Death and Taxes: Auto Dealers Face Their Final Reckoning

Abstract

With all the recent talk about economic “recovery,” it is easy to overlook the fact that auto retailers, who have weathered the worst downturn in auto sales in history, now face an even more ominous financial challenge with the repeal of last-in, first-out (LIFO) inventory accounting. For many dealers on the cusp, this may be the final deathblow after having survived drastically lower sales, tightening credit, greater capital requirements from the auto manufacturers, and the elimination of recognized brands such as Oldsmobile, Plymouth, Pontiac, Saturn, Hummer, and now Mercury.

While a paring down of the auto retail industry, particularly the domestic dealer networks, may be necessary and even welcomed by surviving dealers and the manufacturers they represent, the impact of this sector of the economy cannot be understated. Despite its importance, it has been often overlooked, as the government and public have focused their attention on large individual corporations, such as banks and the auto manufacturers themselves. While even the largest private dealerships in the nation, and even the large publicly-traded dealers such as Auto Nation and J.D. Buyrider, are relatively small in comparison with the likes of General Motors, Chrysler, AIG, Bank of America, etc., collectively they make up the single largest portion of the retail sector of the economy at 17%, accounting for $789B in annual sales in 2008[i] and 1,114,500 jobs with an annual payroll of $54B in 2007[ii]. Moreover, many dealers represent the backbone of small business, especially in small and rural communities throughout the country, paying some $20B in annual sales taxes to state and local municipalities.[iii]