Again, this is a two-part overreaction on a BATFE issue by the AR15 forum crowd (or any gun forum crowd) - it’s as if some of them live to probe the BATFE with letters like this. On the one hand, you have an individual at the Technology Branch making a determination, and putting in on file so that it can be referenced only if the issue arises in such a way that somebody in law enforcement (probably only the BATFE, or FBI) bothers to look it up with regards to a potential violation that is made aware to them, or that they notice (they probably never would). One thing odd about this is that to be able to use a live 40mm flare, one would seemingly need to posses a proper 40mm launcher which is a destructive device anyway, and such a person would posses the permit needed already.
The other issue is the interpretation that possessing munitions over .50cal which are not for sporting purposes is illegal somehow, and this is a gray area. The only new-production live munitions over .50cal that I usually see available to the public are aluminum tip (ball) 20mm, or rarely 25mm (which again only goes to somebody possessing a D.D. already for something like an Anzio 20mm rifle), or the 37mm or 26.5mm launcher rds, which have always been rated as signal devices in line with Coast Guard regs. Those would be the flares, skyburst, and smoke loads. There are of course .55 Boys, or 14.5 rds, but these are old collector items which somebody might have a few of in a drawer, and no way of shooting them.
And then, to be “cartridges” or “ammunition” it needs to be a live loaded munition, and although the agent refers to a regulation that would include “cases”, “bullets”, “primers”, etc… that interpretation has only ever been applied to new manufacture, or import / export. They have never bothered with making trouble for collectors who have old vintage cases or projectiles as long as everything is inert (less than 1/4 oz explosives).
The “explosives” permit that the agent references might just be having either an FFL 10 / 11 (D.D.) or something akin to a fireworks permit in terms of the power of those flares.