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June 26, 2022

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Lawmakers seek tax break for car dealers facing supply troubles

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A bipartisan contingent of lawmakers is pressing to give car dealerships relief from bigger tax bills they could face due to global microchip shortages that have pinched the supply of new vehicles.

Rep. Dan Kildee, D-Michigan, is leading the charge to deliver relief to dealerships and working to attach his bill with Rep. Jodey C. Arrington, R-Texas, to a bigger package that can get it to President Joe Biden’s desk in the coming months.

Kildee, a member of the tax-writing Ways and Means Committee and House Democrats’ whip team, said in an interview that he hopes it will be added to a package aimed at boosting U.S. semiconductor manufacturing and competitiveness with China. That measure is in conference negotiations to resolve differences between House- and Senate-passed bills.

Kildee, a member of that conference committee, said his proposal is both a tax and trade issue and should be germane to the broader competitiveness package. “It’s a bill and an issue that fits very neatly in that subject,” he said.

If that doesn’t work, Kildee plans to look for the next possible legislative vehicle, including a potential year-end tax package that could address expiring tax policy and a range of other outstanding tax issues.

The issue facing auto dealerships stems from an unexpected plunge in inventory because of the COVID-19 pandemic, auto groups say.

The global health crisis caused factories to close and reduced the supply of computer chips critical for producing cars and trucks, among numerous other consumer goods. Without the chips needed to power safety features, dashboard displays and more, auto plants have shut down or slowed production and left car dealerships with emptier lots.

‘LIFO’ concerns

Dealerships tend to use an accounting method called “last in, first out” for their inventories, which allows them to consider the latest cars purchased for their lots as the first sold.

“LIFO” accounting is a time-honored method employed by numerous industries reliant on large inventories, from oil refiners to grocers to wine and beer distributors. It’s meant to smooth out the effects of inflation by providing bigger deductions for the cost of goods sold when higher prices kick in. Conversely, price drops will saddle companies with lesser deductions.

When inventory drops sharply, businesses like car dealers can see taxable income balloon because they’re stuck with slimmer cost of goods sold deductions based on lower-priced vehicles acquired earlier. For dealerships, such sharp drops in inventory typically only occur when unloading product quickly with the intention of selling or winding down the business.

Under current law, the Treasury Department can offer relief in these situations if inventory falls due to an embargo, boycott or other “major foreign trade interruption.” Typically the relief would allow three years for businesses to build their inventory back up and decide what portion of goods to attribute to each tax year. In effect, that would allow car dealerships to catch up on their inventory purchases and avoid a bigger tax bill once supply improves.

But Treasury thus far has declined the industry’s plea, despite backing from Kildee and more than 90 fellow lawmakers in a November letter. Treasury determined they don’t have that authority under current law, according to Kildee and the National Automobile Dealers Association, an industry trade group that’s pressing for relief. A spokesperson for Treasury declined to comment.

In a January letter to Treasury, the NADA cited correspondence from the department arguing businesses that primarily produce or source inventory from within the U.S. aren’t eligible for relief. Treasury also questioned whether dealerships can demonstrate their inventory declines were directly and primarily due to foreign supply chain disruptions, according to the industry group.

The dealers association argued the statute and legislative history say nothing about where inventories are produced or sourced, and that they’ve clearly established the connection to foreign trade disruptions.

Kildee’s bill would make Treasury implement the change by law, sidestepping the need for administrative action. Under the legislation anyone who deals in new motor vehicles — including cars, buses, trucks, boats, farm machinery and equipment and other vehicles — and uses LIFO accounting would be allowed through 2025 to replenish their inventory and in the meantime avoid recognizing any income for the 2020 or 2021 tax years related to falling stock.

‘Life and death’ issue

Kildee said the pandemic and related chips shortage has caused a unique challenge for dealerships that he’s witnessed at home in Flint, Mich. He said thousands of trucks manufactured in his district are sitting in parking lots and open fields while they await chips so they can be sent to dealerships and sold.

The issue could be “life and death” for some dealerships, Kildee said, and was never Congress’ intent.

“The federal government never anticipated that they would have a windfall from car dealerships as a result of the pandemic and so, you know, we clearly need to act,” he said.

Kildee’s bill has nine Democratic co-sponsors, and seven Republicans signed on including Arrington, a fellow Ways and Means member.

Other co-sponsors include those who own car dealerships themselves, including Ways and Means GOP Rep. Mike Kelly of Pennsylvania and Roger Williams, R-Texas. Virginia Rep. Donald S. Beyer Jr., a Ways and Means Democrat whose family owns dealerships across Northern Virginia, is another co-sponsor.

Another Ways and Means member, Rep. Carol Miller, R-West Virginia, isn’t on the bill but signed Kildee’s November letter. Her husband owns a string of dealerships across West Virginia and one in Charlotte, N.C.

A companion Senate bill to Kildee’s is also in the works. Senate Banking Chairman Sherrod Brown, D-Ohio, is planning to introduce legislation, his office confirmed.

Brown also led letters to Treasury urging them to grant car dealerships relief, including a February letter with Senate Finance Chair Ron Wyden of Oregon and 18 other Senate Democrats. Finance Committee member Sen. Tim Scott of South Carolina led 32 Senate Republicans in their own letter pressing for relief for dealerships from the Biden administration.

Alongside the auto dealers group, the biggest U.S. trade association for automakers, the Alliance for Automotive Innovation, is also pushing for relief. The group represents companies that produce 99 percent of cars and light trucks sold in the U.S., and says new vehicles can contain up to 3,000 microchips.

The organization’s data shows month-end inventory of light vehicles began to decline in early 2021, and stayed far below 2019 and 2020 levels throughout most of the year.

Other groups are also weighing in on the issue. CNH Industrial, a London-based manufacturer of farming and construction vehicles, reported lobbying on Kildee’s bill in the first quarter of 2022. The Association of Equipment Manufacturers, a Milwaukee-based advocate for construction and agriculture equipment makers, disclosed lobbying on the topic too.

In a letter to Kildee and Arrington last week, the American Institute of CPAs, a member group for accountants, announced its endorsement of their measure. The group is among Kildee’s top donors this cycle, according to OpenSecrets.org

While it has bipartisan backing, Kildee said challenges to getting his bill over the finish line include the complexity and relative obscurity of the issue at hand, which he’s working to explain to colleagues. There’s also Congress’ busy to-do list in the coming months.

“The number of sort of issues competing for the limited oxygen in the room is also an issue,” he said. “I mean, we’ve got a lot going on and that makes it more difficult.”

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