4.43.1  Retail Industry (Cont. 6)

4.43.1.13 
Business Expenses

4.43.1.13.8 
Other Information

4.43.1.13.8.3  (07-23-2009)
Vendor Programs

  1. In order to gain new business or to retain and increase the existing customer base, numerous vendors offer incentives to retailers. Awards or prizes received by retailers are not merchandise intended to be offered for sale, they are enticements offered to owners or to other authorized decision makers with the intention of obtaining or increasing sales to that retailer. In some cases the retailer will pay a higher price and forfeit allowances or rebates in order to qualify for trips or other personal incentives.

  2. Examples of incentives and possible scenarios include:

    1. Vendor manufacturers

    2. Purchase plateau awards which are received by the retailer as a result of an offering to all applicable retailers. Vendor A, Inc. awards a $ 500 color television to non-corporate Retailer X, who properly reports the $ 500 value in income. Vendor B, Inc. awards a $ 2000 trip to non-corporate Retailer Y, but does not issue the required Form 1099, Retailer Y does not report the fair market value as income, since no Form 1099 was issued.

    3. Bribes or kickbacks are given to owners or employees as a result of the vendor's attempt to get the product purchased. Vendor A's salesperson pays one-third of his/her commission to the corporate buyer in exchange for the buyer discontinuing the purchase of a competitor's product.

    4. The retailer may purchase personal, non-merchandise items from the vendor which are billed to the retailer as part of a normal product invoice. The retailer pays the invoice and deducts the full amount as a cost of goods sold. For example, a wholesaler offers several different trips which a retailer can purchase at a favorable rate. The reduced rate is possible as a result of the wholesaler negotiating with travel agents for a large number of these trips, also the wholesaler requests and receives monies from several large product manufacturers to offset a portion of the costs. The retailer selects a trip with a cost of $ 4000. For the next 5 months the wholesaler will include on its monthly invoice a line item for $ 800. Since the monthly purchases average between $ 50,000 and $ 100,000, the extra amount does not distort the payment.

  3. Audit procedures can include the following:

    1. Secure and review internal audit reports and policies regarding purchasing practices.

    2. Request information pertaining to key employees who have been dismissed and interview them about retailer treatment of vendor incentives.

    3. Ask questions regarding the receipt and disposition of non-inventory vendor awards.

    4. Determine if the owners, family, or key employees took any vacations or received any property provided by vendors.

4.43.1.13.8.4  (07-23-2009)
Owner Initiated

  1. Personal expenses of the owners of a retail business may find their way into a tax return and be deducted as part of cost of goods sold or some type of expense.

  2. These expenditures can cover a broad range of services or merchandise. In many cases the taxpayer purchases personal goods or services from vendors with whom they also conduct normal business. In other cases vendors foreign to the operation of the business are involved.

  3. Retailers usually have vendor access to many products or services which the average household consumes or uses during the year. The owners of a closely held business are not likely to purchase products for their own use at retail from a competing business when the product is available at their own store for cost.

  4. Audit procedures can include the following:

    1. Secure and review the taxpayer's policy and practice regarding merchandise withdrawn for personal use and determine the reasonableness and accuracy of the records maintained.

    2. Review the accounts payable records for unusual vendors.

4.43.1.14  (07-23-2009)
Business Tax Credits

  1. This section provides general background information about common business tax credits within the Retail industry.

  2. Tax credits are generally appealing to businesses because they give a business a more favorable dollar-for-dollar reduction in tax, rather than a deduction from taxable income.

  3. Temporary credits are sometimes available to taxpayers due to disasters occurring from hurricanes (e.g., Hurricane Katrina in 2005), severe storms, tornadoes, earthquakes and floods. These credits, when codified, are generally of limited duration and within specified time periods.

4.43.1.14.1  (07-23-2009)
Potential Compliance Risks

  1. Is the retailer entitled to claim the amount reported as a tax credit?

  2. Is the amount reported as a tax credit proper? A tax credit is generally limited by amount, percentage, or a combination of both.

  3. Did the retailer reduce, if required to do so, any related tax deductions (e.g., salaries and wages expense) by the amount of related tax credit?

4.43.1.14.2  (07-23-2009)
General Tax Principles

  1. IRC 38 governs business tax credits.

  2. Research and Experimental (R&E) - IRC 41

  3. Investment Credit – IRC 46

  4. Work Opportunity Tax Credit (WOTC) – IRC 51

  5. Welfare-to-Work Credit (W-t-W) – IRC 51A

  6. New Markets Tax Credit – IRC 45D

  7. Empowerment Zone Credit – IRC 1396

  8. Indian Employment Credit – IRC 45A

4.43.1.14.3  (07-23-2009)
Key Considerations

  1. Did the retailer use a consultant in the computation of its tax credit(s) claimed on its original tax return or amended tax return?

  2. Did the retailer pay an outside vendor to compute its tax credits on a contingency fee basis or as a percentage of credits earned?

  3. Has the retailer filed any claims (either formal or informal) for additional credits?

4.43.1.14.4  (07-23-2009)
Industry Practices

  1. Retailers frequently use outside consultants such as payroll companies to compute certain credits.

  2. Retailers routinely experience rapid labor turnover and oftentimes hire persons from targeted groups of hard-to-employ individuals under several statutory provisions that provide a tax credit.

4.43.1.14.5  (07-23-2009)
Financial Reporting

  1. Federal income tax credits generally have no impact on the retailer’s books for financial purposes.

  2. Many credits require a proportional decrease in the related expense resulting in a Schedule M adjustment.

4.43.1.14.6  (07-23-2009)
Retail Topics and Issues

  1. Some tax credits an examiner may see on a retailer’s tax return include:

    1. Research and Experimental (R&E) - IRC 41

    2. Investment Credit – IRC 46

    3. Work Opportunity Tax Credit (WOTC) – IRC 51

    4. Welfare-to Work Credit (W-t-W) – IRC 51A

    5. New Markets Tax Credit – IRC 45D

    6. Empowerment Zone Credit – IRC 1396

    7. Indian Employment Credit – IRC 45A

4.43.1.14.6.1  (07-23-2009)
Research and Experimental (R&E)

  1. Retailers generally do not deal in basic research, development, or experimentation of new products. Some retailers, however, have claimed research credit related to computer software development and other research activities.

  2. The credit is computed on Form 6765.

  3. Should the examiner encounter this credit on the examination, contact the Research Credit Technical Advisor for assistance.

4.43.1.14.6.2  (07-23-2009)
Investment Credit

  1. The investment credit comprises the following:

    1. Rehabilitation credit

    2. Energy credit

    3. Reforestation credit

  2. Examiners may need to take a closer look at these credits if deemed material.

  3. The most common type of investment credit on a retail examination is the energy credit.

  4. Many retailers look for energy efficiencies when remodeling or building new stores.

4.43.1.14.6.3  (07-23-2009)
Work Opportunity Tax Credit (WOTC)

  1. The temporary WOTC, (formerly known as the "Targeted Jobs Credit" ), which was authorized by the Small Business Job Protection Act of 1996, is meant to induce employers to hire members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program and other groups thought to experience employment problems regardless of general economic conditions (e.g., food stamp recipients and ex-felons) as defined by IRC 51 (d).

  2. In 2007, the Tax Relief and Health Care Act of 2006 (P.L. 110-28) extended the WOTC provision through August 31, 2011. P.L. 110-28 merged the W-t-W Credit into the WOTC effective for job start dates beginning January 1, 2007. It added "rural renewal county" to the places of residence for designated community residents. The legislation also:

    1. Adopted H.R. 976's definition of disabled veterans

    2. Raised the age limit to less than 40-year olds for designated community residents

    3. Clarified the definition of vocational rehabilitation referrals

    4. Allowed the WOTC and tip credit against the AMT.

  3. WOTC is available on an elective basis. WOTC allows employers a credit against their federal tax liability for hiring individuals from one or more of eleven targeted groups. The targeted groups are:

    1. Qualified TANF recipients

    2. Qualified Veterans

    3. Qualified Ex-Felons

    4. Qualified Designated Community Residents (DCR), formerly the High Risk Group

    5. Qualified Vocational Rehabilitation Referrals

    6. Qualified Summer Youth

    7. Qualified Food Stamps recipients

    8. Qualified SSI recipients

    9. Qualified Long-term Family Assistance recipients, formerly Welfare-to-Work individuals

    10. Unemployed veterans (2009-2010 only)

    11. Disconnected youth (2009-2010 only)

  4. The amount of the credit available is determined by the amount of qualified wages paid by the employer. For purposes of the credit, generally wages are defined by reference to the Federal Unemployment Tax Act (FUTA) definition of wages contained in IRC 3306(b). Qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employee.

  5. The WOTC is a two-tiered tax credit providing a 25 percent credit of an employee’s first year wages up to $6,000 for employees that work between 120 and 399 hours and 40 percent of the employee’s first year wages up to $6,000 for employees that work at least 400 hours. The maximum credit is $2,400. With respect to qualified summer youth employees, the maximum credit is $1,200 (40 percent of the first $3,000 of qualified first year wages).

  6. Certification. An individual is not treated as a member of a targeted group unless, on or before the day on which the individual begins work, the employer receives or requests in writing certification from the designated local agency that the individual is a member of the targeted group. The agency is designated by the Department of Labor who administers the WOTC. The examiner should review such receipts or requests by comparing postmarks (or received dates) with dates the individual actually begins work.

  7. Minimum Employment Period. No credit is allowed for qualified wages paid to employees who work less than 120 hours in the first year of employment.

  8. Non-qualified Individuals. No credit is allowed for wages paid to a relative or dependent of the employer. No credit is allowed for wages paid to an individual who is more than a 50 percent owner of the entity. Similarly, wages paid to replacement workers during a strike or lockout are not eligible for WOTC. Wages paid to any employee during any period for which the employer received on-the-job training program payments with respect to that employee are not eligible for WOTC. WOTC generally is not allowed for wages paid to individuals who had previously been employed by the employer (i.e. "rehires" ).

  9. Independent Employment Firms. Retailers who routinely employ members of targeted groups often rely on independent employment firms who pre-screen the individuals to ensure that all the qualification and certification requirements are met for the retailer. An additional review of these qualifications by a designated local agency should satisfy any concerns the examiner may have as to proper designation of an individual to a specific targeted group.

  10. Some tax compliance concerns involving WOTC and W-t-W credits emerged shortly after the issuance of Rev. Rul. 2003-112 in November 2003.

    1. Some taxpayers contended they were improperly denied certification for certain new hires prior to the revenue ruling.

    2. In May 2004, the IRS became aware of taxpayers filing refund claims to preserve entitlement to WOTC or W-t-W tax credits for past years.

    3. Some taxpayers contended that their entitlement to WOTC and W-t-W tax credits does not necessarily require state certification.

    4. Claims cite the Targeted Jobs Tax Credit (TJTC) litigation to support the position that state certification is not required.

    5. Case law allowed the TJTC without certification where the state agencies were no longer operating due to lack of funding. Announcement 2000-58 provided an administrative resolution for TJTC, allowing a credit for 50 percent of taxpayer claims.

    6. TJTC and WOTC are different thus the taxpayer’s position has no merit.

    7. It is the IRS’s position that no credit will be allowed for any WOTC and W-t-W claims without proper certification by a designated local agency in accordance with the statute; see IRS Announcement 2006-49.

  11. Audit Considerations

    1. If the retailer employs a large number of targeted individuals, the examiner should consider a statistical sample to ensure that all IRC 51 requirements have been met.

    2. Does the retailer have certification from a designated local agency for each of the employees for which the WOTC is claimed?

    3. Did the retailer claim a credit for any individuals who are not qualified for WOTC?

    4. Does the amount reported as qualified wages include any amount paid or incurred that the retailer used to claim for other employment-related tax credits? A business cannot count wages for both the WOTC and W-t-W credits and other employment-related tax credits.

    5. Did the retailer reduce the amount deducted on its tax return for salaries and wages by the amount of the WOTC? The deduction must be reduced by the amount of the credit.

    6. Did the retailer consider the employee’s employment period in computing the credit percentage? A business cannot claim the WOTC and W-t-W credits if the employee worked less than 120 hours. If an employee works between 120 and 400 hours, the business can claim a credit of 25% for hours worked after 10/1/1997.

    7. Did the amount reported include amounts paid or incurred for employees that do not qualify for the credit?

4.43.1.14.6.4  (07-23-2009)
Welfare-to-Work Credit (W-t-W)

  1. The Taxpayer Relief Act of 1997 added W-t-W to the Internal Revenue Code.

  2. The W-t-W tax credit was inserted as a separate provision in the Internal Revenue Code to help the federal effort to move welfare recipients onto payrolls. It is meant to encourage employers to hire particularly disadvantaged members of the TANF group, namely, long-term family assistance recipients.

  3. Like WOTC, W-t-W is available on an elective basis. Generally, qualified wages consist of wages attributable to service rendered by a long-term family assistance recipient during the two-year period beginning with the day the individual begins work for the employer.

  4. The W-t-W program provides employers with credits up to $3,500 for a qualified worker’s first year of employment and $5,000 for the second year.

    1. The credit is equal to 35 percent of the first $10,000 in qualified wages for new hires who work 400 or more hours (or 180 days) the first year.

    2. The credit increases to 50 percent of the first $10,000 in qualified wages the second year.

  5. The Tax Relief and Health Care Act of 2006 (P.L. 110-28) made many changes to the W-t-W credit including incorporating the separate provision for long-term assistance recipients into the WOTC. For long-term family assistance recipients hired after January 1, 2007:

    1. The credit is equal to 25 percent of the first $10,000 in qualified wages for new hires who work between 120 and 399 hours the first year of employment.

    2. The credit is equal to 40 percent of the first $10,000 earned during the first year of employment if individuals work at least 400 hours.

    3. The credit is equal to 50 percent of the first $10,000 earned for the second year of employment.

    4. Qualified wages are cash.

    5. The examiner should consider the WOTC audit considerations when examining the W-t-W credits.

4.43.1.14.6.5  (07-23-2009)
New Market Tax Credit

  1. The New Markets Tax Credit, IRC 45D as added by the Community Renewal Act of 2000, is a new tax credit created to spur investment in low-income or economically disadvantaged areas.

  2. As part of the general business credit, the New Markets Tax Credit is five percent of a qualified equity investment in a qualified community development entity (CDE) as of the original issue date. The five-percent rate is for the first three allowance dates and increases to six-percent for each of the four remaining allowance dates. The allowance dates are the initial offering date and the first six anniversary dates of the initial offering date. The total credit is 39 percent and is claimed over seven annual allowance periods. Credit limitations for each calendar year are applicable.

