Music Trade Review -- © mbsi.org, arcade-museum.com -- digitized with support from namm.org
FEBRUARY 2,
1918
THE
MUSIC TRADE
REVIEW
How the War Revenue Tax Affects the Piano Merchant
An Exhaustive Explanation of the Requirements of the New War Revenue Tax, Written for The Review by Waldon
Fawcett, Showing How the Tax Operates, and What Items Must Be Included in Returns Made to the Internal
Revenue Officials—Deductible Outlays and the Allowance Provided for Piano Depreciation
It is "report time" in the "war zone" of Ameri-
can business. Piano merchants haven't, when
you consider the magnitude of their task, any
time to spare in turning in to Uncle Sam the
reports and returns called for under the War
Revenue Act. The Government wants its in-
formation from corporations having stock val-
ued at $75,000 or more by the first week in
February, and March 1 will stand, unless an
"extension" is granted, as the dead-line for all
returns from individuals, partnerships, etc., cov-
ering profits, income, etc. Brief enough is this
period of grace for the piano man whose book-
keeping methods must, perhaps, be readjusted
or expanded in order to yield all the data that
the Government will henceforth demand.
All interests in the piano trade have been so
engrossed in recent weeks with the lately de-
cided controversial issue as to the precise man-
ner in which the special war tax should be
applied to piano players that it is suspected that
the trade has, for the time being, almost over-
looked the fact that it has other.responsibilities
in connection with the Federal scheme for fi-
nancing the war. The specific levy which Com-
missioner Roper of the U. S. Bureau of Internal
Revenue recently decreed, to the gratification of
the trade, to be applicable only to the player
action as a separate feature of the instrument,
is the only "special" tax levied upon the piano
industry and as such naturally attracted attention;
but in aggregate sum involved it is not com-
parable to those taxes on income and profits
which piano men must bear in common with all
other merchants, jobbers and manufacturers in
every line of industry.
As a matter of fact, the special tax upon play-
ers is one which, though it temporarily hits the
pocketbook of the merchant until he can pass
it on to the ultimate consumer, really makes very
little extra work for the busy retailer. The
player manufacturers, alike to most of the talk-
ing machine manufacturers, have adopted the
plan of billing the merchant for the amount of
the tax as a separate item in every invoice.
Thus, the merchant is not only spared the
bother of computing the levy but he has no
responsibility for paying the special tax direct to
the Government.
Merchants Must Make Report on Operations
When we come, however, to the new war taxes
upon income and profits we have a very different
situation. The piano merchant must make pay-
ment on his own operations to the Collector of
Internal Revenue in his district and, worse yet
from the standpoint of detail encountered and
time consumed, he must as a preliminary to this
payment fill out a form or schedule in the guise
of a "tax return" that has all the elements of a
concise business history for the year 1917 of
the enterprise in which he is engaged. As though
this balancing of expenses against receipts to
ascertain net profits and income were not enough
of a chore, the piano merchant must in addition
"report" every individual or corporation to which
payment was made during 1917 of income or
gain amounting to $800 or more. That means
that the piano retailer must "tell on" his landlord
if he pays $800 or more rent and he must like-
wise confide his financial relations with every
salesman to whom he has paid in salary or com-
missions as much as $800 during the past twelve
months.
What Uncle Sam Insists Upon
For the overworked piano man the making out
of any additional legal document is always an
added responsibility, but on the face of the thing
it would appear that the writing of a "war tax"
return was nothing more serious than transcrib-
ing entries from his ledgers. This might be the
case were it not for the fact that Uncle Sam
has his own ideas as to what, for taxable pur-
poses, are allowable as "expenses" and "losses"
and "income" and "profits" in the conduct of a
business, and in order to square his records with
Governmental requirements it may be necessary
to revise the record and mayhap do some extra
figuring. Furthermore Uncle Sam insists that
business operations shall be reported for the
calendar year 1917. If the piano man's business
year begins on any other date than January 1 it
will be necessary for him to come to the Govern-
ment standard, at least for purposes of income
reports.
That the piano trade has come within a month
of the time limit on "war tax" returns without a
realization on the part of many a dealer of his
responsibilities in the premises is due in part to
the tardiness of the Treasury Department in
distributing the blank forms upon which reports
are to be made. An additional factor is found,
however, in the impression on the part of not a
few of the smaller merchants that the summons
to step up and settle does not include them. As
a matter of fact it is only the piano dealer who
does a business of the most modest proportions
who is excused from reporting to Uncle Sam and
there are scores of well-paid piano salesmen on
salary or commission who will be under the ne-
cessity of reporting just as though each was the
proprietor of his own independent business.
