January 17, 2014
Senator Max Baucus
Chairman
Committee on Finance
219 Dirksen
Washington, DC 20510
Dear Chairman Baucus:
I am writing in response to your request for public feedback on the tax reform discussion drafts
you released in November and December of 2013. The comments in this letter will focus on
your discussion draft regarding cost recovery and tax accounting rules.
With the announcement that you will be named ambassador to China, we also take this
opportunity to thank you for all your hard work on tax reform particularly over these past two to
three years. You have been a tireless advocate for tax reform and you, along with Chairman
Camp, have moved the ball tremendously and we hope ever closer to the actual goal line, which
is the achievement of comprehensive tax reform. You and your staff have always had an open
door policy and you have engaged the public in your proceedings as your recent discussion drafts
demonstrate. You will be missed, but we wish you well in your new endeavor.
Retail Industry Leaders Association and Tax Reform
Before discussing the particulars of the discussion draft let me tell you a little bit about the trade
association I represent. The Retail Industry Leaders Association (RILA) is the trade association
that represents the world’s largest and most innovative retail companies. RILA members include
more than 200 retailers, product manufacturers, and service suppliers, which together account for
more than $1.5 trillion in annual sales, millions of American jobs, and more than 100,000 stores,
manufacturing facilities, and distribution centers domestically and abroad. The overwhelming
majority of RILA’s retail members are brick and mortar C-corporations and the substantial
majority are domestically focused although a number of our member companies have a
significant international presence and others will be looking to expand internationally in the
future. For your reference I have attached a one page document that lists our member companies.
RILA has been an extremely strong proponent of comprehensive tax reform and believes that tax
reform done right will stimulate economic growth and job creation. In our view, tax reform must
include both the individual and corporate side of the tax code. The individual and corporate sides
of the code are intertwined and you can’t properly reform one side without reforming the other.
Moreover, the individual side of the code is as complicated and out of date as the corporate code.
Individuals and small businesses, who are our customers, deserve a more simplified and efficient
tax system as much as corporate America.
More specifically, RILA supports revenue-neutral, base-broadening, rate-reducing
comprehensive tax reform that will better equalize the effective tax rates between industry
sectors. The retail industry is all too well aware of the discrepancies in effective tax rates
between industry sectors. The retail sector pays one of the highest effective tax rates relative to
the other major industry sectors. This is simply not fair, is strong evidence that the current tax
system is broken, and is one of the many compelling reasons why the tax code must be reformed
sooner rather than later.
In our effort to bring focus to the effective tax rate issue and to advocate for comprehensive tax
reform in general, we have joined together with dozens of associations to create the Coalition for
Fair Effective Tax Rates (CFETR). RILA co-chairs this coalition along with the National
Federation of Independent Business (NFIB) and is urging policymakers to view tax reform
through the lens of effective tax rates. Unless a tax reform proposal better equalizes the effective
rates between industry sectors, it will have failed to accomplish one of the primary missions of
tax reform.
Comments on the Cost Recovery and Tax Accounting Rules Discussion Draft
As indicated, RILA’s comments here will focus on the discussion draft related to cost recovery
and tax accounting rules. Broadly speaking, RILA believes the overall approach of the
discussion draft is a good one. RILA strongly supports simplification of tax rules in this area of
the tax code as well as efforts to ensure that recovery periods better reflect economic reality. We
applaud the concept of putting property into four basic categories and giving the Treasury
Department authority to issue guidance to reclassify assets to different pools and modify asset
classes or create new categories of assets without having to resort to federal legislative action. 1
Aside from the annual rite of extending expiring provisions, passage of substantial federal tax
legislation is a rare event. Allowing the Treasury Department to make some of these decisions
regarding class lives should ease the backlog of concerns on this front and should, frankly,
relieve congressional tax writers from the burden of having to wade into the weeds on these type
of issues unless they feel it is absolutely necessary.
We would also note that, of course, the proposals in all of these discussion drafts would be part
of a larger and, we would hope, comprehensive tax reform package that would substantially
1
Keeping in mind that guidance of some kind would need to be included to ensure that Treasury would act
expeditiously in issuing regulatory changes of this kind that would be perceived as taxpayer friendly. In other
words, if a change in class life were deemed appropriate and would be in the taxpayers benefit, we want to ensure
that Treasury would not drag its feet in making such a change.
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reduce corporate rates. At the end of the day, none of these proposals can really be viewed in
total isolation as the overall package may alter our enthusiasm one way or the other with regard
to specific proposals. Specifically, how much the corporate rate may be reduced and whether the
overall package is revenue neutral or actually increases revenue may play a large role in dictating
our view on any proposal.
While we could perhaps comment on some of the more granular details of some of the proposals
within this particular discussion draft, we would like to focus our discussion on the general
merits of two of the significant discussion draft suggestions, namely the amortization of
advertising expenses and the elimination of LIFO/LCM inventory accounting methods.