  3. As part of the general business credit, the New Markets Tax Credit is subject to the limitations of IRC 38 and the carryover rules of IRC 39. However, the credit may not be carried back to tax years before January 1, 2001.

  4. A qualified equity investment is the cost of any stock in a corporation or any capital interest in a partnership that is a qualified CDE, as certified by the Secretary of the Treasury, if:

    1. The investment is acquired on the original issue date solely in exchange for cash,

    2. Substantially all of the cash is used to make qualified low-income community investments, and

    3. The investment is designated by the qualified CDE for new markets credit purposes.

  5. If during the seven years from the original issue date of the qualified equity investment, a recapture event occurs with respect to the investment, then the New Markets Tax Credit must be recaptured. The recapture penalty is severe. Although only the credits claimed (i.e., those credits for which the taxpayer received a tax benefit) are recaptured, the underpayment interest begins to accrue from the due date of the return without extensions for each year the credits were claimed. Additionally, the interest may not be deducted as a reasonable and necessary business deduction. Finally, the recapture amount is treated as an increase in the tax after the regular tax liability and the alternative minimum tax liability are determined.

  6. The Secretary of the Treasury shall prescribe regulations for this section that:

    1. Limit the amount of credit for investments which are directly or indirectly subsidized by other federal benefits,

    2. Prevent abuses of this section,

    3. Provide guidance to determine if the investment requirements are met Impose appropriate reporting requirements, and

    4. Apply this provision to newly formed entities.

4.43.1.14.6.6  (07-23-2009)
Empowerment Zone Credit

  1. The Empowerment Zone (EZ) and Enterprise Community (EC) Initiative is focused on the creation of self-sustaining long-term development in distressed urban and rural areas throughout the country.

  2. The Federal government has established approximately 80 Empowerment Zones and Renewal Communities in many areas across the U.S. The federal tax benefits available in EZs and ECs are designed to encourage businesses to invest in these areas.

  3. The Empowerment Zone Employment Credit (EZEC) provides businesses with an incentive to hire individuals who both live and work in an empowerment zone.

  4. A qualified zone employee is any full-time or part-time employee who:

    1. Performs substantially all employment services for an employer located within an empowerment zone,

    2. Resides within the same empowerment zone where that individual is employed (anywhere in the District of Columbia for the DC zone), and

    3. Is employed by the employer for at least 90 days while performing those services.

  5. Qualified zone wages are any wages the business pays or incurs for services performed by an employee while the employee is a qualified employee. Qualified zone wages include training and education expenses.

  6. The total amount of qualified wages (including training and education expenses) cannot be more than $15,000 for each employee each tax year.

  7. The credit is 20% of the current year qualified wages.

  8. Form 8844 is used to claim this credit. The credit is a component of the general business credit.

  9. Audit Techniques:

    1. The regulations do not impose specific record-keeping requirements. However, an employer is expected to have and maintain records sufficient to identify each employee with respect to whom the employer claims the EZEC, and to maintain records sufficient to establish where each employee actually worked and lived during the relevant period.

    2. The EZEC website is a great tool for examiners to determine if a particular area is considered an EZ or EC area. The current website is http://www.ezec.gov.

    3. An address locator is available on the internet to assist the examiner in determining whether a business or residence is located within a Renewal Community (RC), EZ or EC. This online tool can help verify if a particular location is eligible for the tax incentives offered in RC/EZ/EC areas. The website is administered by the U.S. Department of Housing and Urban Development. The current website for the "RC/EZ/EC Address Locator" is http://egis.hud.gov.

  10. Audit Considerations

    1. Did the retailer claim the EZEC with respect to wages paid or incurred during the calendar year to employees providing services at a store located within an enterprise community or zone? A retailer is not entitled to claim the EZEC with respect to wages paid or incurred during the calendar year to employees providing services at a store located outside an enterprise community or zone.

    2. Does the amount shown as qualified wages include any amount paid or incurred that the retailer used to claim the WOTC? A business cannot count wages for both the WOTC and W-t-W credits and the EZEC.

    3. Does the retailer reduce the amount deducted on its tax return for salaries and wages by the amount of the EZEC? The deduction must be reduced by the amount of the credit.

    4. Does the amount reported include amounts paid or incurred for employees that do not qualify for the credit? A business cannot count wages paid to an employee that is:

    • Related to the employer

    • A five-percent owner

    • An individual employed for fewer than 90 days

    • An employee of golf courses, massage parlors, hot tub or suntan facilities, gambling facilities and liquor stores

    • An employee of farming businesses with owned or leased assets having a fair market value or basis exceeding $500,000.

4.43.1.14.6.7  (07-23-2009)
Indian Employment Credit

  1. The Indian Employment Credit provides businesses with an incentive to hire individuals who live on or near an Indian reservation. A business can claim the credit if it pays or incurs qualified wages to a qualified employee.

  2. A qualified employee is:

    1. An enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe, or

    2. An employee who performs substantially all of his or her services for the business within an Indian reservation,

    3. While performing those services, the employee has his or her main home on or near that reservation.

  3. Qualified wages are any wages the business pays or incurs for services performed by an employee while the employee is a qualified employee. Wages are generally defined as those wages subject to the FUTA without regard to the FUTA dollar limit.

  4. Health insurance costs a business pays on behalf of a qualified employee are treated as qualified wages. However, amounts paid or incurred for health insurance under a salary reduction arrangement are not treated as qualified wages.

  5. The total amount of qualified wages (including qualified employee health insurance costs) cannot be more than $20,000 for each employee each tax year.

  6. In most cases, the credit is 20% of the excess of the current year qualified wages and qualified employee health insurance costs over the sum of the corresponding amounts paid or incurred during calendar year 1993.

  7. Form 8845 is used to claim this credit.

  8. Audit Considerations include the following:

    1. Did the amount reported as qualified wages include any amount paid or incurred that the retailer used to claim the WOTC? A business cannot count wages for both the WOTC and W-t-W credits and the Indian Employment Credit.

    2. Did the retailer reduce the amount deducted on its tax return for salaries and wages by the amount of the Indian Employment Credit? The deduction must be reduced by the amount of the credit.

    3. Does the amount reported include amounts paid or incurred for employees that do not qualify for the credit? A business cannot count wages paid to an employee that is: (1 An employee to whom the retailer paid or incurred wages at a rate that would cause the retailer to pay the employee more than $30,000 if the rate applied for the entire year, (2) Related to the employer, (3) A certain dependent, (4) Any five-percent owner, (5) An individual who performs services involving certain gaming activities, and (6) An individual who performs services in a building which houses certain gaming activities.

    4. About two-thirds of the state of Oklahoma is classified as former Indian reservations that qualify for the Indian employment tax credit.

4.43.1.14.6.8  (07-23-2009)
Audit Techniques

  1. Review the following Forms:

    1. Form 3468, Investment Credit (one of the components of the general business credit)

    2. Form 3800, General Business Credit

    3. Form 5884, Work Opportunity Tax Credit

    4. Form 8844, Empowerment Zone and Renewal Community Employment Credit

    5. Form 8845, Indian Employment Credit

    6. Form 1120, Schedule J, Line 6d to assess audit risk

  2. Prepare a comparative analysis for multiple tax years to identify any unusual fluctuations from year to year

  3. Review Form 8886 for disclosure of contingency fees related to credits

  4. Review the workpapers used to calculate the dollar amounts of the credit.

  5. Verify the amount of the carryover to the current year under exam

  6. Review all supporting documentation

  7. Review claims for credit not claimed on the original filed tax return

  8. Certain credits require a reduction in the amount of the otherwise allowable expense deduction. Verify a Schedule M adjustment was made to reduce the related expense deduction.

  9. Specialists should be contacted when appropriate

4.43.1.14.6.9  (07-23-2009)
Other Information

  1. Should the examiner encounter other tax credits not included in this section, consult the Retail Technical Advisors.

4.43.1.15  (07-23-2009)
Electronic Commerce

  1. [Reserved] This section has been reserved for electronic commerce. Refer to http://www.irs.gov/businesses/small/article/0,,id=108188,00.html.

4.43.1.16  (07-23-2009)
Field Specialists

  1. This section provides a brief description of the specialty areas that may affect the retailer. The examiner will want to refer to a specialist in the local area to address an issue in the area of international, financial products, and employment tax. The examiner will also want to refer to a specialist if they require the assistance of an economist, engineer, or a computer audit specialist. This section will briefly provide an explanation of how these specialists will be able to assist the examiner in the audit of a retailer.

  2. Each of the specialty areas is described in detail in other parts of the IRM. A reference to the applicable IRM sections is provided in each of the discussions below.

4.43.1.16.1  (07-23-2009)
International

  1. This section briefly describes how international issues can affect the retailer. For further information on the International program, please refer to IRM 4.60 and 4.61. Referral criteria and procedures are found specifically in IRM 4.60.6.

4.43.1.16.1.1  (07-23-2009)
CFCs Operating as Buying Agents

  1. A large portion of a retailer’s overseas purchases of apparel comes from relatively low-wage countries, particularly in Asia.

  2. Imported merchandise from these countries is usually made to the specifications of the importing American wholesalers and retailers. Also, fabric is often produced in a country other than that where the cutting and sewing of the apparel takes place.

  3. United States (U.S.) purchasers often use buying agents or trading companies as intermediaries when dealing with overseas factories. Although these may be independent firms, they are often subsidiaries ("CFC" or Controlled Foreign Corporation) of the domestic purchaser.

  4. The foreign intermediary (whether related or unrelated) may perform a number of functions. These may include:

    1. Inspecting the goods for quality both during production and at completion

    2. Assisting in the selection of factories and the procurement and refinement of initial samples

    3. Arranging and coordinating the supply of fabric

    4. Supervising shipping logistics

    5. Keeping the U.S. buyer informed about market conditions in the supplying country or region

  5. Potential transfer pricing issues can arise under IRC 482 when the CFC performs these functions. In determining the potential transfer pricing issue, the examiner should assess the real economic risk borne by the CFC.

  6. When a CFC handles goods which are manufactured or consumed outside of its country of incorporation, there are also potential issues involving foreign base company income under Subpart F.

4.43.1.16.1.2  (07-23-2009)
Product Pricing by the CFC or the Foreign Controlled Corporation (FCC)

  1. Transfer pricing and IRC 482 issues can arise anytime there are transactions between related parties. The examiner should be aware of this issue particularly when one of the parties is a foreign entity that does not file a U.S. tax return. These entities could be a foreign corporation controlled by U.S. shareholders (a CFC), a U.S. corporation owned or controlled by non-U.S. shareholders (an "FCC", or Foreign Controlled Corporation), or other entities where common control exists between a U.S. taxpayer and a non-U.S. entity.

  2. IRC 482 cases involve determining whether prices charged in controlled transactions meet the arm's length standard. The purpose is to place a controlled taxpayer on par with an uncontrolled taxpayer, as if the taxpayer were dealing at arm's length with an uncontrolled taxpayer.

  3. Treas. Reg. 1.482-1(c) establishes a best method rule for selecting the proper method for determining the arms length price. The charge for a controlled transaction must be determined under the method that, under the facts and circumstances, provides the most reliable measure of an arm's length result. Treas. Reg. 1.482-3 and Treas. Reg 1.482-4 list specified methods for determining an arm's length charge for a controlled transfer of tangible property and intangible property, respectively. For more information on examining IRC 482 issues, please see IRM 4.61.3.

  4. When examining a company in the apparel industry, the examiner should be aware of commission charges between the US parent and the CFC. Buying agents or trading companies purchase inventory from foreign sources and then sell them to the domestic company. An issue may arise about the appropriate compensation for the CFC.

  5. In evaluating the arm's-length nature of the commission arrangement between the domestic parent and the CFC under IRC 482, steps to be taken typically would include efforts:

    1. To identify and develop comparables in the same geographic market

    2. To distinguish or make appropriate adjustments to the taxpayer's comparables or other comparables that are identified

    3. To adjust the CFC's results based on the results of comparable uncontrolled transactions, to the extent those can be found.

  6. To start, a functional analysis must be made of the managerial, financial, and other links between the domestic parent and its CFC. This would involve an analysis of the functions performed within both companies.

  7. The following checklist has been prepared as an aid in the identification and collection of basic economic and financial data needed for the development of IRC 482 issues.

    1. Name and geographic location of all related entities: How the entities are related, and where they are incorporated

    2. Principal business activity of each affiliate: Products involved, levels of market served, and principal customers

    3. Copies of most detailed financial statements available including supporting schedules for each affiliate for each year in question

    4. Information for controlled sales between affiliates regarding type of property involved, functions performed, and value contributed by each of the parties

    5. Copies of all contracts and/or agreements for controlled sales regarding: provision of quota for exports, provision of financing to support manufacturing and shipping processes, provision with respect to initial samples and suggesting modifications to samples, provision of test orders, provision of administrative freight service, assumption of risks for defects or delivery, and taking title to finished goods .

    6. Detailed information relative to any uncontrolled sales of taxpayer in which the physical property and circumstances were similar to those of the controlled sales

    7. Discussions with corporate officers, members of the tax department, department heads or tax professionals employed by the company. Information should be obtained directly from individuals involved in the actual day-to-day operations and not through the tax department personnel.

    8. Acceptable comparables

    9. The principal and background documents described in the regulations under Treas. Reg. 1.6662-6. The failure to maintain or timely produce such documentation may be grounds for imposition of the transfer pricing penalty under IRC 6662. See also Rev. Proc. 94-33.

  8. Not all of the above functions may be performed on every examination, but they do provide a starting point for the examiner. Examiners must be resourceful and use techniques that may be required under each particular set of facts and circumstances in each case.

  9. It is important to have the economist and local counsel involved as early as possible. They can assist the examiner in selecting and seeking cooperation from potential third party witnesses and in selecting the correct method for determining the arm's-length price.

4.43.1.16.1.3  (07-23-2009)
Advance Pricing Agreements (APA)

  1. IRC 482 issues involve very substantial resources for the taxpayer and the IRS. Many IRC 482 issues have been successfully resolved before the filing of the taxpayer's return or before the IRS elevates the issue in an examination through the use of Advanced Pricing Agreements (APAs).

