Streamline Excise Tax on Sporting Equipment to Help Conservation

Applying the marketplace facilitator model of state sales tax collection to federal excise taxes would greatly improve compliance, as would using an IRS-designed calculator that would be open and available to marketplaces such as Amazon.com Inc. and eBay Inc.

This in turn would substantially increase revenue for projects funded through these revenue streams. As it stands, federal excise taxes are difficult to calculate and remit, and many taxpayers may be entirely unaware they exist—much less that they may be liable for them.

A July report from the Government Accountability Office highlights a specific example of this issue: Federal excise taxes on many sport fishing and archery equipment sold online by foreign merchants are going uncollected.

When foreign sellers sell goods into the US, the burden is on the importer or consumer to remit excise taxes owed on those goods. A domestic purchaser of a fishing rod from a foreign seller, for instance, is supposed to self-report to the federal government and pay the excise tax owed on the equipment.

The issue may not seem that big. But from 2007 through 2023, excise taxes on just fishing and archery equipment totaled $206 million per year, according to the GAO. Those much-needed funds are earmarked for fish and wildlife conservation.

This problem mirrors the state sales tax landscape prior to the implementation of marketplace facilitator laws, where states struggled to collect sales taxes on online purchases from out-of-state sellers.

The marketplace facilitator model may likewise provide a solution to federal excise tax collection and remittance. Because federal excise tax policy is unitary, the IRS could help streamline the calculation, collection, and remittance of excise taxes through marketplaces.

GAO Recommendations

To address federal excise tax compliance issues, the GAO recommends legislation requiring marketplaces to collect and remit federal excise taxes for importer-customers.

This marketplace facilitator approach shifts the responsibility of tax collection from individual foreign sellers or consumers to platforms that facilitate the sales. The model has proven effective at the state level, significantly improving sales and use tax compliance and revenue. Applying this model to federal excise taxes could provide similar benefits.

The GAO report suggests that marketplaces should collect and remit federal excise taxes on sport fishing and archery equipment, as well as any other excise tax-levied purchases such as telephone services, tires, and firearm accessories. Doing so would help provide consistent and predictable funding streams for projects earmarked for this revenue—including fish and wildlife conservation, in the case of hunting and fishing equipment.

Such a shift would reduce the need for consumers to navigate the complex self-reporting process and help ensure the excise tax system is equitable and efficient. The current dynamic places foreign sellers of excise taxed goods at an advantage, as they can sell goods for prices free from the excise tax.

This means they are better able to undercut domestic sellers. Customers likely see this price differential as reflecting competition in the marketplace, rather than partially representing the amount of tax they need to self-assess and remit.

Centralized Tax Calculator

The IRS can take GAO recommendations a step further by developing a centralized tax calculator that online marketplaces can access through an application programming interface.

Such a system could help automatically calculate excise tax based on the item category and sales price at the point of sale. This would streamline the tax collection process for marketplaces and reduce administrative burdens, ensuring accurate tax calculations.

It would also provide a safe harbor for marketplaces that seek to comply with the proposed excise tax collection requirement—proof that a marketplace is acting in good faith by using the calculator and reporting the purchases.

The IRS already offers APIs for various services, from taxpayer identification number matching and transcript delivery to income verification services. A centralized tax calculator for excise taxes would require collaboration among the IRS, marketplaces, and other stakeholders such as third-party software providers. The long-term benefits of increased compliance and enhanced revenue collection, however, would help offset that overhead.

Linking the calculator with US Customs and Border Protection data could help automate the identification and categorization of imported goods. The CBP is tasked with collecting excise taxes owed on imports. The long-term goal should be to create an excise tax policy system that doesn’t require individuals to be aware of their tax liability to comply.

Information Campaign

Streamlining the calculation and levying of excise taxes at the marketplace level is an ambitious, if achievable, goal. An educational campaign raising awareness among consumers about these excise tax obligations—and where the revenue is spent—will be a crucial immediate step.

Many consumers are likely unaware that they owe additional federal taxes on some imported items such as tires, vehicles, fishing, and archery equipment, much less that it is their responsibility to self-report.

The IRS could use social media platforms and online information resources to explain federal excise tax in clear language for a broader audience. Informational posts, videos, and explainers on how federal excise tax revenue is spent could go a long way toward encouraging voluntary compliance.

For example, in the case of the excise tax on sporting equipment, revenue flows through a wildlife restoration fund and into projects ranging from hunter education and safety to land conservation grants. If the IRS makes it clear these revenue streams are set aside for interest-specific programs that directly benefit those that the tax is levied on, taxpayers may be spurred to comply.

Outlook

To effectively implement the above recommendations, the IRS should initiate a pilot program in much the same way it did with Direct File—opening to select marketplaces to test the functionality and feasibility of a centralized tax calculator.

Enhanced revenue from excise taxes will support conservation projects, wildlife restoration, and educational programs while providing a skeleton frame for automatic tax calculation programs that can be built further. These advancements could also be shared with state governments in the future, offering them a robust system to streamline their own tax collection processes.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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