Treasury Thanks Lawmakers for Comments on Proposed Retail Inventory Method Regs

Thank you for your letter regarding the impact on small businesses of the proposed regulations relating to the retail inventory method of accounting (RIM). The Notice of Proposed Rulemaking (NPRM) was published in the Federal Register on October 7, 2011. The proposed regulations restate and clarify the computation of ending inventory values under the retail inventory method and provide specific rules for the treatment of certain vendor allowances for purposes of the computation.

To put the application of the inventory accounting rules to small businesses in perspective, since 2001, businesses with average annual gross receipts of $1,000,000 or less have been administratively exempted from the requirements to account for inventories under section 471 of the Internal Revenue Code. Thus, the proposed regulations do not apply to these small businesses.

Your letter expresses concern that the NPRM does not include a Regulatory Flexibility Act (RFA) analysis examining the impact of this particular regulation on small businesses. The NPRM does not include this analysis because of our determination that the RFA does not apply to the NPRM. Generally, the RFA applies to any rule subject to notice and comment rulemaking under the Administrative Procedure Act (APA) and to interpretive rulemakings that impose a collection of information requirement on small entities. We determined that the RFA does not apply to the NPRM because it is an interpretive regulation which does not impose a collection of information on small entities that would trigger the analytical requirements of the RFA.

Although we were not required to conduct an RFA analysis, we took several steps to ensure that we considered any burdens potentially imposed by this regulation, including burdens on small businesses. Moreover, in accordance with our common practice, although exempt from the notice and comment rulemaking requirements of the APA, we requested comments regarding the proposed regulations and offered a public hearing on the proposed regulations. Specifically, the Department of the Treasury and the Internal Revenue Service (IRS) considered an alternative to the treatment of certain vendor allowances in the NPRM and asked for comments on the proposed alternative and other alternatives.

We received no comments during the formal comment period, and received only two written comment letters after the comment period had ended. We subsequently met with representatives of both commenters. We are currently considering these comments and communications in finalizing the regulations.

In addition, the Treasury Department submitted the NPRM to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact of such regulation on small business and received no comments.

We appreciate the concerns you raise regarding the impact of these regulations on small businesses. In preparing the final regulations, the Treasury Department and IRS will consider these concerns as we consider all of the comments we received in response to the notice of proposed rulemaking.

If you have additional questions on this topic, please contact Sandra Salstrom, Office of Legislative Affairs, at (202) 622-1900.