Amortization of Advertising Expenses
Under current law, advertising expenses are generally deductible as ordinary business expenses
in the year in which they are paid or incurred. Indeed, that has been the case since the inception
of our tax code over 100 years ago. The discussion draft proposes to require businesses to
capitalize and amortize 50% of their advertising expenditures over a five-year period while
deducting the remaining 50% in the year paid or incurred.
RILA believes that advertising is a very legitimate business expense, should not be labeled as a
tax expenditure, and that the historical treatment of advertising should not be changed. In our
view, advertising is as legitimate an expense as salaries, rent and utilities and should be treated as
such.
While some might argue that there is some long term benefit to advertising with regard to
branding and name identification, this is not the case. The reality is that once advertising stops,
name recognition is almost immediately lost. A recent survey of studies regarding the economic
life of advertising would seem to clearly confirm that the life of advertising should not be
measured in terms of years, but rather in terms of months or even weeks.2
Further, from a retailer’s perspective, by far the primary objective of advertising is to drive
immediate sales. The clearest antidotal evidence of that is exhibited when the holidays come
around. During the holiday season, retailers are fighting tooth and nail for customers and
advertising on every medium possibly available to them. Customers are inundated with
advertising in an effort to lure them into retail locations. Advertising is the weapon of choice in
the battle to attract customers to their stores and to drive sales in that all important sales quarter.
Advertising dollars are spent to drive sales now, not in future periods. If enacted, the proposal
would result in an unwarranted mismatch between the timing of incurring an expense and
earning the related income. Such a provision would be contrary to the fundamental principles
upon which the tax code is based and would unfairly penalize taxpayers, like retailers, that are
more highly dependent upon advertising to drive income.
2
John Wills and Mike Denning , “The Economic Life of Advertising: A Survey of the Evidence,” Bloomberg BNA
Transfer Pricing Report, November 15, 2012
3
By itself, this proposal is rather jarring to the sensibilities of retailers because advertising is the
bread and butter of our industry. As mentioned above in our general comments preceding this
discussion, our view on this matter could be altered to some degree depending upon how much
the corporate rate would be reduced. However, even if this proposal was incorporated into a
package with what we would view as a favorable corporate rate, the industry would, at a
minimum, feel strongly that the period of time over which any advertising expenses should be
amortized should be substantially less than five years.
Moreover, it should be noted that any effort to require any kind of amortization period will
inevitably lead to controversy over what exactly constitutes “advertising.” For example, does a
take-home bag with a retailer’s logo on it, mean that such items must be capitalized? Requiring
amortization of advertising will certainly run counter to one of the universal goals of
comprehensive tax reform which is simplification.
LIFO/LCM Inventory Accounting Methods
RILA has always objected to proposals to repeal long-standing accounting methods applicable to
retailers, namely the last-in/first-out (LIFO) and the lower-of-cost-or-market (LCM) methods of
accounting. LIFO and LCM are essential inventory-accounting methods used for decades by
companies throughout the United States for financial reporting purposes as well as for
determining their federal tax liability. Because of the nature of the business, LIFO and LCM
(particularly under the retail inventory method) are widely used within the retail industry.
Much to our dismay, repealing LIFO and LCM inventory accounting methods has been on the
target list of the Obama Administration for some time now. Because of the potential threat to
these two accounting methods, RILA joined The LIFO Coalition. The LIFO Coalition is
submitting separate and very detailed comments with regard to the discussion draft proposal and
our goal here is highlight our principal concerns with respect to the repeal of LIFO and LCM.
LIFO and LCM had not been classified as “tax expenditures” until 2008 when, for some reason,
the Joint Committee on Taxation (JCT) decided to add these items to their tax expenditures list.
LIFO and LCM are methods of accounting and should not be characterized as tax expenditures
simply because repealing them might raise substantial revenue for the Treasury. Indeed, were the
combined revenue estimate for repealing LIFO and LCM not of the magnitude that it is, it is
highly unlikely that anyone would ever have thought to consider them as “tax expenditures.”
The fact of the matter is that businesses with inventories need an accounting method to account
for that inventory. Businesses are permitted to use several different methods to identify the cost
of the inventory sold, including the first-in/first-out (FIFO) method, LIFO, LCM, and the retail
inventory method (RIM). LIFO has been a widely accepted inventory accounting method
permitted by tax law and regulations for companies of all sizes throughout the U.S. economy to
use since as early as 1939. LCM has been in use since 1918. Any income-based tax system
must include accounting methods that enable businesses, which purchase and sell millions of
items of inventory every day, to determine the cost of such inventory and the resulting income or
loss in an efficient manner so that taxable income can be reflected accurately.
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LIFO repeal would mean a forced change in fundamental tax accounting for any business that
has historically relied on LIFO for its tax reporting, including countless retailers. As a result,
such businesses would have to recapture their LIFO reserves which, even if spread over several
years, would create a substantial additional income tax burden especially for businesses that have
relied on LIFO for many years or even decades. In effect, elimination of LIFO would amount to
an enormous retroactive tax increase by repealing fully authorized deductions from income with
respect to products sold, in many cases years or decades in the past. Moreover, since companies
would have no economic income from such an accounting adjustment, they would effectively be
taxed on non-existent cash flow. Indeed, for some companies, the proposed repeal of LIFO and
recapture of reserves could, quite literally, bankrupt the companies.
