Are tax hikes coming for PHCP-PVF distributors?
Not since 1986, has our tax code received a serious overhaul. In fact, in the past 31 years it’s only gotten more complicated and certainly longer in length, making American companies less competitive.
There are reasons why American multi-nationals merge with (smaller) overseas companies and shelter as much of their taxable profits in these countries. Nearly every county has a lower corporate tax rate and for now the law allows it!
There also are reasons why American multi-nationals keep as much of their earnings in the countries in which they’re earned rather than returning them back home to the United States and reinvesting them in R&D, capital expenditures and personnel at home. Nearly every country has a lower corporate tax rate and the law allows it!
Many on Capitol Hill, including Republican members of the House Ways and Means Committee, have said enough is enough. We’ve heard President Trump suggest simply taxing imports from Mexico to pay for a wall at our southern border, but what’s buried deep within the document known as the “Blueprint” tells a different story. The Blueprint was written by Republican members of the Ways and Means Committee and is widely considered to be the starting point for tax reform this year.
Republicans have long said they want to get the corporate tax rate down from 35% to 20%, but that may come with a heavy price: taxing imported goods at 20%. They have many goals, but the goal that is most important to them is to say tax reform is paid for, or “revenue neutral,” and taxing imports would raise more than $1 trillion over 10 years.
If a company has a taxable income of $10 million and is taxed at 35%, that’s a tax bill of $3.5 million. You can’t drop the rate to just 20% on the same $10 million and not expect huge revenue losses to the government.
Every business owner knows the $10 million in income gets reduced when you’re allowed to deduct various expenses, such as salaries and benefits, operating expenses such as rent, real- estate, insurance, and other items such as advertising costs and travel expenses. So in reality, that $10 million in income is reduced when you deduct $4 million in cost of goods sold and another $2 million in salaries and other deductible expenses. Now, that company has a tax bill of $1.4 million rather than $3.5 million.
In order to get to 20% and admittedly simplify the federal tax code, Republicans are pushing to eliminate numerous business deductions. In the simplest terms (and tax policy is the furthest thing from simple), raising your taxable income back from the $4 million area to closer to $10 million and a tax bill of $2.0 million up from the $1.4 million when deductions are no longer allowed.
For a wholesaler-distributor, aside from their employees, the next most valuable item is their inventory. Having the products the customer needs at a reasonable cost is the lifeblood of the distribution industry. As we’ve said, under current law businesses can deduct the “cost of goods sold,” whether produced or purchased for resale, meaning their investments in inventory can be deducted from their taxable income. Here is the most important point of the plan: under the proposal, only domestically produced items in a wholesaler’s inventory can be deducted and those that a wholesaler imports will be taxed at 20%. It remains to be seen how imports are to be defined and what, it any, carve-outs will be made. Also under the plan, exported products are not taxed.
The goal appears clear, support the domestic manufacturing base, which we all can support, but not by taxing imports. Many sellers, retailers of apparel and electronics specifically, as well as many PVF distributors, are left with few options. Whether it can be achieved and what the details will be is far from certain.
What can be expected is a major battle as tax reform comes more into fruition. And in Washington today, it is one of the single biggest fights between industry groups and decision- makers on Capitol Hill.
ASA continues to listen to its members and educate them of the dangers this plan could pose to small businesses that import goods and are working with allies in Washington to educate Congress on these unintended consequences.