A common accounting method used by many distributors is gaining attention in Washington as a potential source of tax revenue. At end of April, Sen. Bill Frist of Tennessee incorporated the repeal of LIFO a 70-year-old inventory accounting method into a Republican energy bill to help pay for a $100 gas rebate for 100 million U.S. citizens.
After an uproar from businesses, the repeal was taken out of the bill. But the Senate Finance Committee, led by Chairman Charles Grassley of Iowa, is planning to further consider repeal of the accounting procedure. A committee hearing on the subject could happen as early as this month.
If LIFO is repealed, distributors who use the method would have to move their reserves to current inventory, which would then be subject to corporate tax. The move would generate billions of dollars for the government.
The National Association of Wholesaler-Distributors estimates that $78 billion in wholesale distribution inventory is currently classified under LIFO. With LIFO, it is assumed that the last unit into inventory is sold first. Older inventory is left over at the end of an accounting period. LIFO evens out the effect of inflation on inventory because the older inventory left in reserve is assigned a lower value. Distributors have recently seen sharp price increases in commodities such as copper, steel and other metals, spurring price jumps for the products they sell.
NAW’s senior vice president for government relations Jade West says use of LIFO is widespread. For example, one association, the Heating, Air Conditioning and Refrigeration Distributors International, did a survey that showed 40 percent of manufacturers and half of the group’s distributors used LIFO.
West says some distributors might not be able to sustain the hit. NAW is leading a coalition of more than 40 associations to fight the repeal.