Businesses that do not use LIFO, often apply the LCM method to write down the value of their
ending inventory that has declined in economic value. Under this accounting method, the
business determines the market value of its inventory at the end of its tax year and then values
the inventory at the lower of the inventory’s original cost or the current market value. retailers
often use LCM under the retail inventory method. The tax law also permits a business to write
down the cost of certain “subnormal” goods, such as those that cannot be sold in the ordinary
manner or at normal prices due to damage, imperfections, shop wear, changes of style, odd or
broken lots, or similar causes.
The LCM and subnormal goods methods provide an important cushion during economic
downturns, such as the current economic environment. Without these methods, businesses are
precluded from recognizing the loss until disposal of the inventory. The loss in value is a real
economic loss, and these methods allow businesses to recognize the loss in the year it occurs.
Repeal of the LCM and subnormal goods methods would mean higher taxes on a business that
would no longer be able to account for a current economic loss in inventory value, but instead
would have to wait until it is able to dispose of the inventory. In addition, during economic
downturns, the value of the LCM write-down will grow, especially under the retail inventory
method as retailers are forced to mark down retail prices. Thus, repeal of the LCM and
subnormal goods methods will have an even greater adverse effect on businesses’ tax liabilities
in a down economy, at a time when businesses can least afford additional tax liabilities.
Similar to advertising, our view on this issue could be softened to some degree depending upon
the eventual corporate rate and the overall package in which LIFO/LCM repeal would be
included. However, we would stress that we critiqued the Obama Administration proposal in
this regard for only providing 10 years to recapture LIFO reserves indicating that, if such a
proposal were unavoidable, at the very least the recapture period should be longer than 10 years.
Unfortunately, the discussion draft proposal is even harsher than the Administration’s proposal
in this respect, affording companies only eight years to recapture their LIFO reserves.
Furthermore, the proposed recapture period for LCM and subnormal goods write-downs is only
four years. If LIFO/LCM repeal were somehow to be considered a fait accompli, the recapture
periods must be in order to be fair to taxpayers.
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Conclusion
RILA lauds the general direction taken in the discussion draft on cost recovery and tax
accounting rules. Simplifying the tax rules in this area as well as ensuring that recovery periods
better reflect economic reality should be important priorities of any comprehensive tax reform
effort. We do have specific concerns regarding the advertising proposal and the LIFO/LCM
proposals, and we hope that you and your successor as Finance Chairman, Senator Ron Wyden,
will give serious consideration to our thoughts on these two proposals.
Thank you for your time and consideration and we wish you well in your new endeavor.
Sincerely,
Kirt Johnson
Vice President for Tax Policy
Attachment
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RILA RETAIL MEMBERS
24 Hour Fitness Worldwide, Inc.
7-Eleven, Inc.
Abercrombie & Fitch, Co.
Advance Auto Parts, Inc.
American Eagle Outfitters, Inc.
American Signature Furniture
Apple Inc.
AutoZone, Inc.
Belk, Inc.
Best Buy Co., Inc.
Big Lots Stores, Inc.
Blain’s Farm & Fleet, Inc.
Cabela’s Inc.
Canadian Tire Corporation, Limited
CarMax, Inc.
Christopher & Banks Corporation
Claire’s Stores, Inc.
Coinstar, Inc.
Collective Brands, Inc. (Payless)
Costco Wholesale Corporation
Crate & Barrel
CVS Caremark Corporation
Dick’s Sporting Goods, Inc.
Dollar General Corporation
Dollar Tree Stores, Inc.
Duckwall-ALCO Stores, Inc.
Express, LLC
Family Dollar Stores, Inc.
Food Lion LLC (Delhaize America)
Foot Locker, Inc.
GameStop Corp.
Gap Inc.
Giant Eagle, Inc.
H-E-B
The Home Depot, Inc.
Hy-Vee, Inc.
IKEA North America Services, LLC
J.C. Penney Company, Inc.
J. Crew Group, Inc.
Jo-Ann Stores, Inc.
Limited Brands, Inc.
Lowe’s Companies, Inc.
Meijer, Inc.
Michaels Stores, Inc.
Navy Exchange Service Command
(NEXCOM)
NIKE, Inc.
Oriental Trading Company, Inc.
The Pep Boys – Manny, Moe & Jack
PETCO Animal Supplies, Inc.
PetSmart, Inc.
Publix Super Markets, Inc.
RadioShack Corporation
Recreational Equipment, Inc. (REI)
Regis Corporation
Rooms To Go, Inc.
Safeway, Inc.
Sears Holding Corporation
Signet Jewelers Ltd.
Staples, Inc.
T-Mobile USA Inc.
The TJX Companies, Inc.
Target Corporation
Tractor Supply Company
Tuesday Morning Corporation
Ulta Salon, Cosmetics & Fragrance,
Inc.
VF Corporation
Walgreen Co.
Wal-Mart Stores, Inc.
Whole Foods Market, Inc.
Wilkinson
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