HDA opposes repeal of the Last in, First Out (LIFO) accounting method and establishment of gross receipts taxes. Healthcare distribution represents a high-volume, low-profit margin business that is impacted disproportionately under certain tax proposals, including repeal of LIFO and instituting gross receipts taxes.
Last-In, First-Out (LIFO)
LIFO has been an established and recognized accounting method in the U.S. since the 1930s and is used for tax reporting purposes by a broad spectrum of business sectors that sell a wide range of products. Under the LIFO method, it is assumed that the last items produced or acquired are the first items sold, allowing a taxpayer to match its current revenues against its current costs. LIFO accounting is particularly prevalent in the pharmaceutical distribution industry, with companies using LIFO accounting for 98 percent of inventories and net sales in 2013.
Recent legislative and regulatory proposals would repeal the ability of companies to continue using LIFO. Eliminating the LIFO method would have a grossly disproportionate impact upon pharmaceutical distributors with inventories of high-volume, high-value medications. Its repeal would unfairly reverse long-standing tax policy and result in an unprecedented tax increase for these companies.
Gross Receipts Tax
Gross receipts taxes are imposed on sales at each stage of the supply chain (e.g., on suppliers, manufacturers, distributors and retailers). Unlike a corporate income tax, businesses must pay gross receipts tax whether they are profitable or not. A gross receipts tax, which generally is based on total sales revenue without consideration of operating costs or expenses (cost of medicine), has a significant financial impact on pharmaceutical distributors given the high dollar value of the products they carry.
Revenue shortfalls have prompted some states to consider, and in rare cases, adopt, gross receipts taxes to supplement or replace other business taxes. Gross receipts taxes distort production and consumption decisions because the amount of tax imposed on any particular good or service depends on how many different in-state firms are involved in the supply chain. In addition, effective tax rates can differ widely by industry.
Given the business realities of operating in this competitive market, it is impossible for these companies to absorb the resulting negative financial impact of a gross receipts tax. Distributors’ revenues are almost entirely and immediately offset by the costs of purchasing the medicines, since there is relatively no distributor mark-up. The unique nature of the distribution business model results in a disproportionately high tax, compared with other industries.