Pursuant to a presidential mandate to make the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”) at least 75 percent self-sufficient, DDTC has proposed a rule to change the structure of fees associated with registering under the International Traffic in Arms Regulations (“ITAR”). Comments on the proposed rule are due by August 27, 2008.

Section 122.1 of the ITAR requires that all persons engaged in the United States in manufacturing or exporting defense articles or furnishing defense services must register with DDTC’s Compliance and Enforcement Division. The ITAR impose a similar requirement for any person that serves as a broker. At present, DDTC charges a flat fee of $1750 per year to register or to renew a registration. However, the proposed rule would institute a three-tier registration fee schedule with varying fees based on the number of license applications submitted by a registrant in a given year. The proposed rule also explicitly prohibits the formation of new entities "for the purpose" of lowering a company’s registration fees.

Tier One, at a fee of $2250, captures any registrant that has not submitted any license applications within the year ending 90 days before the expiration of the company’s current registration. Tier Two imposes a registration fee of $2750 and includes those registrants who have submitted 10 or fewer applications in the year ending 90 days before the expiration of the company’s current registration. Tier Three captures all registrants that have submitted more than 10 applications in the prior year, and sets a base fee of $2750 plus $250 for each application over 10 submitted in the relevant one year period. The proposed rule caps ITAR registration fees at the greater of 3 percent of the value of the applications submitted or $2750, and also includes a carve out to allow tax-exempt organizations to remain in Tier One, provided that such organizations provide proof of tax exempt status as part of their registration package.

In practicality, the new rule effectively institutes an export license fee, albeit one structured so as to have the greatest impact on DDTC’s most frequent customers. As the cost of registration rises, however, smaller companies at the fringes of the defense trade could become less diligent about ITAR compliance. Though, if the net result of this change in fee structure is increased staffing levels and faster license reviews, it will certainly be welcomed by the industry.