Here is a letter that was sent to the Bureau of Alcohol, Tobacco and Firearms - Department of treasury.  This letter is referring to 'combustion spud guns.'  In the letter the state that these 'devices' (combustion or pneumatic) are legal, however you must check with your local law enforcement authorities because it may not be legal in your county.

Just some advice: If you do encounter a law enforcement officer, don't argue with them.  Just explain it uses air to launch things such as water balloons or potatoes.  Give them a little demonstration - most likely they will start to crack up and find it very humorous.

Here is the letter:

                      DEPARTMENT OF THE TREASURY
                   Bureau of Alcohol, Tobacco and Firearms
                           Washington, DC  20226
                                                              E:CE:F:TE:RAT
                                Sep 12 1995                   3311.4

   Mr. XXXXXXXXX
   address...
   City, State  Zip

   Dear Mr. XXXXXXXXX

   This refers to your letter of August 18, 1995, in which you ask about
   the legality of a device known as the "Spud Gun."

   These subject devices are generally constructed from PVC tubing and
   fittings and are designed to launch a muzzle loaded potato using aerosol
   hair spray or other type of propellant.  Ignition is by means of some
   type of "spark" igniter.

   The Bureau has previously examined devices known as "Spud Guns, Potato
   Guns, or Spudzookas" and have determined that such devices, in and of
   themselves, are not firearms as defined in Title 18 United States Code
   (U.S.C.), Chapter 44, S 921(a)(3) or 26 U.S.C., Chapter 53, S 5845.

   However, any similar devices which can be determined to be weapons by
   reason of their design construction, intended use, actual use,
   ammunition or other factors may meet the definition of a firearm under
   Title 18 or 26 U.S.C.

   We suggest that you contact your State and local law enforcement
   authorities concerning possession of such devices.

   We trust that the foregoing has been responsive to your inquiry.  If we
   may be of further assistance please contact us.

                                             Sincerely yours,

                                             Edward M. Owen, Jr.
                                     Chief, Firearms Technology Branch