Accounting for Floor Stocks Taxes

Rev. Rul. 2001-8 addressed the impact that floor stocks taxes have on valuing ending inventory. A "floor stocks tax" is an excise tax, change in tax rate or subsidy for a taxpayer's existing inventory. If the tax increases, the taxpayer has to pay an additional tax for inventory on the floor stocks tax's effective date. Conversely, if the tax decreases, the taxpayer receives a tax reimbursement for inventory on the reduced floor stocks tax's effective date.

Example: On Jan. 1, 2001, the Federal government increased an excise tax on a particular product from $2 to $3 per unit. The increase has a floor stocks provision and thus applies to all of the product in inventory on Jan. 1, 2001. A taxpayer with 50,000 units of the product in inventory on Jan. 1, 2001 must pay $50,000 in additional floor stocks taxes on the inventory held on that date.

A floor stocks provision ensures that all goods sold on or after the date of an excise tax increase or decrease are subject to the same amount of tax, regardless of whether the goods were held in inventory on the date of the tax increase or decrease (floor stocks date) or purchased or produced thereafter. The equal treatment is achieved by applying the new tax rate or subsidy to goods held on the floor stocks date and assessing the additional tax (or refunding the reduced tax) on existing inventory. Typically, excise taxes imposed on goods such as alcohol, tobacco and tires have floor stocks provisions.

Rev. Rul. 2001-8

Under Rev. Rul. 2001-8, payments made or received for floor stocks taxes must be accounted for as adjustments to the invoice price or production cost of the goods physically held on the floor stocks date. The ruling also provides an optional simplifying assumption for LIFO taxpayers to assume that goods physically held on the floor stocks date are those most recently purchased or produced.

Consistent with Regs. Secs. 1.471-3 and 1.263A-1, Rev. Rul. 2001-8 holds that payments made or received for floor stocks must be accounted for as adjustments to the cost of goods physically held on the floor stocks date to which the payments relate. The resulting effect on gross income or inventory depends on the extent to which the cost of goods physically held on the floor stocks date remains in ending inventory. Whether the cost of goods physically held on the floor stocks date remains in ending inventory is determined by applying the taxpayer's inventory costflow assumption (e.g., FIFO or LIFO).

Thus, to the extent the cost of goods associated with a floor stocks payment remains in ending inventory under the taxpayer's inventory costflow assumption, payments made (or received) for floor stocks increase (or decrease) the taxpayer's ending inventory. For LIFO taxpayers, payments made (or received) for floor stocks affect ending inventory only when one or more LIFO cost increments (i.e., layers) in that inventory include the cost of goods physically held on the floor stocks date. For FIFO taxpayers, payments made (or received) for floor stocks taxes generally are included in cost of goods sold (and not in ending inventory), because the goods physically held on the floor stocks date to which the payments relate usually do not remain in ending inventory.

Rev. Rul. 2001-8 contains four examples illustrating the Service's view of the correct tax accounting treatment of floor stocks payments and reimbursements. All four examples involve a dollar-value LIFO taxpayer using the double-extension method to account for inventories. The examples assume that a taxpayer can apportion the number of inventory units held on the floor stocks date among its LIFO layers in existence on that date. As a practical matter, such an apportionment is frequently impossible to make. Dollar-value LIFO is intended to track the taxpayer's aggregate dollar investment in inventory, not quantities of individual items. Rev. Rul. 2001-8 fails to explain how a dollar-value LIFO taxpayer with hundreds or thousands of items in inventory, a constantly changing product mix and a pool that contains items subject to the floor stocks tax and items not subject to the floor stocks tax can apportion the quantity of items held on the floor stocks date among its LIFO layers.

In addition, the ruling requires LIFO taxpayers to retroactively in-crease (or decrease) their prior-year(s) layer(s), as illustrated in Examples 1 and 4.

Accounting Method Change

Rev. Rul. 2001-8 states that its conclusions do not apply adversely to challenge consistent treatment by taxpayers of payments made (or received) for floor stocks before Feb. 27, 2001. A taxpayer wishing to change its accounting method to conform with Rev. Rul. 2001-8 or elect the simplifying assumption for LIFO purposes must follow the automatic accounting method change provisions of Rev. Proc. 99-49 (or its successor) with the modifications specified in Rev. Rul. 2001-8. However, such a change must be made for the first tax year in which payments are made (or received) for floor stocks after Feb. 26, 2001.

From David L. Strong, CPA, Grand Rapids, MI