  2. An APA is an agreement between the IRS and the taxpayer on a transfer pricing method. This methodology may be applied to any apportionment or allocation of income, deductions, credits, or allowances between or among two or more entities owned or controlled, directly or indirectly, by the same interests.

  3. The APA process is designed to be a flexible problem-solving process, based on cooperative and principled negotiations between taxpayers and the IRS. Taxpayers formally initiate the process for APAs. APAs require discussions among the taxpayer, one or more associated enterprises, and one or more tax administrations, including the IRS.

  4. APAs exist under our various tax treaties and are consummated through each country's Competent Authority office's referral procedures. A more extensive description of APAs can be found in the Tax Treaty Related Matters of IRM 4.60.3.

4.43.1.16.1.4  (07-23-2009)
Foreign Base Company Sales Income

  1. IRC 954(a)(2) and (d) define foreign base company sales income as income derived in connection with the purchase/sale of personal property from/to (or on behalf of) a related person. In this case, the property is manufactured, produced, grown, or extracted outside the country where the CFC is created or organized. In addition, the property is purchased or sold for use, consumption, or disposition outside such foreign country.

  2. Buying agents or trading companies purchase inventory from foreign sources and then sell it to the domestic company. Most domestic companies establish their own buying agents in foreign countries.

  3. New sources for apparel production are sprouting up in the Philippines, Indonesia, Singapore, Sri Lanka, South Korea and the People's Republic of China. However, U.S. companies are still using their Hong Kong buying agents to procure goods manufactured in other countries.

  4. Nearly all merchandise that is bought from these low wage countries is made to the specifications of the importing U.S. producers and retailers. This means that U.S. purchasers provide samples of the styles and the designs they want produced and often supply the fabrics, which they may have purchased in another country. All of this is coordinated through the buying agent, who may then treat the sale of the merchandise to the U.S. Company as a sale of its merchandise.

  5. For more information on Foreign Base Company Sales Income, refer to IRM 4.61.7.

  6. Suggested audit guidelines are:

    1. Analyze gross income figures to ensure that proper costs are deducted from gross receipt figures

    2. Ascertain that the taxpayer is limited to the cost figures according to the U.S. tax accounting concepts so that the CFC includes or excludes costs that should or should not be in the cost of goods sold computation

    3. Determine if, in arriving at the cost of goods sold for Subpart F income sales, the taxpayer was consistent in its method of computation for purposes of applying the de minimis rule (the lesser of 5 percent of gross income or $ 1,000,000) or the full inclusion rule (70 percent of gross income) under IRC 954(b)(3).

    4. Be aware that purchases or sales may be made on behalf of a related person with a commission paid to the CFC which would, if identifiable, be Subpart F income. Examiners should be alert to this possibility as the commission would come from the unrelated third party and would not stand out as income arising in a transaction between related parties.

4.43.1.16.1.5  (07-23-2009)
Other International Areas

  1. There are numerous other international issues that may affect the retailer. These include: permanent establishment rules, certain branch income, foreign tax credit, extraterritorial income, foreign sales corporations, IRC 199 issues, Captive Offshore Insurance, and joint operations with foreign entities.

  2. These issues are further detailed in IRM 4.61. International examiners have special training on the various international issues. Consideration should be given to making a referral to an International specialist. Referral criteria and procedures are specifically found in IRM 4.60.6.

4.43.1.16.2  (07-23-2009)
Computer Assisted Audit Techniques Programs

  1. This section briefly describes the computer audit specialist’s (CAS) role in the examination of a retailer. For more information in the CAS program, please refer to IRM 4.47.

  2. A retailer’s large volume of business transactions results in a large volume of computerized data. The CAS will facilitate the examination of a retailer with computerized records.

  3. A CAS can be an integral part of the exam team. As a team member, the CAS can:

    1. Provide an overview of accounting systems

    2. Generate reports from data not available in hardcopy format

    3. Plan examination areas, develop issues, lay groundwork for future issues

    4. Examine issues that were previously considered beyond reach due to the large amount of data that needed to be screened in order to uncover meaningful details

  4. A CAS can assist the exam team by providing numerous reports that may assist the examiner. The following is not an all-inclusive list:

    1. Comparatives from year to year

    2. Stratification of accounts

    3. Selection of detailed invoices

    4. Statistical sampling

    5. Defragmenting of invoices

    6. Vendor analysis

    7. Analysis of double-sided journal entries

4.43.1.16.2.1  (07-23-2009)
Specific Retail Areas

  1. Retailer enters into a large volume of business transactions every day, including transactions for sales to customers and purchases from vendors. The examination of a retailer should include special consideration of the accounting systems and records used to account for these voluminous transactions.

4.43.1.16.2.1.1  (07-23-2009)
Inventory In-transit (02-14-2008)

  1. Cost of Goods Sold (COGS) is the largest expense for a retailer. Ending inventory, which is indirectly related to COGS, should be examined to determine if goods in-transit have been included. Failure to account for inventory in-transit will overstate the COGS deduction.

  2. To compute in-transit inventory, a taxpayer may accumulate purchase invoices received after year-end for a period of time and examine them for dates from the prior year. If the period of time selected by the taxpayer to accumulate purchase invoices is too short to capture all invoices attributable to purchases made prior to year-end, the purchase journal for the following year should be examined to determine the proper amount of in-transit merchandise.

  3. A CAS can access the computerized Purchases Journal to determine the proper amount of inventory in-transit through the following steps:

    1. Determine the date that will serve as the cut off for receipt of prior year invoices

    2. Request all or part of the subsequent year Purchases Journal that includes transactions posted through the cut off date

    3. Isolate the transactions dated through the end of the prior year

    4. Separate the invoices by LIFO pool for the requisite LIFO calculations.

4.43.1.16.2.1.2  (07-23-2009)
Capital Assets

  1. An analysis of the fixed asset files of a taxpayer can determine the proper allocation between IRC 1245 and IRC 1250 property.

  2. A retailer will use a construction in process (CIP) account to accumulate all costs associated with a project. A predetermined ratio may be applied against the account to determine the amount of IRC 1245 and IRC 1250 property. The detailed Accounts Payable and General Ledger records will contain a data field for the project codes. By collecting all records associated with a project, computer analysis can determine whether all construction costs are included in the CIP account. Another analysis can be used to compare the costs in a CIP account to the value of the assets depreciated that relate to the project.

  3. The detailed Accounts Payable and General Ledger records will contain a data field for the project codes. By collecting all records associated with a project, computer analysis can determine whether all construction costs are included in the CIP account. Another analysis can be used to compare the costs in a CIP account to the value of the assets depreciated that relate to the project.

  4. The CAS can also search accounts payable detail records for the names and/or numbers of vendors known to provide construction related products or services. Include the following in the search for capital items:

    1. Analyze costs of environmental clean up, bond issuance and professional fees

    2. Review supply and repair accounts to obtain vendor information and to defragmentize invoices

    3. Analyze security accounts to obtain costs associated with devices to reduce shoplifting

4.43.1.16.2.1.3  (07-23-2009)
Accounts Receivable

  1. Many retailers have their own in-store credit cards. Some retailers will even have a different credit card for each operating division. As expected, some customers will default on their credit card charges.

  2. The Tax Reform Act of 1986 eliminated the reserve method of accounting for bad debts. After 1986, an account must actually be worthless before it can be written off.

  3. The examiner should review the retailer’s policies to determine worthlessness and if the retailer is complying with such policies. The examiner should also evaluate the aggressiveness of the retailer's write-off policy.

  4. If the retailer's policy is too aggressive or if the retailer fails to comply with written policy, analyze the accounts written off. Only worthless accounts can be written off.

  5. Since a large retailer may have millions of credit card accounts, the analysis performed by the CAS should consider these steps:

    1. Reconcile the Accounts Receivable credit card file to the tax return. If possible, reconcile the write-offs for one or two months to a schedule that ties to the return. This will save time by eliminating the need to analyze the entire file.

    2. Transfer a sample of the data to a spreadsheet or database for analysis. The information can then be manipulated to determine if the retailer is too aggressive or to formulate a write-off policy that identifies only worthless accounts.

  6. The Accounts Receivable file analyzed must contain sufficient information to test for premature write-offs and to test any new write-off policy. The file should contain, among other items:

    1. Account Type -- Indicates if the account is a revolving charge or if full payment is due monthly

    2. Write-Off Type -- Includes the write-off code. Accounts written off due to bankruptcy may contain a different code for the chapter of bankruptcy filed. If the account holder files for bankruptcy the retailer may attempt to write-off the account even if it is not yet delinquent.

    3. Write-Off Amount -- This may be the balance at the start or end of the month. Verify that payments received in the write-off month receive proper treatment.

    4. Write-Off Date -- Specifies the date that the account is written off. Be aware that accounts written off in prior years may still be in the file, although inactive.

    5. Waiver Code -- Indicates if special treatment was granted. Credit managers can delay write-off by entering a code in this field.

4.43.1.16.2.1.4  (07-23-2009)
Reserves

  1. A CAS can assist in the review of the retailer’s reserve accounts.

  2. The Description and Payee fields in the General Ledger or Accounts Payable files can be searched for words such as Reserve or Estimate. The titles found in the Chart of Accounts can also be inspected for similar terms.

  3. Reserves may also be identified by searching general liability accounts for even amounts or amounts that are evenly divisible by an even number. The amount field can also be inspected for values ending in three or more zeroes.

4.43.1.16.2.2  (07-23-2009)
Compliance Programs

  1. The CAS can help measure the retailer's participation in certain compliance programs. This will require coordination with the employment tax specialist. The employment tax program is further detailed in IRM 4.23.

4.43.1.16.2.2.1  (07-23-2009)
Form 1099

  1. An analysis of the Accounts Payable will determine if all required recipients of non-employee compensation received a Form 1099. Some accounts with high potential for containing non-employee compensation are:

    1. Commissions

    2. Consulting

    3. Professional Fees

    4. Repairs

    5. Security

  2. The Payee field of the records found in these accounts may be examined to locate non-corporate recipients. The records can be printed or transferred to a spreadsheet for data manipulation. The employment tax examiner can eliminate all records that indicate a corporate payee (e.g. terms such as corp. or Inc.). Any remaining records can be tested to determine Form 1099 filing requirements.

  3. This type of analysis can be successful when examining a retailer operating many smaller stores. Those small operations allow more discretion by the individual store manager in contracting for landscaping, maintenance and snow removal.

  4. This type of analysis should be coordinated with the employment tax examiner. Examination of the Form 1099 files can lead to issues regarding backup withholding and areas of inadequate compliance such as missing taxpayer identification numbers.

4.43.1.16.2.2.2  (07-23-2009)
Form 1042

  1. Current law requires withholding at a rate of 30 percent on amounts paid for services rendered by non-resident aliens.

  2. An accounts payable vendor analysis similar to the one used for Forms 1099 can be conducted to check Form 1042 reporting and withholding compliance. The accounts payable record should be inspected for indications of a foreign address. The statutory withholding on remittances of dividends, interest and royalties is 30% unless exempt or reduced by tax treaty.

4.43.1.16.2.2.3  (07-23-2009)
Excise Tax

  1. The CAS can perform a vendor analysis based upon store departments or cost centers. For example, suppliers of fishing equipment who may be liable for excise taxes can be identified by examining purchases charged to the sporting goods department. A similar analysis of electronics departments can identify manufacturers using ozone depleting chemicals.

4.43.1.16.3  (07-23-2009)
Engineering Program

  1. This section discusses the role an engineering specialist may have in an examination of a retailer. Below are some of the areas for retailers where the engineers are a primary resource.

  2. The Engineer Program consists of engineers, appraisers and business valuation specialists ("engineers" ) with the expertise, industry experience, and specialized training in technical or industry-specific issues. Further detail regarding the engineering program can be found in the IRM 4.48.

  3. Although not discussed here, other areas where an engineer may assist include: Tangible Assets, Inventory Valuation, Bargain Purchase with LIFO, Gain on Purchase Receivables, Assets, Inventory and 263A issues as discussed in previous IRM sections.

  4. It is important to involve the engineer early in the planning stages of the examination to allow the engineer to coordinate with other members of the team. This will afford the accurate identification and factual development of issues including an efficient and effective resolution. The Engineering Program also has a key role in the Outside Expert Program.

4.43.1.16.3.1  (07-23-2009)
Fixed/Capital Assets, Depreciation, Capital vs. Expense

  1. The engineer can assist in the identification of issues involving depreciation and amortization of assets. This can include the determination and computation of IRC 1245 and 1250 property including:

    1. Placed in service issues

    2. Asset basis issues (e.g. cost segregation studies)

    3. Sale, exchange and disposal of assets issues

  2. The Engineering Program is the principal source of technical expertise for examining cost segregation and repair studies. These asset studies may be performed as a result of new construction, major renovation or acquisition.

  3. The engineer can assist the examiner with depreciation issues by applying the basic depreciation rules for MACRS, identifying the recovery period for an asset under MACRS, and calculating the proper bonus depreciation (if applicable).

  4. The engineer can assist in differentiating between a capital expenditure and a deductible expenditure. Typical expenses include improvements and repairs to real property, demolition and other land site development costs. The engineer can provide guidance on whether the expenditure adds to the value of the property, substantially prolongs the useful life of the property, or adapts the property to a new or different use.

  5. The engineer can assist in developing issues regarding the capitalization of land acquisition costs, and the allocation between personal property and land improvements.

  6. The engineer can participate in the examination of gains and losses from sales and exchanges of assets used in a taxpayer’s trade or business, involuntary conversions, other than casualties and thefts, and income due to the recapture provisions under IRC 1245, IRC 1250, IRC 1252, IRC 1254 and IRC 1255.

4.43.1.16.3.2  (07-23-2009)
Acquisitions, Leases and Intangibles

  1. In an IRC 1060 Applicable Asset Acquisition, the engineer identifies and analyzes the assets acquired and liabilities assumed including all costs and consideration to determine the total purchase price, verifies the fair market value (FMV) of the assets and the allocation of the purchase price into the various asset classes.

  2. In an IRC 338 Qualified Stock Purchase, the engineer can perform the following:

    1. Apply the statutory definition of a "Qualified Stock Purchase" to determine if a transaction has met the criteria under IRC 338

    2. Calculate the Aggregate Deemed Sales Price for the old target resulting from an IRC 338 election

    3. Calculate the Adjusted Grossed-Up Basis for the new target resulting from an IRC 338 election

    4. Distinguish the resulting tax consequences between an IRC 338 election and an IRC 338(h)(10) election

  3. The engineer can assist with the valuation of inventory in an IRC 338(g) or 338(h)(10) election which allows a step-up in the basis of inventory resulting in a faster write-off of the purchase price. The engineer will consider Rev. Proc. 2003-51.

