From the tax increases at the beginning of the year to the uncertainty surrounding the cost of the Affordable Care Act, 2013 has proven to be challenging for many small business owners in this industry.
While numerous new laws and standards have had an influence on many in the HVAC industry this past year, a handful of major issues have affected distributors nearly across the board. Here is a look back at five of the biggest legislative and regulatory issues that have made a significant difference to wholesale distributors in 2013.
Fiscal Cliff Tax Increases
On the first of the year, Congress passed the American Taxpayer Relief Act of 2012 to avoid going over the so-called fiscal cliff, which would have triggered immediate and steep tax increases and cuts to the federal budget.
Still, the fiscal cliff deal raised payroll and income taxes, putting financial strain on employees and small business owners during a time of slow economic recovery. Additionally, two new taxes associated with the Affordable Care Act — The Hospital Insurance (HI) Trust Fund Tax and the Net Investment Income Tax (NIIT) — went into effect at the beginning of the year.
“You saw a variety of different tax increases at the beginning of the year that certainly had an impact on the vast majority of HARDI members,” said Jon Melchi, director of government affairs for HARDI. “It seems so long ago now, but that had a big impact on the business community.”
Along with increased taxes, many wholesale distributors have been dealing with problems caused by the inconsistent supply of HCFC-22, or R-22. This popular hydrochlorofluorocarbon refrigerant is slated to be phased out in the United States by 2020 due to its harmful effects on the environment.
“I would argue that the 2012-2014 HCFC-22 allocation rule had the most immediate impact upon distributors,” Melchi said. “That rule, which came out earlier this year, without a doubt added more R-22 refrigerant into the market than had been anticipated, and it caused prices to drop, leaving folks upside down in their inventory.”
Richard Cook, president and COO of Houston-based Johnson Supply, agreed with Melchi.
“The issue that affected us most was the R-22 allocation change — unannounced — which caused us significant profit loss as the price fell much faster than our inventory cost,” Cook said. “The loss of profitability makes it more difficult to invest in the business and our employees.”
This year’s R-22 surplus has also negatively affected refrigerant recycle and reclaim programs across the country. As a result, retrofit installations have also decreased.
“We went from 47 million pounds in 2012 to 62 million this year — that is not what you would call a phasedown,” Melchi said. “It appears to have complicated the transition as opposed to helping put us on a path to the ultimate phaseout in 2019.”
Bill Bergamini, president and COO of Illco Inc., Aurora, Ill., also agreed that the R-22 surplus has caused a severe headache for many wholesale distributors this year.
“There is absolutely no tightness of R-22 in the marketplace,” he explained. “There’s more R-22 available than the market needs, and because of supply and demand, the price has been dropping and retrofitting and reclaim has been suffering because of it. It’s hurt the reclaim market. People are now just servicing R-22 equipment, whereas before they had been replacing or retrofitting it.”
Affordable Care Act
As one of the most hot-button political issues of the year and a primary contributor to the recent government shutdown, the Affordable Care Act — known by many as Obamacare — has also been a major source of stress and uncertainty for many wholesale distributors.
“It’s caused a great deal of uncertainty for employers and for employees, who are undoubtedly wondering what will happen to their health insurance,” said Karen Madonia, CFO at Illco and co-chair of HARDI’s Government and Trade Relations Committee. “Until employers know exactly what they’re facing in terms of health insurance costs, they cannot reassure employees that group coverage as we know it will continue to be available.”
Madonia said she has heard of some companies’ health care costs rising anywhere between 10 and 40 percent, which she noted can have a significant affect on a small business.
“Outside of payroll, health insurance is our biggest expense,” she explained. “A change of even 10 percent would really affect our bottom line.”
She added that many employers are stuck in limbo waiting to see what the new health care law will cost them. “The uncertainty is really causing everyone to pause and put plans on hold until they find out what that health insurance renewal number will be. Then they’ll be able to make plans for hiring, expanding, and growing.”
