Wednesday, April 11, 2012

Death & Taxes: The IRS, Amazon, my dad's library, and Book Pricing

Book pricing is in the news again. The US Dept of Justice has filed antitrust lawsuits against the Big Six publishers and Apple for allegedly colluding to fix prices on e-Books (which would be illegal). The complaint stems from something we've talked about a lot: Amazon's efforts to unilaterally define the value of e-Books at rock-bottom prices in order to sell more Kindles.

There's a lot of inside baseball here, and if you want to see it from the publisher's point of view, you can read the open letter from Macmillian president John Sargent over on Book pricing is a complex issue and I've been searching for a real-world analogy, something I can point to that will prove my thesis on the perils of training the world to expect literature to cost $.99 (or to be free).  Turns out I didn't need to look farther than the outstretched hand of the tax man.

Believe it or not, the United States Internal Revenue Service has a lot to say on the subject of book pricing. And what they have to say has had a profound effect on the perceived value of books in the marketplace.  It's one of the few places where the market for used books has lessons to teach us about the market for new ones.

Bear with me a moment as I put on my storytelling hat...

My dad and I have always been fond of the idea behind Henry Ward Beecher's marching orders: “A little library, growing every year, is an honorable part of a man’s history. It is a man’s duty to have books. I library is not a luxury, but one of the necessities of life.

That's a lovely sentiment from Mr. Beecher but what happens to those books when you are gone?

I've been sorting the final stacks of boxes that were once my dad's library. He passed away three years ago and I'm still shifting through the boxes and looking for places to donate the ones I don't have room for. Every time I think I'm done, mom says "Have you looked in those boxes in the attic?"

For the most part, these are books I already own or simple aren't interested in. Those precious to me or the family or those in which I have a particular interest I've already sent to live on my own shelves back in Washington. The rest must find other homes, preferably homes that will continue to nurture the love of literacy that my dad spent his life kindling in me.

What does this have to do with book pricing?

Death and taxes being life's two constants, it seems inevitable that they would somehow collide in a way that impacts pretty much every other aspect of life -- including buying and selling books. Hopefully, everyone in the United States knows that donating an item to charity allows you to deduct that item's "Fair Market Value" from your taxes for that year as if you had made a monetary donation in that amount.

This is how the IRS defines fair market value:
Fair market value.   Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.

Sounds simple enough, right? I mean, books have the market price printed on the cover. Publishers sell them for that price, so it seems simple enough, right?

Not so fast.

The chore of determining the fair market value of most items falls to the tax payer seeking the deduction and woe betide the person who gets it wrong. The penalties for over-estimating the value of donations are prohibitively steep. And I'm sad to say that no matter what the publisher prints on the cover, the FMV for books has little or nothing to do with what they cost at Barnes & Noble.

Donate your books to Goodwill, and you can expect to claim Goodwill's value for those books. They will usually sell them for somewhere between $1.00 and $3.00 each regardless of their rarity or condition. You can't claim more than they are worth on the open market, and no market is more open than Goodwill.

Fair enough. But what if I donate them to a library? Or my church? Or a prison literacy program?  Having done exactly that -- literally by the truckload and with the receipts to prove it -- I wondered what my family might claim as a deduction for those books.

The answer: From $1.00 to $3.00 for hardbacks. Because that's what those libraries, churches, and prisons could theoretically buy them for if they bought them from Goodwill or the Salvation Army.  It doesn't matter that for the most part, the libraries of the world wouldn't be caught dead buying books from those sellers, that's their "Fair" market value, defined by the free market.

In IRS Publication 561, the tax agency has defined the 'Fair Market Value' of most goods as the price two honest people can be expected to arrive at if one sells it to the other. For cars, it's the Kelly Blue Book value. But for books as the amount charged not by used bookstores in your area, but as the amount charged by Goodwill and the Salvation Army.

It's the Law of Unintended Consequences in full force.

Even if Half Price Books operates in your area, selling Stephen King hardbacks by the truckload at 1/2 their face value, the IRS wants you to declare their value as $3.00 per copy or explain why. And that explanation had better come in the form of a professional appraisal.

The cover price of the average new hardback novel is about $26.00. And to be fair to our friends at thre IRS, unless you are buying a signed first edition no one really expects that valuation to hold once you've taken the item home. It's like driving a car off the lot depreciates the car -- this is the way of things.

By charging too little for books for too long, these national thrift store chains have had a profound effect on the perceived value of used books. A perception that has taken the force and effect of law unless you care to pay for a professional appraisal.

I checked with my tax preparer, and it's not worth fighting them over it. Either pony up for a professional appraisal (which will also be affected by the degradation of market value) or take your medicine and collect your books for their content, not their value.

If you've ever discovered a rare gem in a thrift store and paid a song for it, you really have no right to complain.

Here's where we pick up the thread of the multi-faceted dispute between the publishers, Amazon, and the US government. The publishers have, for most of their existence, defined the retail price of their product. As they used to tell us at Borders, you can't very well threaten to go down the street to some other publisher and buy Stephen King's new book. If you want to sell King's books, you have to buy them from King's publisher at their asking price.  If you discount them, that's up to you.

Enter and the uncertainty of the brave new world of e-books. Amazon came out of the gate insisting that the fair market value for e-books (regardless of what they may cost to produce) is $9.99 or less.  They trained the market to expect e-books to be less than ten bucks, and to expect most of them to be a dollar or even free.  And in spite of voices raised in protest (including mine) the publishers mostly went along with it.  Even when they started to realize that they were eroding the fair market value of their product as surely as Goodwill has incidentally eroded the value of used books, Amazon was still the only game in town... until Steve Jobs reversed his previous assertion that books were dead and offered publishers a better deal: the "Agency Model".  It was a better deal that publishers were able to leverage into a (somewhat) better deal with Amazon.

All well and good.  But if they cooperated in any way, that's market collusion and it's illegal. Enter the US Attorney General and the current lawsuit against publishers for price-fixing.

What a mess.

The big publishers aren't going to come out well in this. The DOJ thinks they've got a good case, and they probably do.  But even if they defeat the suit by DOJ, (and there's a settlement already in the offing) they already can't afford the protracted battle.

Big Publishing may or may not be an outdated model. They might crumble under the weight of this thing, or they may consolidate further and get even bigger -- either way, there will always be publishers of some kind, whatever size they may be or whatever name might appear on their letterhead. Self-publishing is well and good, but there will always be writers who don't want or aren't able to do it themselves and there will always be people who will stand up and say "Give it to us and we'll be the middle-men for a cut of the take."  It won't look like it did in Salinger's day, but it already doesn't. Those days are gone.

Here's all I care about: the written word has to have a market value that allows writers to make a living writing it. If the agency model falls, if the seller-side model of pricing wins and booksellers set the price too low for the real professionals to stay in the market, we will all suffer for it. Even if it is more legal than what we've already got.

The bulwark of our literary canon is and always will be the professional writer devoted to holding up the literary mirror against all efforts to cover it. Without that professionalism and dedication to craft, we might get more books shoveled at us over the transom in the anarchic e-book free-for-all but we will get less and less of the real quality that already seems too rare.

This is the challenge of writers and publishers going forward: This is a tough thing to describe in a way that is interesting, sounds rational, is devoid of alarmist warnings but isn't laden with statistics, but it's paramount to our future literary legacy that we preserve the value of books.

If we don't, we will one day be gone and we will have left our heirs with a legacy that they can't even give away.

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Pages to Type is a blog about books, writing and literary culture (with the occasional digression into coffee and the care and feeding of giant robots).