The Domestic Manufacturing Deduction: Here’s Why It Matters

  • Kristina Zaumseil
  • 06.28.2017

 

 

In 2015, the Treasury Department proposed amending the Section 199 regulations to clarify that in situations where a taxpayer uses a third-party contract manufacturer, only the contracted manufacturer could claim the tax deduction. Since most contracted manufacturers don’t have any ownership of the product and therefore lack the authority to sell, exchange or dispose of it, this proposed rule, if finalized, would eliminate the benefits of the Section 199 deduction for both parties and contravene the legislative intent of the deduction: to reward businesses for manufacturing their products in the United States.

This scenario is especially true in the newspaper industry. For instance, nationally distributed newspapers typically don’t own and operate printing plants in all regions of the country and therefore contract with third-party commercial printers. The newspaper company provides the contracted printing company with all the supplies necessary for print production – ink, paper, and content – and the printing company provides a service.

When discussing Section 199 and its importance to the newspaper industry, it is important to address the elephant in the room – print is moving to digital. Distribution of newspaper content is changing. Most newspapers own and operate websites and mobile platforms to provide consumers with news when, where and how they want it. Newspaper publishers are spending significant resources to provide on-demand journalism to the public and digital readership continues to grow at staggering rates. For these reasons, the News Media Alliance asked the Treasury Department and the Internal Revenue Service (IRS) to unilaterally extend the benefits of Section 199 to online and digital newspapers – in line with extending the deduction to benefit TV and film production entities. There is no reason to distinguish between advertising and subscription revenue for a print newspaper and those same revenue sources for an online newspaper.  Both print and online newspapers rely on the revenues derived from advertising and subscription fees to produce their product and both would use the Section 199 deduction to reinvest in the business of real, reputable, and trusted news media.

The Section 199, Domestic Manufacturing Deduction, was established by the American Jobs Creation Act of 2004 to reward businesses with a tax break when they keep their manufacturing in the United States. To qualify for the deduction, the taxpayer must possess the benefits and burdens of ownership by both manufacturing and selling the qualifying product. Since its enactment, complications have surfaced concerning how the rule is applied to non-vertically integrated businesses (those that rely on a third-party contract manufacturer) – creating inconsistency during IRS audits and inciting confusion as to who can claim the deduction, causing some qualified businesses to avoid it altogether. As it currently stands, newspapers can claim the deduction based off the domestic production gross receipts (DPGR) qualified production activity income to include subscription and advertising revenue, being that the two are inextricably linked to the manufacturing of the product.

Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA) reintroduced legislation from the previous congress that would allow both the third-party contract manufacturer and the taxpayer to maximize their ability to take the Section 199 domestic manufacturing deduction, while preventing double-counting of the deduction against each party’s reduced income. Senators’ Rob Portman (R-OH), Debbie Stabenow (D-MI), and Sherrod Brown (D-OH) also reintroduced an identical version of the legislation in the Senate. With Chairman Brady and Speaker Ryan’s plans for comprehensive tax reform by the close of 2017 – the reintroduction of these bills reaffirms the value of the Section 199 deduction to the business community and American manufacturing.