Unresolved Business Issues Face New Congress, President

We may have a new Congress and a new president, but there are a number of leftover legislative issues affecting jewelers and other owners of small businesses. Several are tax policies in need of reform, such as estate taxes, leasehold depreciations, and Internet sales taxes. Others-such as personal bankruptcy reform and health care proposals-affect jewelers’ ability to operate their businesses efficiently.

Some analysts claim the delay in resolving these issues is for the good, since President George W. Bush, a former businessman himself, favors the business view. Here’s an overview of some of the issues that lobbyists and other government experts say are sure to be discussed during the 107th Congress:

Death and taxes. Last year, Congress overwhelmingly approved a bill calling for repeal of estate taxes, also known as “death taxes.” President Clinton vetoed it, and the House of Representatives couldn’t muster the two-thirds vote needed to override the veto.

Most jewelry retail and manufacturing businesses are family owned, and removing-or at least reducing-estate taxes would make it easier to pass them on to heirs or employees.

The current estate taxes put a heavy financial burden on small businesses, forcing many to close or be sold after the founder or owner dies. Michael Epstein, director of government affairs communications for the National Retail Federation, says, “Estate taxes are a major reason for the failure of small businesses [in the United States] after the first generation.” Epstein also cites the “fairness” factor: “It’s just not right to be taxed twice on the money you earn.”

Current law exempts $675,000 from taxation for qualified family-owned businesses. But that amount must represent at least 50% of the estate, and heirs must stay in the business for 10 years after the owner’s death. Because of strong bipartisan and business support, proposals to abolish or significantly reduce the estate tax will be put forward again in the 107th Congress. President Bush, who called for its repeal during the campaign, would likely sign such legislation.

Virtually tax-free. Expect the topic of Internet sales taxes to be a hot one this year. In 1998, Congress declared a three-year moratorium on sales taxes for goods sold over the Internet, and that ban ends in October.

The Internet sales tax issue is controversial. E-tailers oppose it, but brick-and-mortar retailers favor the tax because without it, they’re at a competitive disadvantage: They must collect taxes, while online retailers don’t. According to some experts, that gives e-tailers at least a 6% to 8% price advantage on products both they and brick-and-mortar retailers sell. In addition, “brick-and-mortar [store owners] who pay mortgages and have a big infrastructure find it unfair to compete with someone who has only a Web site, may work out of a basement, and doesn’t pay any sales tax on what he sells,” notes Jewelers of America Washington representative Tim Haake.

A number of states, unhappy over the revenue they’re losing, are developing their own online systems for collecting sales taxes on Internet purchases in their states-a move that could create new problems if a universal tax system is ever adopted.

While some retail and business associations do favor an Internet sales tax, it’s unclear what position Congress will take. A bill to extend the moratorium for another five years was approved by the House of Representatives last year but failed because of opposition in the Senate.

President Bush, however, supported the original moratorium during his campaign and urged Congress to extend it. He has said that, when elected, he would “ensure the growth of the Internet and e-commerce by extending the moratorium for up to five years.”

The critical condition of health care. Health care is a topic of great concern to jewelers (according to last year’s JA survey) and to small-business operators in general, according to the most recent poll by the National Federation of Independent Business (NFIB).

Two controversial proposals are certain to reappear in this Congress as parts of a “Patients’ Bill of Rights,” differing versions of which failed to pass last year.

One of the two proposals would enable small businesses, business groups, and associations to acquire less-expensive insurance coverage for their employees or members through multi-state coalitions, called Association Health Plans. This is especially attractive to multi-state and national business associations such as the NFIB and Jewelers of America, which could pool their resources to qualify for less-expensive health insurance plans for their members or employees. The idea passed the House but not the Senate last year, though both Republicans and Democrats are on record as favoring different versions of AHPs.

The other proposal could expose small employers who voluntarily provide health care benefits to malpractice-like liability. They could be sued as co-defendants if their employees engage in legal disputes with the health care provider over treatment or coverage. For owners of small businesses, that raises the twin specters of expensive lawsuits and skyrocketing insurance costs.