  4. The engineer can assist with the analysis of leases and leasehold interests for fair rental value determination and value.

  5. The engineer can assist in the identification of intangible assets that are IRC 197 assets and thus subject to 15-year amortization.

4.43.1.16.3.3  (07-23-2009)
Credits

  1. The engineer can assist with issues related to research and experimentation expenditures under IRC 174, qualified research expenditures (QRE) under IRC 41, and other pertinent issues (base period & gross receipt analysis) involved in the research credit calculation under IRC 41.

4.43.1.16.3.4  (07-23-2009)
Charitable Contributions

  1. The Engineering Program can assist in the review of qualified appraisal reports in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) and IRS standards.

  2. Engineers/appraisers can assist with the review of donations of partial interests, future interests, and interests with restricted use.

  3. The engineer can assist with the deduction amount for the contribution of inventory to a qualified charitable organization. Under IRC 170(e)(3), a deduction is allowed up to the lesser of a) cost plus 50% of appreciation, and b) twice the basis. The FMV is based on the condition of the product and the market.

4.43.1.16.3.5  (07-23-2009)
IRC 199 Domestic Product Deduction (DPD)

  1. IRC 199 is the centerpiece of the American Jobs Creation Act of 2004 (AJCA), and provides for domestic manufacturers to receive a deduction for the net income resulting from the domestic production of products.

  2. The engineer can assist in the examination of the domestic production deduction (DPD). The engineer can assist with the following.

    1. The determination of the location where manufacturing took place

    2. The removal of income from embedded services

    3. The determination of the extent of "assembly" and its qualification as "manufacturing"

    4. The determination of whether an item was substantially produced by analyzing the changes from the taxpayer’s raw materials to the final product

4.43.1.16.3.6  (07-23-2009)
Valuation for IRC 409A Enforcement

  1. The AJCA added IRC 409A to the Internal Revenue Code. IRC 409A provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all taxable years are currently includible in gross income unless excepted. The final regulations under IRC 409A (published on April 17, 2007) address both the FMV of stock related to stock options and Stock Appreciation Rights (SAR).

  2. Generally, if a NQDC plan fails to meet the requirements of IRC 409A, all amounts deferred under the plan are includible in gross income for the taxable year. Certain rules and exceptions apply.

  3. ) If a deferred amount is required to be included in income under IRC 409A, the amount also is subject to an additional 20% income tax and an additional tax equivalent to interest on taxes deferred in prior years.

  4. The engineer can provide assistance with the following.

    1. The determination of appropriate stock valuations as related to SARs and stock options per the requirements of IRC 409A

    2. The valuation of associated hypothetical options where such are utilized to make allocations of total estimated equity value across stock classes

4.43.1.16.3.7  (07-23-2009)
International Issues in the Engineer Program

  1. International Examiners are involved in a complex and sophisticated area of tax administration which may involve assistance from other specialists (economists and engineers). Typically, the engineers’ expertise is helpful in numerous international issues, including:

    1. Subpart F "assembly versus manufacturing"

    2. Shared services (manufacturing, assembly, testing distribution, sales and marketing) and the proper allocation of such expenses

    3. Advanced Pricing Agreements (APA) relative to transferred goods and services

    4. Acquisitions of tangible and intangible assets

    5. Cost sharing of R&E and other issues relative to IRC 482

    6. Worthless stock deduction

  2. The engineer can also assist with functional analysis, services contract evaluation, taxpayer site visits and interviews, and tangible and intangible asset identification and valuation.

4.43.1.16.4  (07-23-2009)
Financial Products

  1. The Financial Products Program seeks to identify, develop and resolve financial products and transactional issues which are national in scope, significant in dollars, important to tax administration and uniformly and consistently treated. The Program performs timely, effectively planned and managed examinations of financial products issues providing for quality results and minimization of burden to the IRS and the taxpayers.

  2. The Financial Products Specialist can help the examiner with a number of issues, including the following:

    1. Original Issue Discount (OID) treatment for credit card fees: Many card issuing banks and merchant banks are treating Interchange and Merchant Discount fees as interest and OID. This issue is discussed in IRM 4.43.1.4.6.6.

    2. Factoring of accounts receivable: This practice is common in the retail industry and involves the sale of accounts receivable to a factoring company. This issue is discussed in IRM 4.43.1.4.6.7.

    3. Securitization of accounts receivable: This practice consists of the sale of a pool of receivables to a special purpose vehicle that finances the purchase by issuing securities on the market. Repayment of principal and payment of interest for these securities are made with the cash flow generated by the assigned receivables.

    4. Mark-to-Market Issues: IRC 475(a) generally provides that a "dealer in securities" must recognize gain or loss on any security that is held at the close of the taxable year as if the security were sold by the dealer for its fair market value on the last business day of its taxable year. Whether a taxpayer is a dealer in securities is a question of fact. A taxpayer that is a dealer in commodities or a trader in securities or commodities can elect to use the mark-to-market method of accounting if it so elects in a timely fashion. The definition of a "security" (e.g. notes) is broad and can be found in IRC 475(c)(2).

  3. Requesting a Financial Products Specialist referral is mandatory for: (a) Coordinated Industry Cases, (b) cases with activity codes 221, 223, 226-230 and 290, and (c) cases with activity code 483 that have gross receipts/deductions of $1,000,000 and above at the beginning of the examination. Request both mandatory and voluntary referrals through the Specialist Referral System (SRS).

  4. Please refer to the financial products IRM 4.37.1 for more information.

4.43.1.16.5  (07-23-2009)
Employment Tax

  1. The Employment Tax Handbook in IRM 4.23 discusses the issues that are identified in an employment tax examination. IRM 4.43.1.16.2.2.1 explains the analysis of Forms 1099 for potential backup withholding and reporting compliance issues. Employment tax examinations also include executive compensation issues such as stock options, nonqualified deferred compensation and golden parachute payments described in IRM 4.23.5.11.3.

  2. Additional issues include fringe benefits, employee vs. independent contractor status, and penalties related to filing information returns, withholding taxes, and timely depositing taxes.

Exhibit 4.43.1-1  (01-01-2002)
Store Closing

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Exhibit 4.43.1-2  (07-23-2009)
List of Coordinated Issues

Note:

The examiner should confirm the validity of the resource listed before relying on it. Additionally, this is not an all-inclusive list.

  1. ACRS & ITC - Suspended Acoustical Ceilings [10/31/1991] [UIL 48.01-18]

  1. Does the suspended acoustical ceiling installed in the selling area of the new store facilities qualify as either three-year or five-year ACRS property? Would this property also qualify for the investment tax credit?

  1. Heating, Ventilating, and Air Conditioning (HVAC) Systems ACRS & ITC [10/31/1991] [UIL 48.01-19]

  1. Do HVAC units installed in retail grocery stores qualify for the investment tax credit and for the three-year or five-year recovery periods provided by ACRS?

  1. Tenant's Rent Leveling IRC 467 Lease Agreements [11/6/1995] [UIL 467.03-03]

  1. Is Company R, for all leases described, allowed to accrue as an annual deduction the annual amount due under a lease agreement or a constant rental amount as defined by IRC 467(e)?

  1. Valuation of an Acquired Retailer's Inventory [10/31/1991] [UIL 471.08-05]

  1. Is the cost of reproduction method more appropriate than the comparative sales method in determining the fair market value of a retailer's inventory?

  2. When the comparative sales method is used as a basis for valuing a retailer's inventory, what costs should be considered as inventory disposition costs?

  1. IRC 401(k) Accelerated Deduction [9/5/1995] [UIL 404.11-03]

  1. Are contributions to a qualified cash or deferred arrangement within the meaning of IRC 401(k) or to a defined contribution plan as matching contributions within IRC 401(m) deductible by the employer for a specific taxable year, if those contributions are attributable to compensation which was earned by plan participants after the end of such tax year?

  1. State and Local Location Tax Incentives (SALT) [5/23/2008] [UIL 118.01-02]

  1. Does a state or local location tax incentive, whether in the form of an abatement, credit, deduction, rate reduction, or exemption (hereinafter referred to as a "location tax incentive" ), give rise to gross income under IRC 61?

  2. Is the amount of such a location tax incentive deductible as a tax paid or accrued during the taxable year under IRC 164?

  3. Assuming for the sake of argument that the location tax incentive is an item of gross income, is it excludible as a non-shareholder contribution to capital under IRC 118(a)?

Exhibit 4.43.1-3  (07-23-2009)
Industry Director Directives

  1. Note:

    The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list is not all-inclusive.

  1. Industry Director Directive on the Planning and Examination of Gift Card/Certificate Issues in the Retail, Food, & Beverage Industries #2 [10/03/08] [UIL 451.13-04]

    1. This Directive updates Industry Director Directive #1 for Gift Cards/Certificates.

  2. Industry Director Directive on the Planning and Examination of Gift Card/Certificate Issues in the Retail, Food, & Beverage Industries [5/23/2007] [UIL 451.13-04]

    1. This Directive provides direction to effectively utilize resources in the classification and examination of a taxpayer who is receiving gift card/certificate income.

  3. Industry Director Directive #2 on Mixed Service Costs [5/1/2007] [UIL 263A-07-00 and 263A.06-01]

    1. This Directive provides field assistance on the Tier I Mixed Service Costs Issue by offering direction on how to distinguish between resellers’ merchandising departments and producers’ purchasing departments.

  4. Field Directive on the Planning and Examination of Cost Segregation Issues in the Retail Industry [12/16/2004] [UIL 168.20-00]

    1. This Directive provides direction to effectively utilize resources in the classification and examination of a taxpayer who is recovering costs through depreciation of tangible property used in the operation of a retail business.

  5. Planning and Examination of Construction "Tenant" Allowances for Leases Greater Than 15 Years [3/24/2003] [UIL 118.01-02]

    1. This Directive provides guidelines for the efficient use of audit time and resources devoted to the examination of payments, commonly called "tenant allowances," made by developers to retail lessees with respect to long- term leases. This Directive only applies to those taxpayers with leases that do not meet the short-term lease definition of IRC 110(c)(2) and IRC 168(i)(3), and the related regulations.

  6. Planning and Examination of Developer Inducements [10/16/2002] [UIL 118.01-03]

    1. This Directive provides guidelines for the efficient use of audit time and resources devoted to the examination of amounts paid to retailers as inducements to "construct, open and operate," or to "continue to operate" a retail store. Such payments are frequently encountered in the retail industry and are often referred to as "developer inducements." The Directive only applies to payments made to a retailer who either has or will have legal title to the building, and either has or will have legal title to the real property on which the building stands, or has or will have a ground lease of such duration that the retailer effectively owns the realty.

Exhibit 4.43.1-4  (07-23-2009)
List of Trade References - Trade Associations

Note:

The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list is not all-inclusive.

  1. National Retail Federation (NRF) - http://www.nrf.com

    1. The NRF is the world's largest retail trade association, with membership comprising all retail formats and channels of distribution including department, specialty, discount, catalog, internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees - about one in five American workers - and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations.

  2. Retail Industry Leaders Association (RILA) (formerly known as International Mass Retail Association (IMRA)) - http://www.rila.org

    1. RILA is the world’s leading alliance of retailers and their product and service suppliers. RILA members represent more than $1.5 trillion in sales annually and operate more than 100,000 stores, manufacturing facilities and distribution centers nationwide. Its member retailers and suppliers have facilities in all 50 states, as well as internationally, and employ millions of Americans.

  3. Food Marketing Institute (FMI) - http://www.fmi.org

    1. FMI is a nonprofit association which conducts programs in research, education, industry relations and public affairs on behalf of its 1,500 member companies – food retailers and wholesalers – in the United States and around the world. FMI’s retail membership is composed of large, multi-store chains, regional firms and independent supermarkets. Its international membership includes 200 companies from 50 countries.

  4. National Association of Chain Drug Stores (NACDS) - http://www.nacds.org

    1. NACDS is the country's largest pharmacy organization. NACDS, formed in 1933, serves as the voice of chain pharmacies representing the concerns of community pharmacies in Washington, D.C., state capitals, and cities across the nation. Membership is open to companies operating four or more retail pharmacies open to the public. NACDS membership consists of more than 200 chain community pharmacy companies. NACDS membership includes more than 1,000 suppliers of goods and services to chain community pharmacies. NACDS international membership has grown to include 100 members from 30 countries.

  5. National Association of Convenience Stores (NACS) - http://www.nacsonline.com

    1. NACS is the international trade association representing all types of convenience store and petroleum marketing companies from independent stores to large chains. NACS members include companies that manufacture or distribute products and/or services to the convenience store and petroleum marketing industry.

  6. National Grocers Association (NGA) - http://www.nationalgrocers.org

    1. NGA is the national trade association representing retail and wholesale grocers that comprise the independent sector of the food distribution industry. An independent retailer is a privately owned or controlled food retail company operating in a variety of formats. Most independent operators are serviced by wholesale distributors, while others may be partially or fully self-distributing. NGA members include retail and wholesale grocers and their state associations, as well as manufacturers and service suppliers.

Exhibit 4.43.1-5  (07-23-2009)
Index of Trade References - Books

Note:

The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list is not all-inclusive.

  1. Randy L. Allen, Bottom Line Issues in Retailing, The Touche Ross Guide to Retail Management (Chilton Book Company, Radnor, PA).

  2. Rona Ostrow & Sweetman R. Smith, The Dictionary of Retailing (Fairchild Publications, Attn: Book Division, 7 East 12th Street, New York, NY 10003, (212) 741-4280).

  3. Ron L. Fowel, Sr., Barry G. High & Howard K. Kingsbury, Guide to Retail Shops, Volumes 1 and 2 (Practitioners Publishing Company, Attn: Subscription Dept., P.O. Box 966, Fort Worth, TX 76101-9940, (800) 323-8724).

  4. Paul A. Wilson, Kenneth E. Christensen, & Ernst and Whinney, LIFO for Retailers, A Business, Financial, and Tax Guide (Ronald Press Publications, Attn: Continuation Department, John Wiley & Sons, Inc., 1 Wiley Drive, Somerset, NJ 08873).

  5. Financial Executive Division, National Retail Merchants Association, NRMA Retail Accounting Manual (Revised Ed. Financial Executive Division, National Retail Merchants Association, 100 West 31st Street, New York, NY 10001, (212) 244-8780).

