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Submission for the record

to the
Ways and Means Committee
of the
United States House of Representatives
on behalf of
NATSO, Representing Americas Travel Plazas and Truckstops
for the Hearing:
Fundamental Tax Reform Proposals

David H. Fialkov
Vice President, Government Affairs
Legislative and Regulatory Counsel
NATSO
703-739-8501
dfialkov@natso.com

Introduction
The National Association of Truck Stop Operators (NATSO), representing Americas
travel plazas and truckstops, submits this statement for the record with respect to
the House Ways and Means Committee hearing regarding Fundamental Tax Reform
Proposals.
As the Committee considers proposals to reform the tax code, its objective should be
to raise revenue in a manner that promotes investment and economic activity. This
will have a multiplier effect on revenue while minimizing economic disruption to
productive entities. It would be counter-productive to make capital formation more
difficult in the name of tax reform. This would only serve to encumber those entities
that drive job creation and economic growth, and thereby reduce the federal
governments ability to raise revenue effectively.
Given the above-captioned hearings focus on cash-flow and consumption-based
approaches to taxation, this statement will focus on the Last-In, First-Out (LIFO)
inventory accounting method that NATSO members utilize.
Background
NATSO is a national trade association representing travel plaza and truckstop
owners and operators. NATSOs mission is to advance the success of truckstop and
travel plaza members. Since 1960, NATSO has dedicated itself to this mission and
the needs of truckstops, travel plazas, and their suppliers by serving as Americas
official source of information on the diverse industry. NATSO also acts as the voice
of the industry on Capitol Hill and before regulatory agencies. NATSO currently
represents approximately 1,400 travel plazas and truckstops nationwide, comprised
of more than 1,000 chain locations and more than 300 independent locations,
owned by approximately 200 corporate entities. Approximately 80 percent of
NATSO members facilities are located within one-quarter mile of the Interstate
Highway System, serving interstate travelers exiting the highway and serving as the
home away from home for the nations professional truck drivers.
Efficient and effective operations at truckstops and travel plazas allows NATSOs
members to sell products to the trucking industry and the American public at lower
costs. This makes the costs of traveling less expensive and lowers the costs of
transporting goods by truck, which can serve to make all goods more affordable.
NATSOs members operate in a diverse and evolving industry. Every travel center
and truckstop includes multiple services, from motor fuel sales to auto-repair and
supply shops, to hotels, sit-down restaurants, quick-service restaurants and food
courts, and convenience stores. It is an evolving industry that once was tailored
primarily to truck drivers, and now caters to the entire traveling public, as well as
the local population that lives in close proximity to a travel center location.

Last-In, First-Out (LIFO) Accounting


The Committee should maintain LIFO as an acceptable inventory accounting
method. NATSOs members, including many pass-through entities, utilize LIFO as
a more accurate accounting method for measuring operations current economic
performance. Repeal or modifications of LIFO would result in substantial, unfunded
tax liabilities for LIFO businesses. Many of these businesses will have no
corresponding cash with which to satisfy the resulting liabilities. This will create
illiquidity events, resulting in job losses and business closures.
In general, businesses must track and account for inventory to determine the cost of
goods sold and to determine taxable income. Both LIFO and First-In, First Out
(FIFO) accounting methods serve similar purposes for the companies that use
them: creating a consistent measure of the cost of goods sold, allowing businesses to
accurately determine their economic performance.
Businesses that sell products in volatile markets or sell products that tend to rise in
price are likely to use LIFO. Companies in stable markets or that sell products likely
to decline in price are likely to use FIFO. FIFO is not the default accounting
method, and LIFO is not an exception or a loophole. In fact, LIFO has been a
generally approved accounting method for over seventy years.
LIFO does not only affect large, integrated oil companies. Indeed, LIFO is used by
more than one third of all U.S. companies, including hundreds of thousands of passthrough and small and mid-sized businesses. Disallowing the use of LIFO as an
acceptable accounting method would overstate a businesss profits, generating tax
liabilities that would decrease the business owners ability to replace inventory or to
reinvest in the company and create jobs.
The Flaws of a Recapture Tax
While LIFO repeal as a general matter is a serious concern for NATSOs members,
recent proposals are particularly troubling due to the inclusion of a recapture tax
on LIFO reserves. Retroactively changing the law and recapturing LIFO reserves
outside of existing recapture events (e.g., reduction in inventory levels, business
liquidation, etc.) would amount to a large, unforeseen tax liability for past business
activities. As a practical matter, a businesss LIFO reserve is not an accumulation of
funds to which the business necessarily has access; these funds often have been
either reinvested in the business or disbursed as income (in which case the
recipient already would have incurred a corresponding tax liability).
For a business to pay a recapture tax, it must have a corresponding business activity
that generates sufficient funds to pay that tax. Current law accommodates this
reality by limiting recapture events to instances that generate cash flow, i.e., where
inventories are reduced or the business is liquidated.

A recapture tax on past business activities disregards this business reality. Indeed,
it presumes sufficient business activity to generate the necessary cash flow when
such activity may not exist. If business owners are faced with such impractical tax
liabilities, they will be forced to generate inefficient liquidity events by assuming
debts, selling their business, or potentially entering bankruptcy proceedings. In
those instances where a business has sufficient cash reserves, the recapture tax
would deprive that business of capital that otherwise would be used for
reinvestment and job creation.
The recapture tax is even more onerous considering the unreasonably short time
frames contained in recent LIFO repeal proposals. For example, former Committee
Chairman Dave Camp (R-WI) developed draft tax reform legislation prior to leaving
office that would have required LIFO reserves to be recaptured and included in
income over a four-year period. Many NATSO members simply do not have the cash
reserves or liquidity to recapture their LIFO reserves in such a short time frame.
The recapture tax and its short transition time frame would result in illiquidity
events and potentially the forced sale of many businesses. If Congress does elect to
modify current LIFO accounting methods, taxpayers should be permitted to include
LIFO reserve funds in income over an extended period of time substantially longer
than four years.
Conclusion
Both LIFO and FIFO are appropriate inventory accounting methods. If Congress
repeals LIFO, it could create a preference in the tax code favoring one type of
business over another. Furthermore, subjecting LIFO reserves to a recapture tax is a
breach of faith with taxpayers utilizing LIFO. These businesses have dutifully
followed tax laws for decades, properly accounting for changes in their investments
and paying the required taxes on their reserves.
Advocates for repealing LIFO do not oppose the merits of the accounting system, but
are simply trying to find additional sources of revenue. NATSO understands and
supports the need to raise revenue and reduce rates; however, it should be
accomplished without imposing debilitating tax liability on a large percentage of the
American tax base.
NATSO urges the Committee to recognize the severe economic consequences that
could result from the repeal or modification of LIFO, and instead maintain LIFO as
an acceptable inventory accounting method.