Washington, D.C., is interesting these days. Just when you thought you would see a few big parades and things would settle down, the House Republicans have started to move aggressively on a tax script for a new horror movie called BAT. This new blueprint could severely affect your business.
Named after the proposed Border Adjustability Tax, the script is keenly reminiscent of a Bela Lugosi horror flick called “The Devil Bat.” In the original movie (circa 1940), Lugosi plays a chemist who is upset with his wealthy employers. Believing the situation to be unfair, he decides to breed giant bats that are trained to do them in.
As with any movie, the writers in D.C. are shopping around to title their new release. If you have any suggestions, please quickly forward them to the House Republicans, who are in charge of writing the screenplay. Some, in our industry, have suggested the title should be: “The bloody vampire death of American retail — felled by BAT.”
The preliminary blueprint for the movie targets every retailer, every footwear supplier, every travel goods maker and every apparel importer in America. This is a horror story about a tax that includes the concept of adjusting your import price at the border. As the screenplay runs its course, BAT will likely kill or severely harm your business. Make no mistake, the consequences of this blueprint are real and the plan is being pushed aggressively on Capitol Hill. Ultimately, this may not be a fictional film. If the producers get their way, the movie will be a documentary.
It’s possible that horror films are not your thing and you may not wish to be involved, but you might ask to see the script for yourself. The film starts out with a rosy prelude that suggests we are going to lower the corporate taxes in America and create a more favorable environment for exports. Corporate taxes run about 35 percent and the government would lower them to 20 percent. Everyone is in favor of lower taxes, so this sounds terrific.
Like all horror movies, there is a subplot. If you import your products, the script wants you to help pay for the country’s loss of tax revenue and opens up a point of horror that will drain your blood. Your imports — or any components of your product(s) that might be imported — will no longer be able to be deducted as a cost of goods sold. So, while your tax rate will go down on a percentage basis, you will now be paying tax on a larger part of your cost.
If Economics 101 is not your thing, let’s try for a simple explanation. You import something for $6, your operating cost is $3 and you sell the item for $10 (making $1.00 as profit). Currently, you pay tax on the $1.00 at (for example) 35 percent, so your profit is 65 cents and your tax is 35 cents on the sale of your $10 item.
Under the new plan, you still import for $6, but you can no longer deduct that amount. Your operating cost is still $3. Your profit is still intended to be $1 if you continue to sell it at $10. However, you now pay tax on $6 + $1 = $7 at 20 percent (new tax rate) = $1.40 tax.
Enter Lugosi, allow for a loud scream, and your tax is now higher than your profit. So you are forced to raise your selling price by the same percentage, just to stay even. Your new selling price would be $11.44.
What just happened? Your selling price went up 13 percent (to get the same margin) and the effective tax you pay went up by 15 to 20 percent.
In the first case, you paid a tax of 35 cents and in the second your tax was $1.40.
Your selling price went from $10 to $11.44. Surely, per Lugosi, your customers won’t mind paying this additional consumer surtax. Really?
Perhaps, this economic example is not 100 percent accurate, but the theory is essentially correct and the concept is reality based. Any way you look at it, Lugosi just cooked your goose.
The other part of the equation is that exported product will be tax free. For the apparel, footwear and travel goods industry, 98 percent of what we do is imported, so exempting exports is not very helpful.
Quite frankly, our industry horse has been out of the barn for years and isn’t coming back any time soon. While we all agree that we want to fix the tax codes, our idea of fixing them is not to take it all out on us.
We’d all love to bring the sewing business back to America, but many of the associated industry skills have disappeared years ago, and many of the fabric mills have left as well.
Let’s be honest, people tune in to horror movies hoping — against hope — that they will have a good ending. It’s really best that you should be extra careful with this one, as it may end with your head being chopped off.
This is, unfortunately, quite real and is happening now.
Do get involved, and let’s all try to establish a tax change that works for our industry. Let’s not help create one that works against us.
And, one final note about the concept of horror, Lugosi said: “I have never met a vampire personally, but I don’t know what might happen tomorrow.”
What do you think will happen tomorrow?
Rick Helfenbein is president and chief executive officer of the American Apparel & Footwear Association.