Tolbert: Ross Campaign Provides Explanations On Pharmacy Inventory Questions

Most stories begin with a question.

Sometimes that question is answered clearly one way or the other. Other times, the answer is elusive. Such is the case with this story. But I am getting ahead of myself. Here are the facts. I will lay them out for what they are.

This question started with a report ProPublica ran back in 2009 on the 2007 sale of Ross Pharmacy by then Congressman Mike Ross. As I observed at the time, I believe ProPublica’s analysis of the sale based primarily from the value of the balance sheet was lacking. A sale of a business is usually based primarily on potential future cash flow and the value of the customer base.

Regardless one question raised from the information released at the request of Ross by the pharmacy’s buyer,  USA Drug, stood out. Specifically, the value of the tax assessment compared to the valuation of the pharmacy’s assets made during the sale. This was part of the analysis that ProPublica used to argue that the sale was too high and to imply something improper was taking place in the sale itself.

But what about the opposite question? If the value of the assets in the sale is correct, was the tax assessment too low? And the item that seems to stand out the most is the inventory valuation.

Records from the Nevada County Assessor show that Ross Rx assessed its inventory in January of 2007 as valued at $356,566.

In previous years the inventory was assessed even lower – at $265,000 (2006) and $291,547 (2005). According to the Arkansas Assessment Coordination Department, assessed inventory value should be the average inventory for the prior year and reflect inventory for a typical day.

The two-page summary released by USA Drug stated that the inventory was valued much higher – $450,565.40 as of May 31, 2007 – just four months after the 2007 tax assessment of $ 356,566 was made. Washington Inventory Services performed the third party physical count on the night of closing to determine the value.

This puts the independent third party inventory valuation made during the sale $94,000 higher than the amount of the tax assessment. A lower tax assessment translates into a lower tax bill – in this case, potentially around $900 based on the millage in effect in 2007 in Prescott/Nevada County.

Of course this potential savings is based solely on inventory and does not include the all of the property assessment. When fixed assets – vehicles, furniture and fixtures, and machinery and equipment – are included, the difference between the total tax assessment and the valuation made to the time of the sale for both inventory and fixed assets is closer – $66,295 lower instead of $94,000.

The question is a legitimate one and a spokesman for the Ross campaign stands by both assessments, attributing the difference to “seasonal fluctuations in inventory.” Brad Howard, spokesman for the Ross for Governor campaign, explains.

“The tax assessment conducted for Nevada County in January 2007 was 100 percent accurate and reflected the prior year’s average value of the pharmacy’s inventory, along with the total cost of the fixed assets. The assessment conducted for the purchase agreement on May 31, 2007, was 100 percent accurate and reflected the value of the pharmacy’s inventory and assets on that specific date in time. So, the county’s assessment – as defined by law – attempts to remove seasonal highs and lows by asking for a yearly average, while the professional inventory for the purchase agreement does not. So, one assessment accounts for day-to-day and seasonal fluctuations in inventory, and the other assessment does not. Both assessments are 100 percent accurate, but use different assessment methods. Therefore, you cannot compare these two inventory assessments equally as they use different assessment methods,” said Howard.

“As is the case with any retail store, particularly pharmacies that have expensive medical supplies and equipment, inventory will constantly fluctuate over time to meet the changing needs and demands of customers and patients. Holly’s Health Mart also offered home medical equipment delivery and other features such as a bridal registry that did particularly well in spring and summer months,” continued Howard. “As any business owner knows, the law of supply and demand drives your inventory. For a retail pharmacy, demand constantly changes as patients’ medical needs change, as new patients arrive, as new seasons require different products, etc. If your supply is greater than demand, you lose money as items sit on shelves and expire. If demand is greater than your supply, you lose business as customers and patients get frustrated by empty shelves and take their business elsewhere. In the case of Holly’s Health Mart, business was growing, which is why a retail pharmacy chain wanted to buy the store in the first place.”

Although the documents do show a variance large enough to be worthy of this closer examination, there is nothing conclusive to dispute this explanation since several months passed between the assessment in January and the independent valuation in May. But the question is warranted particularly since Ross has made a campaign issue of his opponent Asa Hutchinson’s error in claiming a $350 homestead credit on two home when state law only allows this on one. The Ross campaign has run a campaign ad saying Asa “got caught cheating on his taxes” in reference to the double homestead credit which Asa corrected by repaying the improper credit in 2012 to Pulaski County.

While answering my questions, the Ross campaign dismisses the whole issue as an attempt by the Hutchinson campaign to distract from the issue of the homestead credit.

“Congressman Hutchinson’s campaign and his allies are desperate to try and tarnish the sale of a successful small business Mike and his wife, Holly, built up after years of hard work and sold over seven years ago. Asa’s campaign and allies are doing so in an effort to cover up the fact that the Arkansas Democrat-Gazette revealed that Congressman Hutchinson pocketed illegal tax credits on multiple homes in 2008, 2009, 2010 and 2011,” said Howard. “It is time for Congressman Hutchinson – whose very own campaign staff has pushed and promoted these slanderous attacks against Mike and Holly – to apologize to them, which Congressman Hutchinson has yet to do.”

While similar, Asa’s tax issue was more cut and dry – he improperly took two credits. Ross’s issue is more subjective – did he understate his inventory valuation or was it merely “seasonal fluctuations in inventory?” I cannot say for certain.