The threatened repeal of LIFO remains very real in the U.S. Senate, and this is, in my opinion, one of the most important issues facing wholesaler-distributors in recent years. It’s so important that I want to spend some time to bring you up-to-date on what is happening with LIFO in Congress, what devastating results repeal would have on our industry, and what NAW is doing on behalf of wholesaler-distributors.

LIFO (which stands for “last-in, first-out”) is a common inventory accounting method many in our industry use to determine book income and tax liability. Why use LIFO? If inventory costs are rising—when there is inflation—LIFO is a more accurate way of measuring financial performance and calculating tax. It takes into consideration the greater cost of replacing inventory, which in turn gives a more conservative measure of the financial condition of a distributor’s business and the economic income to which tax should apply. Simply said, without LIFO, phantom profits would be taxed.

This past April the Senate Republican leadership unexpectedly proposed the LIFO accounting method be permanently eliminated from the tax code for all types of companies—including wholesaler-distributors, in order to fund a $100 rebate to 100 million individual U.S. taxpayers to help offset high gasoline costs.

LIFO repeal was apparently proposed in part because of mistaken beliefs that LIFO is a “tax loophole” and that it is set to disappear from use anyway. This is incorrect. LIFO is an established, widely accepted inventory accounting method that has been used by large and small companies throughout the United States for the last 70 years. Just as manufacturers make permanent investments in production equipment, distributors make a long-term investment in their inventory. LIFO recognizes that when a distribution company is formed, it has made a permanent commitment to holding a baseline inventory. Without this inventory, the company could not justify its existence. Additionally, the LIFO method allows the business to match current sales with current cost. This results in a much more accurate reporting of the efficiency of its operations. Repealing LIFO would translate to a massive tax increase on hundreds of thousands of large and small American businesses and could easily force many smaller ones to close their doors.

As expected, there was an instant outcry from our industry as well as from many others in both the manufacturing and retailing sectors. This outcry forced the Senate Republican leadership to quickly withdraw this proposal four days after it was introduced. However, Senate Majority Leader Bill Frist (R‑TN) indicated that he fully expected the Senate Finance Committee to hold hearings in the near future to review whether LIFO should remain available to business taxpayers or be repealed.

I’m pleased to report that NAW immediately sprang to the defense of our industry by helping to organize and now is leading The LIFO Coalition, an ad hoc group of more than 70 trade associations, business organizations, and advocacy groups representing hundreds of thousands of separate businesses, to fight this repeal before the U.S. Congress. To learn more about the serious ramifications of LIFO repeal for American businesses, click here to read the document, “LIFO Repeal Means Massive Tax Increase on Large and Small American Businesses,” prepared by The LIFO Coalition. To learn which trade associations are members of The LIFO Coalition, click here.

A June hearing by the Senate Finance Committee was held on short notice and was announced with an already set and closed witness list. Unfortunately, despite the Coalition’s specific request to be involved in this process, no one representing the business community—those of us affected by LIFO repeal—was informed of the hearing and no pro-LIFO witnesses were allowed to testify. What is most alarming to the Coalition, and to our industry, is that very few members of the Senate actually understand the reasoning and relevance behind LIFO or the fact that its use is widespread across business sectors. In fact, the sole anti-LIFO witness at the hearing testified to the contrary—that LIFO is not widely used; thereby giving the Committee the impression that repeal would have little impact on American business. This too is incorrect.

NAW estimates that $78 billion in wholesale distribution inventory is currently classified under LIFO. If LIFO is repealed, those in our industry who use this method will be forced to move their LIFO reserves to current inventory, and would then be subject to a massive tax increase. What’s more, it would mean potentially higher future tax bills, making it even harder for large and small companies in our industry and across other business sectors to reinvest in their companies, expand their workforce, or even simply manage inflation. Some in our industry may be unable to sustain the hit on their businesses that LIFO repeal would unleash and could be forced to close.

This is why it is critical to our industry that the U.S. Congress rejects any effort to repeal LIFO. On our behalf last month, The LIFO Coalition offered a memorandum to the Senate Finance Committee that addressed the serious inaccuracies in the anti-LIFO witness’ testimony in that June hearing. Click here to read the memorandum.

This fight is far from over, and NAW, through its leadership in The LIFO Coalition, will continue to keep our membership apprised of all the latest developments as they occur. Last month, NAW sent an e-mail to NAW Direct Members informing us of the current happenings with LIFO and asking us to complete a five-question survey so that NAW and the other members of The LIFO Coalition could demonstrate two crucial points of fact to the U.S. Congress:

1) LIFO is in fact widely used in our industry, and

2) repeal would have a devastating and perhaps ruinous impact on many wholesaler-distributors.

Not surprisingly, hundreds of distributors have already responded. The colossal harm this repeal will have on many of our small businesses has been made abundantly clear. We do have strength in our numbers. If you have not already done so, I ask you to complete the survey by going to http://www.surveymonkey.com/s.asp?u=176352268904. I also ask you to contact your U.S. Senators and urge them to stop the repeal of LIFO. You can do this easily by clicking on the TELL CONGRESS button in the top right corner of your screen located at http://www.naw.org/. You will be linked to NAW’s “Take Action” E-Alert Program. Easy to follow instructions, including talking points, will take you through the rest of the very quick process.

Please make your voice known on this vitally important issue to our industry. NAW and The LIFO Coalition will continue this significant fight on our behalf.