  6. Financial Executive Division, NRMA Retail Accounting Manual, (Book Two) (Financial Executive Division, National Retail Merchants Association, 100 West 31st Street, New York, NY 10001, (212) 244-8780).

  7. Louis C. Moscarello, Retail Accounting and Financial Control (John Wiley & Sons, Inc., 1 Wiley Drive, Somerset, NJ 08873).

  8. Leslie J. Schneider, Federal Income Taxation of Inventories (Matthew Bender and Company Inc. 1997).

  9. Gordon Smith & Russell Parr, Valuation of Intellectual Property and Intangible Assets (3rd Ed. John Wiley & Sons, Inc. 2000).

  10. Gordon Smith, Corporate Valuation: A Business and Professional Guide (John Wiley & Sons, Inc. 1998).

  11. International Council of Shopping Centers, The SCORE: ICSC's Handbook on Shopping Center Operations, Revenues, and Expenses (2004 Ed. International Council of Shopping Centers) (1992).

  12. First National Bank of Chicago, Retailing Companies Division, The Retailing Industry: A Statistical Review for Fiscal 1990, 1989, and 1988. (First National Bank of Chicago, Retailing Companies Division 1990).

  13. Mary A. Hines, Shopping Center Development and Investment,(2nd Ed.John Wiley and Sons, Inc. 1998).

Exhibit 4.43.1-6  (07-23-2009)
Index of Trade References - Periodicals and Journals

Note:

: The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list not all-inclusive

The following are examples of the numerous industry related publications which might be useful to the examiner in gaining insight into various aspects of a retailer's operation. Larger taxpayers may have their own in-house library containing a number of these industry periodicals.

  1. Apparel Import Digest American Apparel & Footware Association (AAFA)
    1601 Kent St., Suite 1200 Arlington, VA 22209
    (703) 524-1864 (800) 520-2262
    http://www.apparelandfootwear.org


    Annual report providing statistical information on apparel imports of the previous year, including data by fabric, country and garment line

  2. Chain Store Age
    Lebhar-Friedman Inc.
    425 Park Avenue New York, NY 10022-3506
    (212) 756-5000


    http://www.lf.com
    http://www.chainstoreage.com
    Information on non-merchandising topics including finance, security, information systems, store planning, real estate and construction

  3. Chain Store Guide
    Lebhar-Friedman Inc.
    425 Park Avenue New York, NY 10022-3506
    (212) 756-5000


    http://www.lf.com
    http://www.csgis.com
    Information on chain store topics

  4. Dealerscope
    North American Publishing Co.
    1500 Spring Garden Street,
    12th Floor
    Philadelphia, PA 19130
    (215) 238-5300


    http://www.dealerscope.com
    Addresses new products, technologies and issues of interest to buyers of consumer electronics, major appliances and consumer computing products

  5. Distribution Center Management
    Alexander Communications Group, Inc.
    712 Main Street,
    Suite 187B
    Boonton, NJ 07005
    Telephone: (973) 265-2300,


    http://www.distributiongroup.com
    Industry news and strategies to assist distribution center and warehouse professionals improve efficiency

  6. Drug Store News
    Lebhar-Friedman Inc.
    425 Park Avenue
    New York, NY 10022-3506
    (212) 756-5000


    http://www.lf.com
    http://www.drugstorenews.com
    Directed to those responsible for planning, merchandising and operating drug stores and pharmacies, including industry news and reports

  7. Retailing Today
    Lebhar-Friedman Inc.
    425 Park Avenue
    New York, NY 10022-3506
    (212) 756-5000


    http://www.lf.com
    http://www.retailingtoday.com
    Directed to those responsible for planning, merchandising and operating discount stores, including industry news and reports

  8. Grocery Headquarters Magazine
    Macfadden Communications Group
    333 Seventh Ave.
    11th Floor
    New York, N.Y. 10001
    (212) 979-4800


    http://www.groceryheadquarters.com
    News and feature articles pertaining to chain and independent grocers as well as brokers and wholesalers

  9. Home Channel News
    Lebhar-Friedman Inc.
    425 Park Avenue
    New York, NY 10022-3506
    (212) 756-5000


    http://www.lf.com
    http://www.homechannelnews.com
    Directed to those responsible for planning, merchandising and operating home centers, including industry news and reports

  10. Journal Of Marketing
    American Marketing Association
    311 S. Wacker Dr.
    Suite 5800
    Chicago, IL 60606
    (312) 542-9000
    (800) 262-1150


    http://www.marketingpower.com
    Directed to marketing executives and teachers, it includes articles related to marketing trends, ideas, techniques and discoveries

  11. Marketing News
    American Marketing Association
    311 S. Wacker Dr.,
    Suite 5800
    Chicago, IL 60606
    (312) 542-9000
    (800) 262-1150


    http://www.marketingpower.com
    Current articles on marketing and this association's activities

  12. MMR Mass Market Retailers
    Racher Press, Inc. 2
    20 Fifth Ave
    New York, NY 10001
    212-213-6000
    Fax (212) 725-4594


    http://www.massmarketretailers.com
    Events and trends relating to growth and development of the supermarket, drug and discount chain industry

  13. Minnesota Grocer
    Minnesota Grocers Association
    533 Saint Clair Ave.
    St Paul, MN 55102-2800
    (612) 228-0973


    http://www.mngrocers.com
    This is an example of what would possibly be available for each state. Trade journal for retailers and wholesalers in the grocery industry

  14. Nation's Restaurant News
    Lebhar-Friedman Inc.
    425 Park Avenue
    New York, NY 10022-3506
    (212) 756-5000


    http://www.lf.com
    http://www.nrn.com
    Directed to those responsible for planning, merchandising and operating restaurants, including industry news and reports

  15. Progressive Grocer
    Bill Communications, Inc.
    770 Broadway
    New York, NY 10003
    (646) 654-4500


    http://www.progressivegrocer.com
    Provides information regarding food distribution as well as research and topics pertaining to grocery management

  16. Retail Merchandiser
    Red Coat Publishing
    900 Cummings Center,
    Suite 222-T
    Beverly, MA 01915
    (978) 232-9494


    http://www.retail-merchandiser.com
    Serves the information needs of the retail industry

  17. Shopping Center Digest
    Jomurpa Publishing Co.
    Box 837
    20 N Broadway,
    Suite 13
    Nyack, NY 10960
    (845) 348-7000


    http://www.shoppingcenters.com
    Provides information on new and expanding centers as well as space availability and specifics of the expansion plans of larger retailers

  18. Shopping Centers Today
    International Council of Shopping Centers
    1221 Avenue of the Americas
    New York, NY 10020-1099
    (646) 728-3800


    http://www.icsc.org
    Data pertaining to the industry as well as the activities of the council

  19. Stores
    National Retail Federation
    325 7th Street, NW, Suite 1100
    Washington, DC 20004
    (800) 673-4692
    http://www.stores.org
    Emphasizes issues and concerns in operations, credit, human resources, merchandising, store design, marketing and other areas of interest to senior level management in stores, buying offices and shopping centers

  20. Supermarket News
    Penton Media, Inc.
    249 W. 17th Street
    New York, NY 10011
    (212) 204-4200


    http://www.supermarketnews.com
    A weekly publication for retailers, brokers and wholesalers

  21. Value Retail News
    International Council of Shopping Centers
    1221 Avenue of the Americas
    New York, NY 10020-1099
    (646) 728-3800


    http://www.icsc.org
    A publication targeted to off-price and outlet retailers, with information as to when and where malls and strip centers are being built and what retailers are expanding into same

  22. Women's Wear Daily
    Fairchild Publications, Inc.
    750 Third Avenue
    New York, NY 10017
    (212) 630-4000


    http://www.wwd.com
    Daily news of the fashion industry, trends and designers

Exhibit 4.43.1-7  (07-23-2009)
List of Trade References - Websites

Note:

The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list is not all-inclusive.

General Industry

http://www.groceryretailonline.com
The site provides a source for professionals in the grocery industry.

http://www.retailindustry.about.com
The site provides retail statistics and market research data, including links to 700 other retail-related web sites.

Industry Classification

http://logisticsworld.com/sic.asp
The site provides the current industrial classification system for industries in North America. Search by code number or keyword, or browse by category or alphabetical listing.

Company Directories

http://www.bizweb.com
The site provides an index to company websites, arranged by type of product or service.

Company Financial and Descriptive Information

Bizjournals http://www.bizjournals.com
The site is operated by the American Business Journals firm, the publisher of dozens of leading city business journals nationwide, and provides access to research into the latest news regarding companies.

Hoover’s Online http://www.hoovers.com
Hoover’s provides corporate profile information, with links to corporate websites and relevant news.

EDGAR Database of Corporate Information http://www.sec.gov/edgardhp.htm
The site provides the full text of financial reports filed with the U.S. Securities and Exchange Commission by publicly held corporations.

Government Economic Data and Research U.S. Bureau of Labor Statistics

U.S. Department of Labor Statistics http://stats.bis.gov
This division of the U.S. Department of Labor is the principal fact-finding agency of the federal government in the broad fields of labor, economics, and statistics. Its major programs include the consumer price index, the producer price index, the employment cost index, and the national compensation survey.

U.S. Department of Commerce http://www.doc.gov
This cabinet-level department is responsible for various government agencies that monitor and regulate U.S. commerce. Among its many divisions is the Census Bureau, which publishes population statistics and projections.

U.S. Patent and Trademark Office http://uspto.gov
This office provides general information on patents and trademarks and enables the user to search databases.

U.S. Securities and Exchange Commission http://www.sec.gov/cgi-bin/srch-edgar
Many corporate filings with the federal Securities and Exchange Commission, including 10Ks and 10Qs, are available through its Edgar website. The SEC issues comment letters to companies in order to get clarification or further explanation on various aspects of the companies’ disclosure statements, including accounting treatment and general adequacy of the disclosure statements. SEC comment letters and responses from companies beginning in August 2004 and thereafter are available to the public.

Industry/Market Research Firms

AC Nielsen Worldwide http://www.acnielsen.com
This research firm provides retail sales data on product movement, market share, distribution, price, and other information.

Forrester Research, Inc. http://www.forrester.com
This research firm analyzes emerging issues regarding trends in technology and their impact on businesses, consumers, and society.

Jupiter Media Metrix http://www.jmm.com
This research firm publishes research and analysis of Internet commerce.

NPD Group, Inc. http://www.npd.com
This market research and consulting firm provides global sales and marketing perspectives; combines consumer information with point of sale data collected from retailers and other distribution channels.

Plunkett Research, Ltd. http://www.plunkettresearch.com
This research firm provides market research, industry trends, analysis, and business statistics.

Retail Forward http://www.retailforward.com
This research firm provides research on retailing, including e-commerce. The firm’s website provides excellent press releases and forecasts and statistics regarding retail activity and trends.

Promotion and Marketing Trade Promotion Management Associates (TPMA), (F/K/A NAPAA) http://www.tradepromo.org
TPMA is an association for professionals and organizations involved with trade promotion.

Promotion Marketing Association of America, Inc. http://www.pmalink.org
The PMA is the leading nonprofit trade association that represents the promotion marketing profession.

Exhibit 4.43.1-8  (07-23-2009)
Index of Trade References - List of Universities and Institutes

Note:

The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list is not all-inclusive.

  1. Center for Retail Management - This Center was founded in January 1993 at the J.L. Kellogg Graduate School of Management, Northwestern University. The center is one of the largest academic centers devoted to retailing in the United States.

  2. Center for Retailing Studies - This Center is a privately funded center housed in the Department of Marketing at Texas A&M University.

  3. The Retail Management Institute - This Institute was formed in 1980 by Santa Clara faculty members working with an Advisory Board of leading figures in Northern California retailing.

  4. UF Center for Retailing Education and Research - This Center, which is part of the University of Florida, selects its activities to meet the needs of a variety of retailers.

Exhibit 4.43.1-9  (07-23-2009)
List of Retail UIL

Note:

Note: The examiner should confirm the validity of the resource listed before relying on it. Additionally, this list is not all-inclusive.

Common UILs used by Retail Examiners  
   
Tax Treatment of Gift Cards 451.13-04
Interchange/Merchant Discount Fees 1272.06-03
Characterization of Sales-Based Allowances 61.10-04
Construction Allowances 118.01-02
Retail Cost Segregation 168.20-00
Upfront Payments Supply Agreements 61.10-00
Vendor Allowances (General) 61.10-00
WOTC/W-t-W Tax Credit Claims 51.02-03
Acoustical Ceilings Cost Recovery  48.01-18
IRC Section 401(k) Accelerated Deduction 404.11-03
Heating, Ventilating, and Air Conditioning (HVAC) Systems Cost Recovery 48.01-19
Tenant's Rent Leveling IRC Section 467 Lease Agreements 467.03-03
Valuation of an Acquired Retailer's Inventory 471.08-05
Closed Store Losses 165.13-00
Contribution of Food Inventory 170.02-01
Loyalty Program - using Rev. Proc. 71-21 or 2004-34 for deferral 451.13-01
Loyalty Program - Trading Stamp Treatment 451.17-00
   
IRC 118 - Tax Incentives  
Non Shareholder Contribution to Capital v. Income 118.01-02
Basis Adjustment Under IRC 362(c) 118.01-03
   
Inventory  
Dollar-Value LIFO: Bargain Purchase Inventory 472.15-01
Dollar-Value LIFO: Earliest Acquisition Method 472.08-10
Dollar-Value LIFO: Segment of Inventory Excluded for the Computation of the LIFO Index 472.08-09
   
IRC 263A  
Interest capitalization calculation under IRC 263A(f) 263A.11-00
   
Mixed Service Cost  
Simplified Service Cost Method 263A-07-00
Facts & Circumstances (2005 and later years) 263A.06-01
Accuracy-Related Penalty 6662.00-00
   
IRC 199  
Income attributable to Domestic Production Deduction Activities 199.00-00
Taxable Income and Adjusted Gross Income 199.01-00
Taxable Income and Adjusted Gross Income 199.01-01
Wage limitation 199.02-00
Domestic Production Gross Receipts (DPGR) 199.03-00
   
Definition of manufactured, produced, grown, or extracted 199.03-01
Definition of by the taxpayer 199.03-02
Definition of in whole or in significant part 199.03-03
Definition of United States 199.03-04
Derived from the lease, rental, license, sale, exchange, or other disposition 199.03-05
Allocation of gross receipts 199.03-06
Costs allocable to Domestic Production Gross Receipts 199.04-00
   
Cost of goods sold allocable to Domestic Production Gross Receipts 199.04-01
Other deductions properly allocable to Domestic Production Gross Receipts or gross income attributable to Domestic Production Gross Receipts 199.04-02
Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006 199.05-00
Agricultural and horticultural cooperatives 199.06-00
Expanded affiliated groups 199.07-00
Other rules 199.08-00

Exhibit 4.43.1-10  (07-23-2009)
Referral/Recommendation Form

Part I: A copy of this form may be used to make recommendations for improvements to this section of the techniques handbook or to inform the Technical Advisor of an issue or audit technique that may be of interest to other examiners.
Mail to: Internal Revenue Service
1122 Town & Country Commons
Chesterfield, Missouri 63017
Attn: David Moser or Maria Montani, Retail Technical Advisors
David Moser- (636) 255-1246; David.F.Moser@irs.gov
Maria.A.Montani: (636) 255-1385; Maria.A.Montani@irs.gov
Part II: Recommendations (issue/technique/other):
(if necessary, attach additional explanation, sample RAR, IDR, etc.)
 