Organizations such as the National Retail Federation (NRF) and Jewelers of America (JA) have opposed such a provision in the Patients’Bill of Rights, warning that its passage would worsen the health care coverage problem. Potential liabilities and higher insurance costs would “force many small businesses to drop [voluntary health benefits], and that means millions more Americans-not less-would be without insurance,” notes the NRF’s Epstein.

President Bush will probably support changes that remove business owners’ liability. He also favors legislation similar to that in Texas that lets policyholders sue insurers after a quick review process, to ensure that such cases are resolved quickly. As he said in his second debate with Al Gore, Bush supports the AHP concept, which lets small businesses enjoy the same economies of scale as large employers.

Tradewinds. Expect the issue of “conflict diamonds” to surface again in 2001. Bills to control the illegal flow of diamonds that finance brutal civil wars in Africa were introduced, though none passed, last year in Congress. In July, after the World Diamond Council’s meeting in Antwerp, Belgium, the group urged the diamond trade’s key countries, including the United States, to implement an international system of rough certification. That effort will begin this year.

Meanwhile, manufacturers that legally use products made from endangered species-e.g., watchbands and straps, gift boxes, even mother-of-pearl watch dials-will also get attention this year. The American Watch Association is forming a multi-industry coalition that would work with the U.S. Fish and Wildlife Service. The intent is to bring consistency to import procedures for these products.

Even though the importation of such products is legal, minor technicalities-such as a typographical error on a document or a tiny difference between the number of watch straps noted on a document and the actual count-can cause an entire shipment to be seized. “We need uniform procedures like those of [the U.S.] Customs [Service] for companies who regularly bring in products,” says AWA executive director Toby Collado.

Worth watching. Other issues worth noting this year include the following:

  • Bankruptcy reform had strong bipartisan support in the last Congress. Despite a threatened White House veto, a bill passed both houses, but a compromise version of the House and Senate bills wasn’t ready when Congress adjourned.

“There were very strong votes and bipartisan margins [for this] in both Houses,” notes Epstein “We expect many of the same legislators who introduced and supported it then to do so again this year.”

Of special importance to jewelers and other retailers is the reform of laws related to personal bankruptcy. That would prevent consumers who are able to pay back their debts (including merchandise purchases) from declaring Chapter 7 bankruptcy (which eliminates all debt) to avoid payment and require them to file under Chapter 13-which mandates a method of repayment-if they meet certain criteria.

  • The American Watch Association will work for legislation that preserves a victory it gained last year. The U.S. International Trade Commission had intended to make significant changes in the tariff rate schedule for imported watches and watch parts. The changes would have boosted duties and, eventually, the prices of those watches for retailers and consumers, especially the upscale watches sold by jewelers.

AWA convinced the ITC that the change was bad foreign policy because of the strong reaction it would provoke from watchmaking countries and because of its disruptive effect on competition in the watch industry. The ITC compromised by making some changes to the complex system, but tariff rates-and their effect on watch costs-remain the same.

Tax reform redux. Many political experts expect President Bush to push for fundamental tax reform as early as this year. If that happens, several taxes affecting jewelers will be considered for revision or implementation:

  • A national sales tax (similar to Europe’s VAT) would be one of the revenue replacements or enhancements suggested in Congress.

  • Legislation on depreciation of leasehold improvements has been pushed for several years by jewelers and other small businesses. Currently, a building owner must depreciate improvements over a 39-year tax life of the entire building. However, many retailers’ leases require that they remodel their stores every five to seven years. A depreciation category of seven to 10 years would more accurately reflect the lifespan of such improvements.

  • Finally, there may be calls for a new “luxury tax”-even though costs of administering it outweigh revenues. Jewelry industry coalitions have successfully fought to repeal such taxes three times in the past century. Still, notes one savvy Washington lobbyist, “The government may have a surplus now, but once these guys [in Congress] spend it or just need another source of money, you can expect the idea of a luxury tax will surface.”