Social Engineering

[malloyd]

Originally Posted by Steven Marsh

To expand a bit on what Kromm said here, this is largely because the U.S. changed the laws on warehoused resources sometime in the recent past (the late 1990s or early 2000s seems about right in my mind). It used to be that books gathering dust in a warehouse were considered a liability; you needed to pay for the warehousing of them, after all, and they weren't making you any money.

I think this must have been early 90s, I'm pretty sure it was part of the financial reform package before Sarbanes-Oxley and the Enron/Tyco fallout in 2002, and they seem to come around about every 7-10 years, with the business cycle....

Anyway the effect on publishing is a side effect, the goal here is to kill schemes where you buy an easily liquidated asset shortly before closing the books, removing the cash from your balance sheet, then sell it just after the next fiscal year starts.

[Peter V. Dell'Orto]

Originally Posted by Turhan's Bey Company

The list of playtesters seems a bit wonky; I can't imagine what I said to merit inclusion on it. Other than that, it's really, really good.

I'm down for additional material. I'm sure something I wrote before is in there, but I can't figure out what.

But so far, it's looking good.

[Landwalker]

Originally Posted by Steven Marsh

To expand a bit on what Kromm said here, this is largely because the U.S. changed the laws on warehoused resources sometime in the recent past (the late 1990s or early 2000s seems about right in my mind). It used to be that books gathering dust in a warehouse were considered a liability; you needed to pay for the warehousing of them, after all, and they weren't making you any money.

Nowadays, books in a warehouse are considered an asset; if you have 2,000 $20 books in a warehouse, that's considered $40,000 in assets, and you need to pay taxes on it accordingly.

This led to a huge incentive to try to print only as many as you could sell reasonably quickly... and to destroy/liquidate any copies you couldn't sell after a fairly short time frame.

Nur?

Either your accountant is lying to you, everything I've learned studying and practicing accounting has been a lie, or that must be a bizarre state-specific thing. Federal (and state, for me) business taxes are based on income, not on assets, and inventory doesn't generate income until it gets sold. Having it sitting on its butt in a warehouse and causing overhead costs actually reduces tax liability, since those overhead expenses reduce taxable income. Basically, spending cash (or increasing accounts payable) in order to build up inventory shouldn't have any effect at all on income until that inventory is sold and generates revenue.

Personally, I'm hoping for the bizarre state-specific thing, since neither of the other two options end well.

[Kromm]

Inventory and warehousing taxes are state-specific, yes.

[Steven Marsh]

I probably got some of my terminology wrong (my accounting lore doesn't go much above Quicken), but for the nuts and bolts about what's going on, I suggest the extremely informative (and relevant from an RPG publishing POV) article at:

http://www.sfwa.org/bulletin/articles/thor.htm

If I'm reading this right, then everything changed in 1979 (!).

One good quote:

"[The ruling] eliminated a tax dodge, and thereby made it more expensive for publishers to carry inventory from year to year. As a result, publishers have cut print runs in order to minimize inventory. They have also become quicker to dispose of inventory -- i.e., pulp it -- before the end of the fiscal year."

There's a bit more info here:

"The economics and accounting practices are complicated, but the result is that publishers suddenly found it much more expensive to hold large inventories year over year."

I suspect that, during RPGs' flush years, it was worthwhile to pay full tax value on assets in the warehouse, since it was reasonably certain to sell them. However, the migration of RPG publishing from an evergreen to a periodical format (again, mid-'90s by my memory) meant that publishers needed to be even snappier to clear items out of their warehouses.

[Pragmatic]

Originally Posted by Kromm

Inventory and warehousing taxes are state-specific, yes.

You can't do the traditional thing and find a warehouse just across state lines?

[Landwalker]

Originally Posted by Kromm

Inventory and warehousing taxes are state-specific, yes.

Thank God. I was concerned that when Steven said that the U.S. changed the warehousing laws, he was implying that the asset / inventory / warehousing taxation that followed was also federal.

Edit:

Originally Posted by Pragmatic

You can't do the traditional thing and find a warehouse just across state lines?

Might depend on the state. In some cases, the state of a company's primary operations (which I'm guessing for SJ Games is Texas) might slap them for all of their inventory rather than just in-state inventory. I know that some states up here in New England do something similar with regards to income (but usually have a compensating credit). Like the tax itself, it depends on the state. And some states are crazy.


Edit 2: In any case, thanks to Kromm and Steven both for helping clear up the situation and assuaging my panic.

[Steven Marsh]

In this case, the situation publishers find themselves facing is a national one, thanks to the IRS and a 1979 Supreme Court ruling (see my links, above).

[Landwalker]

Originally Posted by Steven Marsh

In this case, the situation publishers find themselves facing is a national one, thanks to the IRS and a 1979 Supreme Court ruling (see my links, above).

Ultimately, it depends on how a company interacts with their inventory. Although the author's breakdown of the hypothetical financial statements is self-admittedly simplified, at best, and has some things that make me cringe from a mechanical standpoint, some of the non-accounting concepts mostly hold. The article also at least does a good job of clarifying that the federal decision isn't a tax on inventory. Which is a relief.

The "just-in-time" or "lean production" strategy O'Donnell points out isn't something unique to the publishing industry, of course. It's widely taught and practiced across almost all manufacturing industries (and was really popularized by Toyota). For most industries, it's terrific. Unfortunately, publishing (or rather, writing, since the writer is ultimately the one in a squeeze) isn't one of them.


And as an aside, I know people like to demonize the IRS, but they get a bad rap. The IRS didn't and still doesn't have anything to do with this. Congress writes the tax code. The IRS just carries it out and makes sure people follow Congress's rules (which Thor, and evidently many other companies and industries, weren't). It's like blaming the police department or state patrol if you get a speeding ticket—they don't make the rules; they just enforce them.

[PK]

Originally Posted by Pragmatic

You can't do the traditional thing and find a warehouse just across state lines?

Been there, tried that. The added expenses (extra personnel, shipping stuff between the two locations, etc.) of having an Austin office and Las Vegas warehouse went a long way toward mitigating the tax savings, to the point where it wasn't worth the headache and hassles.