 
 
 
Forwarded by: (Name) (Address) (Telephone #)

Exhibit 4.43.1-11  (07-23-2009)
Glossary of Retail Terminology

  1. Account Openers Premiums or special promotional items offered to encourage the opening of new charge accounts.

  2. Advance Bill A bill presented to a purchaser before goods are actually received or service performed. May be requested by purchaser in order to include a payment within a certain accounting period.

  3. Advance Order An order placed well in advance of the desired shipment date. This practice generally enables a buyer to obtain a lower price for the goods since he has given the manufacturer business during slack periods.

  4. Advertising Allowance A monetary commitment made by a vendor to a retailer to share the advertising costs of a specified product, brand, or line. The allowance is generally a percentage of the retailer's purchases from the vendor and covers a percentage of the retailer's advertising cost.

  5. Air Curtain A stream of air used in food retailing establishments as a barrier to prevent the loss of heat of cold to the surrounding air. Used over some refrigerated or freezer cases as well as between some back rooms, etc.

  6. Allowance from Vendor See Returns and Allowances to Suppliers.

  7. Allowance to Customers See Returns and Allowances to Customers.

  8. Assistant Buyer A buyer-in-training position involving exposure to all phases of the buyer's responsibilities, including the department budget, selecting and promoting merchandise, analyzing stock and sales reports, supervising sales and stock employees, summarizing information for the buyer.

  9. Automatic Markdown Plan Price reductions contingent upon the length of time merchandise has remained in stock.

  10. Automatic Reorder A system whereby supplies of staple merchandise are monitored and when they have been reduced to a predetermined minimum a reorder procedure is activated.

  11. Backdoor Selling Practice by a wholesaler of selling to consumers while representing himself as a supplier to retailers only.

  12. Bailment Lease A retail installment contract in which the merchandise is technically rented to the buyer and the rent is paid in installments. Whenever a predetermined number of rental payments has been made, title is given to the buyer on the payment of a nominal fee.

  13. Balanced Stock An assortment of merchandise with sufficient breadth and depth to meet demand of target customers while maintaining a reasonable investment in inventory. Also called model stock or ideal stock.

  14. Bangtail The perforated flap on an envelope which, when detached, serves as an order blank. Often included by stores when they mail monthly statement and accompanying inserts.

  15. Bar Code A configuration of alternating dark bars and light spaces, usually vertically arranged. Information is encoded into these bars and spaces by varying their individual widths. Use of a bar code system requires an optical code reader, bar-coded labels, and a computer. See also Universal Product Code (UPC).

  16. Bartering The trading of goods or services without the use of money

  17. Bill of Lading A document issued by a carrier acknowledging receipt of a shipment. Bill indicates name of consignor and consignee, describes merchandise, and states shipping charges. In air shipping referred to as an airway bill. Both constitute contracts between shipper and carrier.

  18. Book Inventory A perpetual system of inventory maintained by adding the value of incoming goods to the value of previous inventory and then subtracting the value of sales, markdowns, and discounts.

  19. Brick & Mortar A business establishment with an actual physical facility, generally with walk-in customers and inventory, as distinct from providing remote online services.

  20. Broker A non-merchant middleman or marketing intermediary who brings buyers and sellers of a product together. Generally a broker does not take title to merchandise nor does he have physical possession of the goods. Most commonly operates in the grocery business. See also Commission Buying Office and Commission House.

  21. Bulk Marking Price is marked on large lots in original shipping containers. Individual pieces are marked with retail price at a later time.

  22. Business Cycle In retail trade, from February 1 though January 31.

  23. Buyer A line merchandising executive responsible for selecting and purchasing merchandise and for selling it at a profit. Among the buyer's duties are the supervision of the assistant buyers and salespeople, planning advertising and displays, stock control and pricing, and budgeting.

  24. Buyer's Black Book The retail buyer's unit control book.

  25. Buyer's Order The order blank or form used by a retail buyer to purchase merchandise from a vendor.

  26. Buying Calendar A retailer's buyer's plan of merchandising activities for a period (often six months) which includes special promotions and other seasonal events.

  27. Buying Office The buying office is made up of buyers in national or international market centers who daily shop the market in order to provide their clients or member stores with information and to select and buy merchandise for them. Buying offices are either independent (salaried office or commission buying office) or store owned (private office, cooperative office, and corporate office).

  28. Buying with Return Privileges Merchandise is purchased from a vendor with the understanding that certain things may be returned for credit if they remain unsold.

  29. Capital Budget A plan for proposed expenditures for acquiring long-term assets and the means of financing these acquisitions. Lists future investment projects and includes a justification for each.

  30. Car Card An advertisement appearing as a card or poster in a vehicle of public conveyance such as a bus, subway or train.

  31. Carry-Over Merchandise Unsold goods remaining from a previous selling season which are held for future sale.

  32. Cash Discount A reduction in sales or purchase price, allowed by a vendor, for payment before the due date of the bill. It is generally expressed as a percentage of the billed price. For example, a cash discount of "2/10 net 30" indicates a 2% price reduction given for payment within the first 10 days of a 30 day billing period.

  33. Cash Receipts Report A form used by salespeople to record money received from cash sales of merchandise at the close of each business day.

  34. Catalog A book or pamphlet listing merchandise for sale, usually with descriptive comments and illustrations.

  35. Central Buying The concentration of the authority and responsibility for merchandise selection and purchase for a chain of stores or the branch stores of a department store in the hands of the headquarters staff rather than in the individual units. The central buying function is generally located in the flagship store or the central market.

  36. Cents-Off Coupon A certificate entitling the customer to a reduced purchase price for the item being promoted. The product and the amount of the cash saving are specified in the certificate which is generally redeemable at the point of purchase. See also coupon.

  37. Certification of Origin A document attesting to the point of origin of a shipment.

  38. Certification Mark A label, seal or tag placed upon a product testifying to its quality, worth or origin.

  39. Charge-Back A retailer's invoice for claims against a vendor resulting from such items as damaged merchandise, cooperative advertising costs, adjustments, and the recovery of transportation charges for improperly routed merchandise.

  40. Circular Advertising literature in the form of printed booklets, often included with newspapers or delivered door-to-door.

  41. Claim A transportation term referring to charges for damages incurred while goods were in the possession of the carrier. (2) A retailer's claims against a vendor. See Charge-Back.

  42. Classification The breaking down of merchandise into categories called classes, i.e., into groups of items similar in nature or in end use without regard for style, size, color, price, etc. These classes are developed in direct response to the needs expressed by customers and, as they are fundamental merchandising units, change little from year to year even though the actual merchandise within each classification will be in a constant state of flux. The purpose of classifications is to provide a basic statistical structure to facilitate merchandise control.

  43. Clearance Markdown A reduction in retail price for the purpose of stimulating sales of slow-moving merchandise. Unlike the promotional markdown, the clearance markdown is a defensive strategy calculated to reduce losses.

  44. Closed-Loop System A computerized method of inventory control in which merchandise data is recorded at the point of sale for use in ordering and reordering. The item is removed from the inventory memory bank at the time of sale.

  45. Closing Physical Inventory The dollar-value of stock remaining at the close of the accounting period as determined by an actual count of the stock.

  46. Coding A method of identifying merchandise numerically or alphabetically on price tickets.

  47. Collection System The established procedure used by retailers to encourage customers to pay debts, especially delinquent accounts. The procedure includes several levels of increasing intensity, such as impersonal routine billing, impersonal appeals, personalized appeals, and drastic legal action.

  48. Commission Buying Office An independent resident buying office which receives its compensation from manufacturers as a percentage of orders placed with retailers. Generally deals with small retailers and provides few or no services other than the procurement of goods. The commission office may represent many manufacturers and gives the retailer the advantage of choosing from a large assortment of merchandise without paying a fee. Also known as a merchandise broker or manufacturer's representative. See also Commission House, Broker, and Manufacturer's Agent.

  49. Commission House A middleman establishment supplying large retailers, especially supplying large retailers, especially in the food trade. Generally exercises physical control over and negotiates the sale of the goods handled. Enjoys broad powers as to prices, methods, and terms of sale, although still subject to the instructions of the principal. Operates most often in the central market. May also arrange delivery, extend credit, make collections, etc. for the principal. See also Broker.

  50. Company Induction A planned, formal orientation program to inform the new employee about the firm he or she is joining. The information imparted includes details about the firm's history, development, organization, policies and regulations as well as facts about the operation of the company (number and location of stores, warehouses and manufacturing facilities, if any). Also includes terms of employment, disciplinary policies and procedures, company benefits and advancement opportunities. The orientation is often accompanied by an orientation booklet.

  51. Comparative Balance Sheet Two or more balance sheets for the same company for different times displayed side by side to facilitate the observation of similarities or differences, growth or decline.

  52. Comparison Department The department of a retail store responsible for checking similarities or differences in prices, styles, quality, service, etc. between the store and its competitors.

  53. Cooperative Advertising (1) Vertical Cooperative Advertising-An advertising strategy in which a retailer and a manufacturer or wholesaler share the cost of advertising. (2) Horizontal Cooperative Advertising-An advertising strategy in which two or more retailers share in the cost of advertising.

  54. Cooperative Buying Consolidation of orders by a number of stores, generally to take advantage of quantity discounts, etc. The cooperating stores may be independent or members of a consolidated group. The term includes group, committee and central buying, buying clubs, cooperative wholesalers, wholesaler-retailer cooperative groups, and manufacturers' cooperative retail groups. Also known as affiliated buying.

  55. Cost Complement The average relationship that exists between the cost of goods and retail value of the goods handled during an accounting period. The dollar-value of the inventory at cost is divided by the dollar-value of the inventory at retail. Cost complement = $ Cost of goods / $ Retail value of goods

  56. Cost Department (1) An operation such as a restaurant, barbershop, fur storage vault or beauty parlor in a retail store which maintains no inventory at retail and so operates on the cost method of accounting rather than the retail inventory method for determining profits and losses. (2) A manufacturing or processing department within a retail store that is operated on the cost method of accounting.

  57. Cost Method of Inventory A technique for determining the cost of inventory on hand based on the cost price of goods. The actual cost of the goods is marked on each price ticket in code. Inventory is taken by actual physical count and recorded at cost prices, with an allowance made for depreciation. This method is used primarily in small stores and for high-priced items. The ending inventory at cost becomes the beginning inventory at cost for the next accounting period. Purchases are also recorded at cost. This method may be used to calculate the cost of goods sold and the gross margin of the store. See also retail method of inventory.

  58. Cost of Goods Purchased The net price paid for merchandise by the retailer, plus the price paid for transportation and delivery to the retail store.

  59. Cost of Goods Sold The price paid for any merchandise required to obtain the sales of the period. It generally includes all charges (invoice costs) for goods on hand, goods on order, freight-in charges, and workroom and alteration costs. The cost of goods sold may be calculated either before or after cash discounts have been deducted or alteration and workroom costs added. The cost of goods sold may also be determined by subtracting the closing inventory at cost from the opening inventory plus purchases at cost. Opening inventory (at cost) + New purchases for period (at cost) - Closing inventory (at cost) = Cost of goods sold

  60. Coupon A certificate, card, or other printed offer distributed to customers and redeemable for goods or services specified at a reduced price or free. Used as a sales promotion technique. May come from a manufacturer or vendor, in which case the coupon is redeemable at a wide variety of retailers, or from a retailer, in which case they may be used only in that store. See also cents-off coupon.

  61. Coupon Account An arrangement by which the customer purchases coupons for cash and exchanges them for goods in the store.

  62. Couturier (Couturiere) The designer of women's fashion apparel, especially one in the business of making and selling the clothes he or she has designed. Applies particularly to French, high-fashion designers. Couturiere is the feminine form.

  63. Cumulative Markon When expressed in dollars, cumulative markon is the difference between the cost price of merchandise and the highest retail price at which it is offered for sale. The concept cumulative markon is generally applied to classifications, departments, or the entire store rather than to individual items and is thus an average figure useful in setting price policy. See also initial markup.

  64. Cumulative Markup For a specified period, the difference between the total cost of merchandise and the total original retail value of that merchandise. Included in the total are all additional markups for the period. Some times called cumulative markon.

  65. Cumulative Quantity Discount A discount based on all the purchases made during a specified period from a vendor or wholesaler. Also called a deferred or patronage discount.

  66. Cycle Billing A procedure by which customers receive monthly invoices on a rotating alphabetical basis throughout the month rather than all at the first of the month.

  67. Deferred Billing Payment due date is moved forward a specified period of time under this billing system to provide an added incentive to purchase.

  68. Demurrage In transportation, a fee payable to the owner of a vessel, or truck, for failure to unload freight in time allowed under an agreement.

  69. Designer A person who makes original sketches and patterns for apparel, scenery, automobiles, packaging and a wide variety of other products. Fashion or apparel designers create ideas for new styles of clothing and accessories. See also couturier (couturiere).

  70. Detailer One who sets up vendor displays in retail stores and who maintains inventory of the product.

  71. Direct Marketing A term that embraces direct mail, mail order, and direct response. Direct marketing is a process by which a message is conveyed directly to the customer and which is designed to elicit a response on his part.

  72. Discount Loading An accounting practice in which all invoice prices are treated as though they contained a cash discount. Result is a higher cost and higher retail price.

