The Battle to Preserve LIFO

Prompted by Congressional thoughts of repeal, companies that use last-in, first-out inventory accounting start mobilizing their defense.

The coalition, however, wasn’t invited to the Senate Finance Committee hearing on corporate taxes, noted Jade West, a government relations representative at the National Association of Wholesaler-Distributors, a lobbying group that manages the coalition. “Our argument is with the Finance Committee because they had one person testifying” on LIFO, said West. The coalition asked the Finance Committee to be involved in hearings, but did not learn about the June hearing until after the witness list had been completed, she said.

Plesko, who characterized his testimony as a list of the pros and cons of LIFO and FIFO, nevertheless drew fire from the coalition. The coalition claimed, in a letter to the Finance Committee, that Plesko’s testimony significantly understates the use of the accounting method by the business community and the adverse effect that would occur from a LIFO repeal.

Measuring the LIFO Effect

“If there were a repeal, the business community would pay a ton of tax,” Stephen Elkins, tax director of the American Chemistry Council, a member of the LIFO lobbying coalition told CFO.com.

But information on the dollar amount of tax benefits companies would lose in case of a repeal is only anecdotal. There is no single database that compiles information on which companies use LIFO and how much they benefit from it.

Basing his estimate on public-company data amassed from 1975 to 2004 by the American Institute of Certified Public Accountants, Plesko also said at the hearing that LIFO repeal could yield a federal revenue gain of about $18 billion before tax credits. The coalition rejects that estimate because it says many privately-held companies employ the method, although it cannot estimate an amount.

PricewaterhouseCoopers, however, is attempting to measure the economic impact of the accounting method. The Big Four firm aims to produce a tax and economic analysis of the types of companies that use LIFO. PwC intends to “organize and represent a coalition of companies to support the retention of LIFO and refute the testimony of Dr. Plesko,” according to its website. A partner in PwC’s Washington National Tax Services Group did not return calls for comment.

Even without comprehensive statistics, it’s possible to get some idea of the impact of a LIFO repeal on businesses, experts say. A broad ban would adversely affect all companies that use the accounting method, with a greater impact on small and mid-sized companies, according to David Auclair, a principal at Grant Thornton.

“If tax savings are not there, businesses would have to generate that from somewhere else,” said Auclair. “It might impact prices to customers, which might lead to further inflation, and it could impact on their [firms'] ability to sell, which could impact their earnings.”

For companies that have been using LIFO for decades, a repeal would be a surprise akin to people realizing that if they were to buy the houses they own today, they wouldn’t be able to afford it, notes Stephen Gertzman, national director of federal tax accounting at Ernst & Young. “The principal burden from a tax standpoint is that now you have to report income on this LIFO reserve,” he said, “which is like having additional tax liability but no additional income to help pay for it.”

Further, companies would need to be prepared for the higher costs of inventory, if they include products that increase in price, he added. “You may have companies that would say [they] don’t believe they could afford to pay all the tax they owe,” comments Gertzman.

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