DDTC Guidance On Registration By Manufacturers

Aug 10, 2016

As the government noose continues to tighten around our industry, it is crucial for all of our NASGW members to stay on top of all issues that impact our industry. We've recently seen aggressive changes proposed in states like Massachusetts and California which caused all of us to reevaluate our understanding of certain compliance laws. Most recently as noted in the NSSF article in this email, the State Department released its "guidance” regarding who is required under current law to register with the agency as a manufacturer of defense articles. NSSF is fighting this with the help of Rep. Collin Peterson (D-Minn.). NASGW stands with NSSF and recommends that you take action by Call your U.S. Representative at 202-225-3121 and U.S. Senators at 202-224-3121  and encourage them to support Rep. Collin Peterson’s Resolution, (H. Res. 829). Also, tell your U.S. Representative and Senators the DDTC must stop imposing registration fees on small businesses that do not export products.

In the meantime, here is some guidance from our friends at Orchid Advisors regarding registration by manufacturers. 

DDTC GUIDANCE ON REGISTRATION BY MANUFACTURERS 

By Orchid Advisors, The Firearm Industry’s Trusted Compliance and Operations Experts 

On July 22, 2016, the State Department’s Directorate of Defense Trade Controls (DDTC) issued policy guidance about whether certain activities related to firearms constitute manufacturing for ITAR purposes and require registration with DDTC and payment of the registration fee. DDTC stated that the guidance “is intended to aid firearms manufacturers and gunsmiths in making registration determinations” but a number of questions have arisen nonetheless. 

We address a number of those questions here. 

1. What are the new rules? 

Actually, there aren’t any new rules. Just a new statement by DDTC about the way they are interpreting the existing rule. The requirement for manufacturers, exporters and brokers to register is contained in ITAR §122.1: 

Any person who engages in the United States in the business of manufacturing or exporting or temporarily importing defense articles, or furnishing defense services, is required to register with the Directorate of Defense Trade Controls under §122.2. For the purpose of this subchapter, engaging in such a business requires only one occasion of manufacturing or exporting or temporarily importing a defense article or furnishing a defense service. A manufacturer who does not engage in exporting must nevertheless register. 

2. I buy AR rifles from suppliers, change the furniture and resell them. Am I a manufacturer? 

Maybe. The DDTC guidance says that the following activities are not “manufacturing:” 

  1. Occasional assembly of firearm parts and kits that do not require cutting, drilling, or machining; 
  2. Firearm repairs involving one-for-one drop-in replacement parts that do not require any cutting, drilling, or machining for installation; 
  3. Repairs involving replacement parts that do not improve the accuracy, caliber, or other aspects of firearm operation; 
  4. Hydrographic paint or Cerakote application or bluing treatments for a firearm; 
  5. Attachment of accessories to a completed firearm without drilling, cutting, or machining—such as attaching a scope, sling, or light to existing mounts or hooks, or attaching a flash suppressor, sound suppressor, muzzle brake, or similar item to a pre-threaded muzzle; 
  6. Cosmetic additions and alterations (including engraving) that do not improve the accuracy, caliber, or other aspects of firearm operation beyond its original capabilities; 
  7. Machining new dovetails or drilling and tapping new holes for the installation of sights which do not improve the accuracy or operation of the firearm beyond its original capabilities; and 
  8. Manual loading or reloading of ammunition of .50 caliber or smaller. 2 

Activities limited to the domestic sale or resale of firearms, the occasional assembly of firearms without drilling, cutting, or machining, and/or specific gunsmithing activities that do not improve the accuracy, caliber, or operations of the firearm beyond its original capabilities (as described above) are not manufacturing within the context of the ITAR. 

“Maybe” isn’t very helpful, you say. But this is the best we can do, unfortunately, on this issue, which is one to discuss with your attorney, if you are determined to get an answer. The final paragraph of the portion of the July 22 Guidance quoted above is a challenge to apply to specific situations. What does “occasional” mean? What is the meaning of “activities that do not improve the accuracy, caliber, or operations of the firearm beyond its original capabilities? 

If you are a wholesaler that is not registered with DDTC today and you are concerned about whether the July 22 Guidance means you have to register, you may want to consider short-circuiting the whole issue by registering. Yes, that means agreeing to pay the $2,250 fee every year, but that’s about the only meaningful negative consequence. If you register with DDTC, you want to be aware of the record-keeping and retention requirements in ITAR §122.5, but these are records you probably keep and retain already. On the positive side, DDTC registration will allow your business to export defense articles using exemptions and is a prerequisite to applying for DDTC export licenses. 

3. I have a small gun-smithing shop. I buy great guns and make them greater before I sell them. I do a little machining, but not much. I sell about two guns a month and I don’t really make money. I have my FFL because I have to even though this is more of a hobby than a business. Am I a manufacturer? 

Sorry, but DDTC says you do. ITAR §122.1 says that a single instance of manufacturing defense articles (e.g., guns) for a business purpose triggers the requirement to register. The July 22 Guidance reiterates this point, but it’s not new. 

4. Is it true that the ITAR only applies to me if I register with DDTC? 

No. Don’t get this one wrong. We are all subject to the ITAR whether we register or not and that’s probably the most important thing to remember. Whether you register or not, your business cannot export defense articles other than in accordance with the ITAR (and keep in mind that you can’t use the exemptions in ITAR §123.17 unless you register). Your business cannot share technical data with foreign persons anywhere, even in the United States, whether or not you are registered. Nor can your business provide defense services to foreign persons anywhere, even in the United States, whether or not you are registered. 

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