  73. Distribution Center A facility to which goods are shipped for the purpose of short-term storage, sorting, repacking, and finally, shipment to individual stores.

  74. Diversionary Pricing A deceptive practice in retailing in which a lower than market level price for a small number of items is widely promoted to create the impression that all merchandise is comparably priced.

  75. Drop Shipment Merchandise which is delivered by vendor to individual branch stores rather than to a warehouse or other intermediate location

  76. Due Bill A certificate issued by a store redeemable for merchandise of a specified dollar-value. Due bills are often issued to customers in lieu of cash refunds for merchandise returned. Also called store credit, merchandise certificate credit voucher, store money, or scrip coupon.

  77. Dun To persistently demand payment of a delinquent account.

  78. E-commerce Sales of goods and services where an order is placed by the buyer or price and terms of sale are negotiated over an Internet, extranet, Electronic Data Interchange (EDI) network, electronic mail, or other online system. Payment may or may not be made online.

  79. Employee Discount A reduction in retail price granted to a store's own employees (and sometimes their dependents) when purchasing goods at the store.

  80. Employee Handbook A manual of facts and instructions provided for the employees of a retail firm or other business. May include the history and philosophy of the firm, regulations, policies, procedures, benefits, dress code, etc. Often used in the orientation of new employees.

  81. Expense Center Any area of a store to which particular, controllable costs may be assigned and which becomes responsible for those costs.

  82. Factoring The selling of a retailer's accounts receivable to another party, or factor. The factor assumes the loss resulting from any uncollected accounts and receives a relatively high commission from the retailer. Factoring is used in other industries as well, particularly in the apparel manufacturing industry.

  83. Fashion Coordinator At the retail level, a fashion coordinator may be responsible for organizing in-store fashion promotions, doing trend research for various fashion departments, etc. Fashion coordinators usually do not have direct merchandising responsibilities. In large organizations often works under the fashion director.

  84. Fidelity Bond An insurance contract protecting a business against losses resulting from any dishonest acts of employees involving money, merchandise, or property.

  85. Fixed Period System A system for reordering merchandise in which orders are submitted to the vendor at regular predetermined intervals regardless of inventory.

  86. Fixed Quantity System A system for reordering merchandise in which orders are submitted to the vendor when stock levels reach a predetermined low level or cushion regardless of when the last order was submitted.

  87. Fixtures Tables, counters, racks, etc., used by a store to stock and display its merchandise.

  88. Fixturing The selection and arrangement or store fixtures such as racks and counters for the purposes of display and customer convenience, especially in the case of self-service stores.

  89. Flagship Store The main store of a large retailing firm having a number of branches. The flagship store is usually the original downtown store and often houses the executive, merchandising, and promotional personnel responsible for the centralized operation of the entire operation.

  90. Floor Allowance A discount allowed a customer in the selling department or at the point of sale when purchasing a soiled or otherwise defective item.

  91. Floor Plan Financing A form of financing commonly used by retailers when purchasing big ticket items such as appliances, automobiles, electronics, boats, etc. in which the retailer borrows money from a lending institution and, in turn, pays the vendor (a manufacturer or distributor) for the goods at time of receipt. Proceeds from sales are used to repay the lender.

  92. Floor Stock Back-up merchandise which is actually on the selling floor and accessible to customers.

  93. Free on Board (FOB) A term used in shipping agreements meaning that the buyer of goods pays the freight charges from the FOB point (the point of origin), e.g., the factory, port-of-entry, etc. Title to merchandise passes to buyer at FOB point.

  94. Foreign Buying Office An office situated abroad to facilitate buying merchandise from foreign vendors.

  95. Foreign Valuation The value of imported goods expressed in terms of the currency of the country of origin for purposes of duty.

  96. Free Goods Additional merchandise included with a retailer's order at no additional charge. Given by the vendor in lieu of a special discount and in appreciation for the size of the order.

  97. Freight Allowance A transportation expense paid in part by the manufacturer or other supplier when shipping merchandise to a retail store. Considered a means of equalizing transportation costs for distant retailers. The allowance may be based on the cost of the merchandise, or the quantity of the merchandise ordered.

  98. GAAP Generally Accepted Accounting Principles: Conventions, rules, and procedures that define accepted accounting practice. The Financial Accounting Standards Board sets these principles.

  99. Gift Card A electronic card purchasable in any dollar amount which may be given as a gift and which is redeemable in merchandise at the store of purchase.

  100. Gift Certificate A certificate purchasable in any dollar amount which may be given as a gift and which is redeemable in merchandise at the store of purchase.

  101. Gondola A counter, often two-sided, having shelves at the top and storage space at the bottom. Primary function is to display merchandise and provide room for back-up stock.

  102. Goodwill The intangible favor with which a business is viewed by its customers based on the reputation and performance of that business. Good will is distinct from the tangible assets of the business even though it has a dollar-value.

  103. Gross Leasable Area (GLA) The standard unit of measure used by the shopping center industry. GLA is the total floor area designed for tenant occupancy and exclusive use, including basements, mezzanines, and upper floors. It is measured from the center line of joint partitions and from outside wall faces. GLA is that area on which tenants pay rent.

  104. HVAC Initials’ for heating, ventilation, and air conditioning.

  105. Incentive Buying The practice by which the retail buyer places orders early in the season, stimulated by the discounts offered by manufacturers for the early orders.

  106. Initial Markup When expressed in dollars initial markup is the difference between the cost price of merchandise and its first retail price. When expressed as a percentage it is computed as the difference between cost price and first retail price divided by retail price. In both cases markdown and stock shortages are not counted in the computation. Initial markup is sometimes referred to as original markup, initial markon, or markon.

  107. Initial Retail Price The cost of merchandise plus the amount of initial markup.

  108. Intermediate Markdown A reduction in retail price made prior to the current, and usually final, reduction being advertised. Current retail price may have been reached in stages, i.e., via several intermediate markdowns.

  109. Intransit A transition state in which merchandise has left its point of origin and has not yet arrived at its destination.

  110. Inventory Merchandise on hand and ready to sell. Inventory and stock are terms often used synonymously.

  111. Invisible Shrinkage Stock shortages due to shoplifting, employee theft, losses due to clerical error, etc. which are undiscovered until a physical inventory is made.

  112. Invoice A bill, or statement, usually itemized, which is enclosed with a shipment of merchandise or mailed later by the seller. Information generally includes quantities shipped, prices of goods, terms of sale, discount, method of shipment, and other particulars including total amount due seller.

  113. Invoice Apron An attachment to an invoice form prepared by either the shipper of goods or by the receiving party on which relevant notations may be made. For example, on the receiving end an apron may be prepared on which quantities received are noted so that goods may be passed through to the selling floor before the seller's invoice arrives by mail.

  114. Invoice Cut-Off A procedure in making a physical inventory in which, after a specified date, invoiced merchandise will not be added in to the total count.

  115. Kickback In vendor/vendee relations the kickback is generally in the form of a money payment to the retail buyer by the vendor as a recompense for the buyer's patronage.

  116. Last In, First Out (LIFO) A method of inventory valuation which assumes that merchandise most recently acquired is disposed of first. What remains, therefore, at the end of the inventory period, is a composite of the oldest merchandise costs.

  117. Layaway A retail deferred payment purchase arrangement in which the store sets aside a customer's merchandise (on which he or she may or may not have made a deposit) until the customer has fully paid for it. If purchase is not completed, deposit may or may not be refunded.

  118. Leased Department A department or area within a store operated by an outside organization although often not so identified to the customer. Generally the store supplies the space and those essential services such as lighting, security, etc. in return for a flat fee or for a percentage of the leased department's sales. Shoes, jewelry repair, photo services, etc. are leased departments frequently found in department or discount stores (sometimes called licensed departments in discount stores).

  119. Letter of Credit A document obtained by a buyer of goods from a bank which is evidence of the buyer's credit standing. The letter of credit is presented to the seller of the goods by the buyer, the seller delivers the goods and collects his money from the bank which, in turn, collects from the buyer. The letter of credit is useful in international trade where the buyer has been unable to establish a line of credit with vendors.

  120. Licensing An agreement between the creator of a product or line of products and a manufacturer in which the creator gives the manufacturer permission to use his name in the marketing of a product in return for a royalty, usually computed as a percentage of sales.

  121. List Price The list price may be the manufacturer's price to the retailer as represented on a list or in a catalog, but more often list price is meant to indicate the retail price as suggested (and sometimes advertised) by the manufacturer.

  122. Loading of Cash Discount A retail practice in which the vendor's invoice amount is increased (loaded) to compensate for a lower than expected cash discount. The increased amount is charged to the department buying the merchandise thus, on paper, creating the illusion that the goods cost more than they really did. The object of this practice is: (1) to induce buyers to gain the largest discount possible to avoid the penalty of increased invoice prices, and (2) to gain a higher markup on the merchandise.

  123. Loyalty program Commitment to a particular store or brand; Program designed to reward customers for their continued business.

  124. Mail Order Retailing A form of selling in which personal contact and store operations have been eliminated. The retailer contacts potential customers through the use of direct mail, catalogs, television, radio, magazines, newspapers, etc. Merchandise is described in words and pictures, customers order by telephone or through the mail, and orders are filled by the seller through the mail or via parcel services.

  125. Manufacturer's Agent A middleman performing many of the functions of the selling agent, but who may sell the products of a number of non-competing client manufacturers in a specified territory. Manufacturer's agents have limited control over prices and terms of credit and act as salespersons calling on industrial customers and retailers. Also known as a manufacturer's representative.

  126. Markdown A reduction from original or previous retail price, generally as a result of reduced demand for the item in question (termed a clearance markdown) or in an attempt to increase store traffic (termed a promotional markdown).

  127. Markdown Money A money payment by a vendor to a retailer to compensate the retailer for losses incurred because of the need to reduce the selling price of the vendor's merchandise.

  128. Markon A money payment by a vendor to a retailer to compensate the retailer for losses incurred because of the need to reduce the selling price of the vendor's merchandise.

  129. Markup The difference between cost price of merchandise and its retail price. Markup may be expressed in dollars or as a percentage. If stated as a percentage it may be based on either cost price or retail price. Markup is sometimes used synonymously with the term markon, but there are certain distinctions which can be made between the two. Markon is computed as follows: Retail price - Cost price = Markon % Cost price $20 - $10 = 10 = 1 = 100% $10 10 1 Markup is computed as follows: Retail price - Cost price = Markup % Retail price $20 - $10 = 10 = 1 = 50% $20 20 2 Markup is also a term most commonly applied to the amount added to cost price to reach a retail price for individual items, while markon more often refers to the total amount added to the cost of all the merchandise in a department. Finally, markon is a term more frequently found at the manufacturing level and markup at the merchandising/retail level of the distribution chain. See also markon.

  130. Markup Cancellation A reduction in the price of an item after it has been subject to additional markup. Markup cancellation never, by definition, exceeds the amount of additional markup applied to an item.

  131. Memorandum Buying An arrangement between vendor and retailer in which the retailer buys merchandise from the vendor and, while taking title to the goods, retains the right to return to the vendor merchandise unsold over a specified time period. Retailer may also have the right to pay for goods as they are sold, rather than on receipt, for an indefinite time period.

  132. Merchandise (1) Usually manufactured goods, but sometimes applied to commodities. (2) To merchandise is to: (a) buy and sell, carry on trade, or (b) to promote one's goods, as in "to merchandise a line."

  133. Merchandising The American Marketing Association definition: "The planning involved in marketing the right merchandise at the right place at the right time in the right quantities at the right price." More specifically, it is the buying and selling of appropriate goods coupled with the accurate targeting of consumers for the ultimate purpose of making a profit.

  134. Missionary Salesperson Employees of manufacturers who assist retailers in arranging displays and other promotional materials supplied by the manufacturer for use in the store. Missionary salespeople may also demonstrate the manufacturer's products in the store and assist store employees in effectively presenting the product to the customer. Ordinarily missionary salespeople do not sell directly to store customers.

  135. Model Stock Plan One method for developing the assortment plan, the model stock plan, although it may include some staples, is largely composed of shopping and specialty merchandise. Because of this the model stock plan is less specific than the basic stock list despite the fact that it includes certain information, such as classification, cost, price, color, size, retail selling price, etc. The inclusion of fashion and seasonal merchandise in the model stock plan adds to it an element of unpredictability.

  136. Near Pack Premium A manufacturer's promotion that offers a completely different product free with one purchase of the product being promoted. The premium is displayed near the basic product but in a display of its own.

  137. Net Lease Under a net lease a retailer must assume such expenses as heating, maintenance, insurance, etc., as well as basic rent charges.

  138. Nonperpetual Inventory An inventory control system in which a physical count must be made to determine how much stock is on hand. See also perpetual inventory.

  139. Omnibus Cooperative Advertising A full-page ad placed by a retailer and bearing the name of the retailer. It consists, however, of mats supplied by various vendors of different products. The retailer bills each vendor a prorated share of the cost of the ad.

  140. On-Line Retailer A retailer conducting business through the world wide web or through a network.

  141. On Order Merchandise that has been ordered by the buyer but not yet received by the store is said to be "on order." This represents a commitment of the planned purchase figure and affects the open-to-buy.

  142. Open-To-Buy (OTB) The amount (expressed in dollars or units) a buyer is permitted to order for a specified period of time. In terms of dollars, a department's open-to-buy would be the total amount budgeted less the value of goods yet to be delivered in the specified period.

  143. Open-To-Buy Report A document used to calculate the open-to-buy, this report summarizes the existing or projected relationship between inventory and sales. It is generally prepared on a weekly basis for the department buyer. The open-to-buy report indicates the amount of merchandise on hand at the beginning of the period, the amount received, the amount sold, markdowns, current inventory, and merchandise on order.

  144. Optical Code Reader A minicomputer used to record, calculate, store, and transmit coded data to the main computer by means of a wand or light pen. The wand focuses a beam of light on a bar-coded surface and senses reflections from it. The reader may be stationary and connected to a cathode ray tube (CRT) display device, or portable. The portable reader is battery operated and contains a wand and either a keyboard or a scanboard for data input. Optical code readers may also be called terminals or scanners.

  145. Order Form A blank used by buyers to place their official orders with a vendor. The order form may be previously prepared or printed with information about the product or service being offered for sale. See also preprinted order form.

  146. Order Register A store's official record of orders placed with vendors. Includes the date of the order, vendor's name, amount of order, month shipment is due, etc.

