An 80% lower receiver is almost a receiver but some of the critical finishing still needs to be done. That means it is not yet a firearm and is not regulated as a firearm. The receiver is supposedly 80% finished though that number is completely arbitrary. I have yet to find the origin of the term "80% lower" but the ATF says the term is not used by or officially recognized by them. Since the term is not official some manufacturers have taken to calling their receivers 90% or 95% to imply substantially less finishing needed although the only difference I have seen is that the rear pocket has already been machined. The main fire control group pocket, hammer/trigger pin holes, trigger pass-through hole and safety selector holes still need to be completed.
From what I have seen a manufacturer can make an AR-15 lower receiver an 80% as long as they do not touch the fire control group pocket (rear takedown pocket is OK) and do not machine or even mark the trigger and hammer pin holes. I have seen every other aspect of the lower completed and it was still determined not to be a firearm by the ATF.
So why does someone choose to make an AR receiver from an 80% lower rather than just buy a complete 100% lower from a dealer? There are many reasons actually. One very good reason, if you live in California for example, is to create an AR-style handgun. In California any AR receiver you purchase is treated as a long gun (rifle) even when it is a stripped receiver that could be made into either a rifle or a handgun. So if you purchase the receiver from a dealer you can never create an AR based handgun because you cannot legally create a handgun from a rifle. That's a Federal law, not just a California law. I should note that California recently changed their laws on handguns so it is not yet clear how one can make an AR pistol from a stripped receiver, 80% or otherwise.
Another reason you may choose to go with an 80% is that you want to start with a blank canvas. Most 80% lowers have no markings on them while some do have selector markings or even manufacturer markings. But a truly blank receiver gives you the control to put (or not put) your own logo, selector markings and even the color/finish you want your receiver to have. Although not required from a Federal standpoint you can even add your own custom serial number and manufacturer info. Do you want to have serial number 000001? You can with an 80% receiver. Or maybe you want to have your birthday as the serial number or something cool like 556x45. You are in control of that because you are the manufacturer. I've seen some really neat engravings and finishes done with 80% projects. To get an idea of what is possible with lower receiver engravings check out the photo gallery of VaderTactical's engraving work (often goes by VaderSpade). His prices are very reasonable and he can provide you with the lower already engraved (it's a Tactical Machining lower) so you don't have to purchase, ship and then re-ship to him.
Along those same lines is the ability to create a more true "retro" or "clone" rifle build. For example, there are still some M16A1 (think Vietnam era) rifle kits available. These can be fitted with a new barrel (the original barrels were destroyed when they were "imported" back into the US) and a new lower receiver to make a working rifle (minus the full-auto fire control group of course). Technically these builds can be on a new A2 type receiver but there will be some subtle shape differences as well as the anodizing color being wrong. Even if you buy a ready-made retro lower receiver from a place like NoDak Spud you will still have their markings on the receiver. But if you buy one of their retro 80% blanks you can engrave it with all of the era-correct markings and make the rifle look original. Then you can send it off to a place like US Anodizing to have them anodize and dye the lower the correct color (I believe you can send in your factory upper receiver and they will try to match that). I'd recommend sending in the receiver before you machine it (but after engraving) so US Anodizing does not have to log it in as a firearm. If it is a firearm they will have to log in all of the pertinent information such as manufacturer info and if you've marked the receiver with retro markings that information will not be correct.
I often see the complaint about 80% lower receivers that they cost just as much, and often more, than a complete stripped receiver from a dealer. In many cases this is true but you cannot get into 80% receivers thinking you are saving money. You have to either enjoy the process of creating the final product from an 80% lower or have a valid reason to go the 80% route such as the California example. Think about people that like to do woodworking. They spend thousands of dollars on setting up a shop, buying expensive hand and power tools and getting the raw materials. Then they spend $50 and ten hours building a table that they could have purchased for $300. So if you look at it from a purely monetary savings standpoint it makes no sense. But it's not about the savings, it's about the enjoyment of the process and the ability to customize it to your own taste.
You also have to figure in the total cost to purchase the complete receiver. You might be able to get a stripped lower for $40 online but then you have to add in $10-15 for shipping and likely $20+ for dealer transfer fees. Plus the hassle of having your chosen dealer fax or email his FFL to the seller and then coming down to the paperwork and NICS check once it arrives. Depending on where you live you may be an hour or more away from a dealer whereas an 80% receiver can be sent to you in the mail. Still, all of that is easier to do than spending a few hours machining the lower, not to mention the cost of the parts and equipment needed. It is cheaper and easier to buy a complete lower but there are benefits to doing it yourself.
Is it legal to build your own receiver? Click here