excise taxes on hunting and angling equipment were first imposed (1930s for hunting, 1950s for angling). Because of changes to the business model, there are increasing “leakages” in the American System of Conservation Funding that are undermining the revenue potential for conservation. The first story of this two-part series looked at where these changes in the outdoor industry are occurring and how it is impacting excise tax collections. This second part will focus on the specific point of leakage and potential solutions.
In the first part, we talked about how the evolving business models are resulting in growing leakages in the excise tax collections. The majority of this leakage stems from foreign manufacturing and the technological advances in internet connectivity. Foreign manufacturing has resulted in less expensive equipment in the market and internet connectivity has resulted in a much easier and effective way for consumers to shop for and purchase their hunting and fishing equipment. Consumers are connecting directly to manufacturers and distributors (including foreign-based companies) and having their hunting and angling products shipped directly to their door. Alternatively, large internet marketplace providers (i.e. Amazon, Walmart, eBay & Alibaba) have found a business niche where they connect these foreign-based businesses and the consumer, making shopping and purchasing easy for the consumer. These 21st century business models have created a pathway for foreign manufacturers of taxable hunting and fishing equipment to avoid paying the required excise tax by selling directly to the consumer.
So, what’s the harm? At first glance, it appears that this new business model makes it easier and cheaper for hunters and anglers to purchase the equipment needed to pursue their passion in the field or on the water. What can possibly be wrong with that? The immediate losers in this breakdown of the excise tax collection model are the U.S. based hunting and angling industries who are trying to compete within the bounds of U.S. tax law. The second loser is the state fish and wildlife agencies who depend on the excise tax to support their efforts to provide abundant fish and wildlife and easy public access for hunting and fishing. The ultimate loser will be hunters and anglers here in the U.S.
U.S. based industries who support conservation by complying with the excise tax rules are being put at a distinct competitive disadvantage. Their foreign-based competitors are using the antiquated excise tax collection model to gain a 10% or 11% pricing advantage. In a market where the profit margins are around 5%, this disadvantage is intolerable and U.S.-based hunting and fishing companies are either closing their doors or moving overseas. Those that make the business decision to stay in the U.S. have a legitimate complaint about a tax code that reduces their ability to compete on world markets and are beginning to make their frustration known to those that write these laws – who can blame them?
State fish and wildlife agencies are losing because what started out a few years ago being just a minor leakage in their revenue stream, is now turning into significant losses. This directly impacts their ability to manage fish and wildlife resources and provide easy public access for hunters and anglers to get outside. This loss of support for state fish and wildlife agencies will ultimately impact hunters and anglers through reduced resource management and reduced access to pursue their passion.
To analyze possible solutions requires us to first look at the root of the problem. The business models of the last decade have resulted in situations where there is no U.S.-based business entity that can be easily identified by the collection agency (in this case - the Internal Revenue Service) as the responsible taxpayer. Consequently, that responsibility falls on the U.S. based hunter or angler that puts the taxable product to use here in the U.S. While we all know that the consumer has always payed the tax through the purchase price, hunters and anglers have never been the one responsible for writing the check to the IRS. That responsibility has always rested with either the U.S.-based manufacturer or importer. Unfortunately, this shifting of responsibility for paying the excise tax to the consumer is at the center of the problem with the American System of Conservation Funding. The excise tax collection model was built around putting the responsibility for paying the tax onto business entities that handle large amounts of taxable product, not the end user of the product that may be purchasing only one taxable product. It is simply not realistic to think that the IRS would track down consumers who may owe a few dollars in excise taxes.
Any solution will require some major revisions in the excise tax collection model – rather than the band-aids that have been used in the past. The solution must ensure that the responsibility for writing the check for the excise tax is directed away from the end user.
There are a number of options currently under consideration. One option focuses directly on the large internet marketplace providers and follows the track of state sales tax collections and payments. This solution would require treating these business entities as if they were “importers” within the current excise tax collection process. Specifically, those business entities would collect the taxes and make the quarterly payments to the IRS – similar to how they collect state sales taxes and make payments to the appropriate state revenue department. While this “sales tax like” solution would seal a significant point of leakage in the excise tax collection model, there still is the option for a consumer to connect directly to a foreign manufacturer and have their hunting and angling equipment shipped directly.
Another option would be to engage U.S. Customs and Border Protection (Customs) to intercept taxable hunting and angling equipment as the products are coming into the U.S. Currently, Customs identifies fishing and archery equipment entering the U.S. (through their Harmonized Tariff Schedule). However, Customs’ business is tariffs and they currently lack the authority to either collect the excise tax or to ensure that the excise tax has been paid. A change in the process for collecting the tax which would place responsibility on Customs to prevent foreign fishing and archery equipment from entering the U.S. without documentation of payment of the excise tax would eliminate the potential for taxable product entering the U.S. without paying the tax.
Implementing either of these solutions, or one that has yet to be identified, will be a heavy lift. Changes in tax law or tax code is never easy. The good news is that two of the three impacted parties are aware and engaged in identifying and implementing a solution. U.S.-based archery and fishing industries that are paying the excise tax see a solution as necessary for their existence in their very competitive industries. Similarly, the state fish and wildlife agencies are feeling the impact of the leakage in their most dependable funding source and are having to make some tough resource management decisions because of the lost revenue. Unfortunately, U.S.-based hunters and anglers are not as aware of the impact that this 21st century business model is having on the American System of Conservation Funding.