Hammered by Thor

Once upon a time in Washington (it was 1979), the United States Supreme Court decided 439 U.S. 522, Thor Power Tool Company v. Commissioner of Internal Revenue. In a nutshell, the Supreme Court decided that the Commissioner didn't abuse his power by denying Thor Power Tools a write-down of "excess" inventory. As a result, book sales for midlist authors (i.e. most of you, gentle readers) have suffered ever since.

Wait, what?

For an in-depth treatment, I'll direct you to Kevin O'Donnell, Jr.'s excellent article on the subject, but what happened is this: in the 1970s, Thor had a bunch of inventory that they were having difficulty moving. All companies—Thor included—pay income tax on their profits, which they pay after making all legally deductible expenses from overall revenues. One way, then, of increasing overall profitability is to pay income tax on a smaller percentage of gross income. Thor decided to do this by increasing their deduction in one field, cost of goods sold (COGS).

Now, there are legal ways of doing this. Say you have $1000 worth of inventory in your warehouses, but by the time taxes are due, the market value of said inventory has dropped to $800. The IRS will let you write down the value of your inventory, i.e. pay taxes on the lower of the two numbers (in this case, $800 instead of $1000). By the end of the 1970s, however, businesses had started writing down the cost of inventory that hadn't yet realized a drop in market value; in the above example, it would be as if your inventory were still technically worth $1000, but you knew (based on the rate you were selling it) that you would only sell 800 units at $1.00 per unit before Inventory 2.0 would come out, rendering your current merchandise obsolete and unsalable. Before Thor v. Commissioner, you could claim $800 in inventory due to slow rate of movement (ROM) and not due to actual depreciation in value; after 1979, you couldn't.

Now, as you may know, the book industry operates in two weird ways. One, it automatically renders huge quantities of its stock obsolete (i.e. hardcovers) every year by printing trade paperback/mass market editions, and two, it allows accounts to return unsold stock to publishers for full credit if those accounts can't move their inventory.

You might already see the problem: each year, thousands upon thousands of books are returned to their respective publishers, generating high levels of nigh-unsellable inventory at their warehouses. Because publishers can no longer write down the cost of their inventory based on inability to sell, they have to do one of two things: remainder the books, i.e. sell them for pennies on the dollar in order to get rid of them, or pulp (destroy) them. (This is the case for hardcovers and trade paperbacks; mass market editions are generally stripped. In case you were having a good day thus far, please note that 40% of books suffer this fate.)

Because publishers lose money on returns/remainders/pulping (and face losing even more money if they don't do this), they compensate by ordering smaller initial orders than they used to and allowing titles to go out of print faster. For a midlist author, this means fewer copies of your book are sold/shipped to stores and remain in print for less time than they would have pre-Thor. While there are potential missed sales here, the publishing houses generally come out on top by doing this, whereas most midlist authors get the hammer.

I've said it before and I'll say it again: I don't want to discourage you from writing or make you cry yourselves to sleep at night. I just want to help you figure out what you're up against in this crazy industry. At this point, we've been operating under the post-Thor tax code for thirty years; there's no going back, and I'm honestly not sure there's a way to remedy the problem of smaller initials and shorter shelf life across the board. Any ideas you might have, however, are (as always) more than welcome in the comments.