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TAX PROFESSORS KNOW HOW TO SPEND A THREE DAY WEEKEND

May 31, 2005

Professor Maule spent part of his weekend writing a 1900-word essay on the Section 199 deduction and how it affects Costco's in-store bakeries:

The example in the legislative history is, as the Costco letter points out, ambiguous and confusing. Does it mean that all receipts from the sale of products produced by the in-store bakery are ineligible? Does it mean that the receipts should be allocated between those arising from sales to retail customers and those sold to, for example, restaurants for re-sale? Does it mean that receipts from items that undergo additional processing qualify, such as sliced bread used by the bakery to make sandwiches sold to customers? Costco's letter notes that a fourth interpretation exists, because one could argue that even a cake prepared by the bakery is not ready for immediate consumption because the "normal" way in which individuals consume a cake is not to dig into it immediately. It needs to be unpackaged and cut into individual slices.

How he barbecued anything while doing this is beyond us, but the Costco problem is a handy illustration of the folly of the Section 199 policy of trying to tax "manufacturing" income different from other earnings.

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