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The preferred tax treatment of slotting fees paid by manufacturers to retailers in the food industry has yet to be formally provided by statute or IRS pronouncement. Because the benefit period related to the fees may extend beyond one year, the question of whether the payments constitute a currently deductible expense rather than one that should be capitalized is of concern to taxpayers. This is particularly true in light of the Supreme Court's INDOPCO, Inc. decision.
Slotting Fees
Slotting fees are food industry manufacturers' payments to retailers to induce a retailer to shelve the product. The use of these fees is found throughout the food retailing industry and is considered standard practice. In addition, the practice is spreading to other retail industries (such as bookstores). Another related practice is that of "staying fees," payments made in subsequent periods so that the retailer continues to shelve a manufacturer's products.The practice is often subject to criticism, due to inconsistent payment amounts and the camouflage surrounding these transactions.
There is currently a great deal of debate surrounding both the origin and continuing purpose of slotting fees. The primary problem with any objective study of the economic issues surrounding slotting fees is the inconsistency in amount and clandestine nature of the payments. Manufacturers blame the fees on the consolidating retail food market. They argue that retailers now possess the power to force manufacturers to pay these fees so that retailers' products can be made available to consumers. The retailers claim, however, that manufacturers willingly pay the fees.
Applicable Tax Law
In general, Sec. 162 and the related regulations allow a deduction for ordinary and necessary business expenses incurred by a taxpayer. Sec. 263 provides that taxpayers are not currently allowed to deduct amounts paid that permanently improve or increase the value of an asset. In other words, typically those expenditures that result in a benefit (asset) which has value over multiple tax periods are to be capitalized and their costs allocated over multiple tax periods.
In INDOPCO, Inc., 503 US 79...