What Dealers Must Report Upon
To be explicit, it may be said that a report is
required from every unmarried man in the piano
trade who made more than $1,000 last year and
from every married man whose net return from
his business was more than $2,000. The more
prosperous members of the trade will be hit pro-
portionately harder than the small fellows be-
cause the old Federal income tax which was im-
posed on incomes above $3,000 and $4,000, re-
spectively, yet remains, the new war income tax
having been simply put on top of the old levy,
and then when an income passes the $5,000
mark it encounters surtaxes in addition to the
regular and extra income taxes. Nor can the
small man in the trade with safety overlook the
"excess profits" tax, so called, on the theory
that this is applicable only to "war brides" that
are making much more money than they did be-
fore the war. To "get" these profiteers was, to
be sure, the primary purpose of the war profits
tax, but as worked out by Congress the "ex-
cess" tax is liable to operate in the case of
every business man whose profits are large in
proportion to the capital he has invested. That
is to say, a piano man might be doing a com-
paratively modest business and yet if the capi-
tal invested were insignificant he might be liable
to the "excess profits" tax. Indeed, if the prof-
its of a piano business in 1917 passed the $3,000
point in the case of a corporation or $6,000 in
the case of an individual or partnership, it will
be necessary that a careful accounting of profits
be made, and if this discloses a profit above 7
per cent, on invested capital, rest assured the
Internal Revenue officials will scrutinize the re-
turn very closely.
Watch Invested Capital and Business Expenses
The conditions of the "war tax" game are
such that it is desirable for the piano merchant
to do, in so far as he legitimately can, two things
that are the exact opposite of what he would
normally do in regular business accounting—
that is, make his invested capital appear as large
and his net profits as small as he truthfully can.
Presumably when the manager of a piano house
is preparing his annual report for his board of
directors he desires to have the operating ex-
penses appear as modest as possible. But in
making out a Federal tax "return," business ex-
penses are an asset in that they are entitled to
"deduction" before the tax levy is made, and so
it is important that no item of expense be for-
gotten in striking a balance. On the other hand,
the piano man intent upon impressing a banker
or a manufacturer with his efficiency is apt to
put his best foot forward to indicate frequent
turnovers on a limited capital. But at Federal
tax time, invested capital is the sole means of
escape from an "excess profits" tax, and conse-
quently the piano man who wants all that is
coming to him has every incentive to overlook-
no item in taking stock of his resources.
For the benefit of the piano merchants who
must this month or next submit war tax returns,
it may be whispered that Uncle Sam is going to
be pretty liberal in allowing the deduction from
income of every legitimate business expense, but
downright hard-hearted in rejecting anything
that is classified at the United States Treasury
as personal expenses or household overhead. In
the main, the business man can readily surmise
how the line is drawn. Rent of his wareroom,
light, heat and telephone service at the business
establishment are all deductible as business ex-
penses, while the same items at his place of
residence cannot be counted out in figuring net
income. However, there are some contingencies
in which the piano man, left to his own devices,
may be in doubt.
Various Outlays That Are Deductible
For instance, take the matter of automobiles.
A piano merchant may have a car that he uses
during the day in his quests for prospects and
in locating freight shipments, etc., but in which
he motors out to the golf club in the late after-
noon and takes the family for a drive in the
evening. Can gasoline and tires for that car be
entered up under the deductions for business
expenses? The answer of the Internal Revenue
Man is likely to be "no." Only the automobile
used strictly for business purposes may be main-
tained out of the business. The Treasury has
even ruled that when a business man employs a
rrian part of the time at his store and the re-
mainder of the time doing chores at his resi-
dence, credit can be taken in the tax return for
only such part of his time as is devoted to
business duties.
All the advertising outlays of the piano man
are deductible before he begins to pay a war
tax, and presumably this would include the
amount of rebate on the price of a piano offered
as a prize in a contest, provided it could be
proven that the claim was for a legitimate re-
duction below the sum which the dealer had
paid for the piano. Similarly, while most mer-
chants dispose, in the regular cou-rse of busi-
ness, of the talking machine records and player
rolls used for demonstration purposes, the
houses that specialize on "sealed records" are
unquestionably entitled to deduct as advertising
items the cost of records that are worn out by
repeated demonstration work. All the expenses
of piano travelers, such as railroad fare, hotel
bills, etc., etc., are, of course, allowable deduc-
tions, and the dealer who takes out to dinner
the farmer prospect whom he is striving to close
on a piano sale is warranted in charging up the
cost of his customer's "entertainment," though
he is not allowed to include as a business ex-
pense the cost of his own dinner that he ob-
tains downtown when he might, theoretically,
have returned to his own home.
Doing Business in a Private House
In this calculation for war taxation purposes
of the operating expenses of a retail piano busi-
ness, an interesting situation is presented with
respect to the numerous merchants who have in
recent years forsaken the shopping districts of
certain of our cities and have leased handsome
private residences in fashionable districts fur
conversion into warerooms. The Internal Rev-
enue Bureau has ruled with respect to such cases
(Continued on page 6)