Ways and Means Members Say IRS Rule Change Could Increase Small Business Taxes

We are writing to express our concerns about a regulation proposed by the Treasury Department and the Internal Revenue Service (IRS) modifying the retail inventory method of accounting (RIM), which would reverse a position that has been in the regulations for more than 50 years, and would result in significant new costs for retailers using the RIM accounting method.¹

The Proposed Regulation changes the tax treatment of allowances that retailers receive from their vendors. For retailers using RIM, most would be affected by these regulations and would have to create costly new inventory tracking systems to comply with the new regulations. On a relative basis, the tax cost of these regulations would fall more heavily on smaller retailers because the type of vendor allowances affected by the regulations are virtually the only type of allowances that smaller retailers receive. Larger retailers may be able to use their greater bargaining power with their vendors to receive other types of vendor allowances with more favorable treatment under the Proposed Regulation.

With respect to small retailers, we are particularly concerned that the Proposed Regulation fails to include a small business regulatory analysis under the Regulatory Flexibility Act (RFA). We believe that the Proposed Regulation's conclusion that the RFA is inapplicable to this rulemaking is clearly incorrect and that a regulatory flexibility analysis needs to occur, as mandated by Section 603 of the RFA.

The regulation constitutes substantive legislative rulemaking requiring notice and comment pursuant to Section 553 of the Administrative Procedure Act (APA), which triggers the requirements of the RFA. Even if the rulemaking is considered to be interpretative and not subject to notice and comment, the change in treatment of vendor allowances will impose significant new recordkeeping and reporting requirements on small entities thereby triggering application of the RFA. Finally, even if the Proposed Regulation is neither a legislative rulemaking nor imposes a collection of information requirement, courts have held that amendment of interpretative rules requires notice and comment rulemaking. This would then trigger the analytical requirements of the RFA. Consequently, we believe there is no legal basis for the Treasury Department and IRS to claim that the Proposed Regulation is exempt from complying with the requirements of the RFA.

Retailers typically operate with very slim profit margins. This regulatory change would cost our retail constituents additional millions in taxes over the next several years. It also would require the creation of costly new inventory tracking systems. Both effects would divert scarce resources from investments that could otherwise be made in additional jobs and economic growth for constituents in our districts.

We strongly urge you to conduct the appropriate regulatory flexibility analyses, especially with respect to small retailers that would be affected by this rulemaking, and in accordance with such analyses, we ask that you revise the Proposed Regulations to minimize the recordkeeping and compliance costs. In addition, we urge you to reconsider the disproportionate tax burden on smaller retailers that will result if the regulations are enacted as proposed.

Thank you for your attention to this matter. We would appreciate your staff providing us with an update on the Proposed Regulations once you have had a chance to consider the concerns set forth above.