Since many wholesale distributors are family-owned, repeal of the estate tax has been another top legislative issue in 2013. Currently, the estate tax rate is 40 percent for assets over $5 million, which is a big problem for many small businesses, according to Madonia.
“It’s not difficult to get to that $5 million threshold when you’re a small business owner,” she explained, adding that assets not only include personal ones like homes and retirement accounts, but also less liquid ones like inventory, equipment, and accounts receivable. “HARDI is made up of a large number of family businesses, many of which are undergoing generational transfers. After a lifetime of building a business and a legacy, and the hoops that they have to jump through to make a transfer possible are very high. Until they fully repeal that tax — and I hold out hope that Washington will figure out that it’s anti-entrepreneurial, and that the revenue they receive is just a fraction of the overall government revenue — it will continue to devastate family businesses, including farms, where the value is completely tied up in land. The estate tax kills them too.”
Madonia added that her company has been negatively affected by government overreach in recent years, especially when it comes to trying to grow the business beyond its current 92 employees.
“We want to grow our business. We want to hire more employees, open more branches, and expand our inventory,” she said. “But we have to spend so much time dealing with the regulations that Washington puts out that we really don’t have time to focus on our core business.”
Perhaps the most widely covered regulatory issue of the year is regional standards. The regional standards lawsuit has dominated trade publication headlines and has been of special interest to the wholesale distributor community, especially HARDI.
In January, the American Public Gas Association (APGA) and the U.S. Department of Energy (DOE) filed a joint motion to vacate and remand the rule setting new energy-efficiency standards for nonweatherized natural gas furnaces. Shortly thereafter, HARDI filed a motion to continue the regional standards case by substituting itself as petitioner in an attempt to rescind the regional efficiency standards for central air conditioners and heat pumps, which go into effect at the beginning of 2015.
On May 1, the court ruled favorably on a motion filed by the Air-Conditioning, Heating and Refrigeration Institute (AHRI) to stay the May 1 compliance date for the implementation of regional furnace standards.
In August, despite the APGA, DOE, and others filing motions asking the court to deny HARDI the opportunity to fight the DOE’s regional standards for air conditioners and heat pumps, the U.S. Court of Appeals for the D.C. Circuit ordered the parties involved in the lawsuit to agree to a briefing schedule on three main issues: the settlement agreement between the APGA and DOE, HARDI’s motion to continue the lawsuit, and the merits of the lawsuit itself. Meanwhile, the proposed settlement between the DOE and the APGA is still pending, having never been accepted by the court.
“On the product side, the regional standards lawsuit has continued to be a major issue in our industry,” Melchi explained. “When we came up to that May 1, 2013 enforcement date [for nonweatherized gas furnaces], we had distributors getting very low on inventory so they wouldn’t be stuck with
Even now, Melchi said there is continued uncertainty surrounding regional standards. He added that HARDI will continue its quest to vacate and remand the regional standards for air conditioners and heat pumps.
“Our position has always been to get the right solution as opposed to the most expedient,” Melchi said.
At the end of 2013, many of these issues remain unresolved and will continue to be a focus of HARDI’s advocacy efforts in 2014.
“Some of the issues we’ve been working on are tax reform,” noted Melchi. “Obviously, with the budget standoff and the debt ceiling, everything has been placed on hold.”
For Cook, the biggest issue he anticipates focusing on in 2014 is the possible attempt to repeal the last in, first out (LIFO) method of accounting.
“The efforts to repeal this accounting method could cost us a substantial amount of money — it is unprecedented in that it seeks to be a retroactive tax,” he explained. “It would be like the government telling a homeowner, ‘all the interest deductions you have taken over the last 30 years are now invalid and you owe us the tax on that deduction.’ Only in Washington would something like that be considered.”
Madonia said they will continue to participate in events, including HARDI’s annual Congressional Fly-In, in order to make sure lawmakers are aware of how issues like estate tax and health care significantly affect small businesses.
“It really has been a tough couple of years for distributors,” Madonia said. “But, it is what it is.”
For more information on HARDI’s legislative advocacy efforts, visit www.hardinet.org/advocacy.