  147. Original Retail The first price set by the retailer for an item of merchandise, prior to discounts, markdowns, and other reductions.

  148. Periodic Actual Count A system of unit inventory control in which the merchandise on hand is counted on a systematic, regular basis.

  149. Perpetual Inventory A system of dollar inventory control in which daily sales, discounts, and markdowns are deducted from the book inventory on a continuous basis. It provides a picture of the inventory which agrees with the actual stock on hand, provided no shortages have occurred. The movement of goods into and out of stock is continuously recorded. Also called "book inventory," this system is used in the retail inventory method of accounting.

  150. Perpetual Unit Control A system of unit inventory control in which all factors affecting the number of units on hand (such as purchase orders, receipts of merchandise, and sales for individual styles) are recorded on a continuing basis as they occur.

  151. Physical Inventory The dollar-value at retail of merchandise on hand during inventory. Includes only the stock actually present in the department or store. The physical inventory usually also includes the unit count, quantity, weight or measure as well as the dollar-value.

  152. Planned Markdown A markdown anticipated by the store's buyer for a particular selling season. Since it is expected, it is taken into account in sales projections for that season. Planned markdowns are often used to generate store traffic.

  153. Planogram Instructions sent to branch stores by the parent organization detailing how much merchandise is to be stocked and how it is to be displayed. In some organizations planograms are advisory, in others, conformance to the plan is mandatory.

  154. Point of Sale (POS) (1) That section of the store or department where the sale is consummated, i.e., where the customer pays for and receives the merchandise. This is often the location of point-of-purchase displays and other promotions. Also called "point-of-purchase." (2) A register-based data collection system used by retailers.

  155. Point of Sale (POS) Perpetual Inventory Control SystemAn automated retail system in which the store cash registers are linked to computer processing systems. For example, in the National Cash Register (NCR) 280 Retail System, the automated equipment handles marking, checkout and recording data functions. Merchandise is ticketed with colored bar code tags which are read with wand readers at the check-out counter. The computer accumulates sales transaction information on magnetic tape for daily input into the computer memory bank or storage system.

  156. Point of Sale Terminal A cash register or terminal linked to a computer. The register controls and records all sales (cash, charge, COD, layaway, etc.) at the point of sale. The terminal issues sales checks, prints transaction records, and feeds information about each transaction into the data bank of the computer. Also called an electronic cash register (ECR) or shortened to "point-of-sale (p.o.s.)" in common usage. The terminal is part of a point of sale (POS) perpetual inventory control system.

  157. Prebuying Process The activities of the buyer before he/she actually goes into the market to buy for the store. Prebuying includes planning, budgeting, shopping the competition, knowledge of customers, vendors, and store policies, etc.

  158. Preprint A copy of an advertisement intended to be run in a print medium (newspaper or magazine, etc.) which is distributed to customers and/or resources as a flyer prior to publication.

  159. Preprinted Order Form A vendor's order form on which are listed the products carried by the vendor. Includes check-off spaces for entering quantity desired, unit price, and total price.

  160. Price Change Form A record used for reporting any raising or lowering of the retail price of merchandise in stock. For example, additional markups, markup cancellations, and markdowns would all be recorded on price change forms.

  161. Price Discrimination The sale of goods by vendors to competing retailers at different prices under similar conditions of sale. If no saving to the seller can be demonstrated, or if the sale tends to create a monopoly or restrain trade, this practice is outlawed by the Robinson-Patman Act. See also resale price maintenance.

  162. Price File A computer memory bank used with the universal product code (UPC). It matched the store prices to the item and is central to the effectiveness of UPC operations in the store.

  163. Pricing Any of a variety of methods used by retail merchants to determine the prices at which to sell their merchandise. These methods include the full cost approach to pricing, flexible markup pricing, going rate pricing, gross margin pricing, and suggested pricing.

  164. Prior Stock Report A report prepared by the retailer which summarizes quantitative information about all stock on hand remaining from the previous season.

  165. Private Brand A brand developed, owned, and controlled by the retailer or other middleman. This merchandise is generally lower in cost than other brands. The merchant becomes both the producer and the marketer so the manufacturer's only responsibility is to make the merchandise according to the merchant's specifications. Also called a distributor brand, dealer brand, reseller brand, middleman brand, and private distributor brand.

  166. Promotional Markdowns A reduction in retail price for the purpose of stimulating store traffic. Unlike clearance markdowns, promotional markdowns are regarded as part of the store's offensive strategy calculated to increase sales.

  167. Promotional Stock Goods offered for sale to the consumer at an unusually low price so as to generate volume sales and store traffic. The item is generally a special purchase from a vendor and may be advertised as such.

  168. Pull Date In food retailing, the date on the package which indicates when a product should be removed from the shelves due to loss of freshness.

  169. Purchase Journal A report that includes the charge to a department or classification for merchandise received, all invoices for the merchandise, transfers of merchandise, returns and claims against vendors, short shipments, lost merchandise, etc. Prepared on a monthly or semi-monthly basis.

  170. Purchase Order A written document, made out by the buyer, authorizing a seller to deliver goods at a specified price. Payment to be made later. The purchase order becomes a contract upon its acceptance by the vendor.

  171. Push Money Bonus money paid by a vendor or a retailer to sales people for selling specially designated merchandise. Some push money is in the form of prizes such as appliances or vacation trips.

  172. Rack A floor stand used as an interior display for holding and/or showing merchandise. Utilizes shelves, hooks, or pockets.

  173. Rack Jobber A wholesaler that sells specialized merchandise, especially to supermarkets and other self-service retailers. Provides sets up, and maintains the displays of this merchandise and the requisite fixtures. Usually paid only for goods sold, a percentage of which goes to the retail outlet.

  174. Rebate (1) A reduction in price or partial refund on the price paid for merchandise given by the vendor to the retailer (generally for the size of the order), or by the vendor to the consumer (as a promotional device). In either case, its purpose is to encourage sales. (2) A synonym for patronage dividend.

  175. Rebuyer A person, usually in a large retail organization, who has the responsibility for buying additional merchandise. Generally the buyer will have placed the original order with the rebuyer given the task of ordering merchandise to bring inventories up to their proper level later in the year.

  176. Receiving Book A log kept in the receiving department in which incoming shipments of merchandise are entered. Information recorded includes number of packages, name of vendor, date of arrival, etc.

  177. Receiving by Invoice The process of checking a shipment of merchandise as it arrives at the store or warehouse against the accompanying invoice.

  178. Receiving by Purchase Order The process of checking a shipment of merchandise delivered to a store against the purchase order, a copy of which has remained on file in the store.

  179. Referral Premium A gift or other reward offered to a satisfied customer whose recommendation brings in additional prospects and additional sales.

  180. Reorder Point The planned spacing of time between orders of a specific item.

  181. Resale Price Maintenance The once common practice of manufacturers controlling the price at which their products will be sold at subsequent stages of distribution. These agreements were generally imposed on retailers and were terminated, for the most part, by the Consumer Goods Pricing Act (1975). The term resale price maintenance is also applied to the minimum price laws some states have passed for specific products, such as milk. Also called fair trade or retail price maintenance.

  182. Resource File A compilation of facts relating to each vendor with whom the store has done business. Facts include the performance of goods, delivery record, condition of goods, etc.

  183. Retail Method of Inventory A means of calculating ending inventory at cost. All transactions effecting the value of the inventory are recorded at retail values (e.g., sales, purchases, markdowns). The current retail prices of all merchandise on hand at the end of the accounting period are totaled and the sum is translated into cost by using the complement of the cumulative markup percentage. For example, if the cumulative markup percentage is 40%, the complement (or cost) is 60%. If the closing inventory at retail is $100,000, the closing inventory at cost will be $100,000 x .60, or $60,000. This method provides the retailer with valuable information about inventory levels, including such factors as stock shortages, overages, and gross margin.

  184. Returns & Allowances from Suppliers The total value of purchased goods returned to the vendor (returns) and unplanned reductions in purchase price (allowances). Each represents a reduction in the cost of total purchases. Also called "purchase returns and allowances."

  185. Returns & Allowances to Customers The dollar-value of goods returned to the store by customers plus price reductions made to customers. Deducted from gross sales to get net sales. Also called "sales, returns and allowances."

  186. Returns to Vendor (1) Goods shipped back to a supplier by a store. May result from errors in filling the order, unacceptable substitutions, late delivery, defective merchandise, or other breaches of contract. (2) The dollar-value of such returns and the resulting unplanned reduction in the cost of the purchase.

  187. Revolving Credit A regular 30-day charge account which may be paid in full or in monthly installments. If paid in full within 30 days of the date of the statement, there is no finance charge. When installment payments are made, a finance charge is made on the balance at the time of the next billing. The customer may continue to add new purchases to the account until the credit limit is reached.

  188. Robinson-Patman Act (1936) Federal Legislation intended to protect small businesses. The act prohibits vendors from providing "extraordinary" quantity discounts to large volume retailers, thus limiting the large retailers' buying strength and price advantages. The act forbids a manufacturer engaging in interstate commerce from selling to similar customers at different prices if both sales involve products of the same quality and grade and if the resultant price difference serves to substantially lessen competition or create a monopoly. Certain quantity discounts are allowed, as are different prices for private vs. national brands, even if the only difference between them is the label. These regulations are enforced by the F.T.C.

  189. Sales Based Allowances An Allowance a vendor agrees to reimburse a retailer for offering a temporary reduced sales price during a promotional period. The amount received by the retailer is based on the specific units of a vendor’s products sold during that period.

  190. Sales Record Control A merchandise information system used in unit control which is based on the analysis of sales ticket stubs, sales-checks, and other sales records which reflect an alternation of inventory.

  191. Seconds Merchandise which is damaged in manufacture or which is otherwise flawed (although still serviceable) and which is offered at retail at greatly reduced prices.

  192. Sell-and-Lease Agreement A practice whereby a retailer who owns a property sells the property to an investor who, in turn, leases the property back to the original owner. The lease may include an option to buy. The strategy at work here is one of keeping funds free for further expansion activity.

  193. Short Delivery A shipment of merchandise which is less than the amount ordered and indicated on the invoice.

  194. Shrinkage The difference between book inventory and actual physical inventory.

  195. Skimming A retail pricing strategy in which new merchandise is introduced at a high price with the intention of selling as many items as possible before competition drives the price down. Also called creaming.

  196. Sliding Scale Lease A commercial lease in which there is provision for increased rental as gross sales increase.

  197. Smallware The many items in the preparation, service, and storage of food and beverages. Pots and pans, dishes, and glassware are common examples of these items, known as "Smallwares" in the restaurant industry

  198. Specialty Chain Chain specialty stores usually selling apparel and most often found in shopping centers. These stores do little advertising and offer few traditional customer services. They depend on the shopping center in its entirety to draw customers. They are, however, efficient and are able to target their market with considerable precision.

  199. Specification Buying In retailing, the retail organization (often a large chain store) submits definite specifications to the manufacturer detailing how goods are to be made rather than shopping the market for goods already produced.

  200. Split Ticket Price tag which is perforated so that, at time of sale, a portion (stub) can be removed for inventory control purposes.

  201. Standing Order An order for merchandise placed with a vendor in which previously agreed-upon amounts of merchandise are automatically shipped over a predetermined period of time.

  202. Stock Book A book, usually maintained at the department level by the buyer, in which are entered additions to stock in the form of merchandise received from vendors, and merchandise deductions which represent sales to customers.

  203. Stock Count A periodic inventory in which each item is counted and recorded, generally by unit price within a classification.

  204. Stock Keeping Unit (SKU) In inventory control and identification systems the stock keeping unit represents the smallest unit for which sales and stock records are kept.

  205. Stock Overage A condition which exists when the actual merchandise on hand as determined by physical inventory is greater than the amount indicated in the stock records.

  206. Stock Shortage Represented by the difference between book inventory and actual physical inventory, i.e., unrecorded shrinkage in the store's merchandise.

  207. Straight Lease The most simple form of lease agreement in which the retailer pays a fixed rent over the entire life of the lease without regard to amount of business done in the store.

  208. Suggested Retail Price The price of merchandise at retail recommended by the manufacturer to the retailer.

  209. Tear Sheet In retail advertising, a page from a magazine or newspaper submitted by the publisher to the advertiser as evidence of having been run in the publication.

  210. Trade Discount A discount offered to wholesalers and middlemen and sometimes to retailers by manufacturers to compensate them for the performance of some marketing function. Thus, the reduction in price is often called a functional discount. A trade discount is independent of quantity discounts and is in effect regardless of when payment is made.

  211. Trade Promotion A sales promotion in which both the retailer and manufacturer cooperate. Cooperative advertising is one form of trade promotion. Also included are displays, demonstrations, and exhibitions.

  212. Transfer Book Book used to record which merchandise has been transferred from one department to another.

  213. Transit Time Period between the time vendor ships merchandise and the time it is received by the retailer.

  214. Universal Product Code (UPC) Adopted by the food industry in 1973, the UPC is a classification system in which each product (and each size, flavor, color, etc.) is assigned a ten-digit number. The numbers are premarked on the package by the manufacturer in the form of a bar code over the ten corresponding Arabic numerals. The bar code is readable by an optical scanner at the checkout counter and the information it contains is transmitted to a computer. It is the computer which contains the prices, not the UPC, and it is the computer which controls the cash register. See also universal vendor marking (UVM).

  215. Universal Vendor Marking (UVM) A voluntary marking system in which the manufacturer attaches an identifying tag or label to his product on which is recorded such information as size, color, style, price, etc. Data is presented in Optical Character Recognition-Font A which is readable by the human eye as well as by wands and other scanners. See also universal product code.

  216. Visible Shrinkage Stock shortages due to breakage or wear and tear on merchandise. This shrinkage is accounted for as it takes place in contrast to invisible shrinkage which is discovered through physical inventory.

  217. Wand A device used in the optical scanning of machine readable symbols. The wand focuses a beam of light on bar-coded surfaces and senses reflections from them. The tip of the wand is kept in contact with the entire length of the coded surface while it is moved to read a message. Most wands have hard tips made of ruby or sapphire. The wand is wired to a decoder which provides computer-compatible output.

  218. Warehouse Control System A system of inventory control in which the store informs its warehouse of all sales so that the warehouse can adjust inventory records to reflect the change. Warehouse can, at any time, inform the store as to how much merchandise is available.

  219. Workroom In a retail store, a non-selling area devoted to such support services as apparel alterations, drapery fabrication, etc.


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