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Lawmakers seek tax break for car dealers facing supply troubles

Laura Weiss, CQ-Roll Call on

Published in Automotive News

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.

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