CHAPTER 6. MARKUPS FOR EQUI PMENT PRICE DETERMINATION

TABLE OF CONTENTS

6.1 INTRODUCTION

.................................................................................................................. 1 6.1.1 Baseline Markups

.................................................................................................... 2 6.1.2 Incremental Markups

.............................................................................................. 3 6.1.3 Overall Markups

..................................................................................................... 4 6.2 BASIC ASSUMPTIONS USED TO ESTIMATE WHOLESALER AND MECHANICAL CONTRACTOR MARKUPS

..................................................................... 5 6.3 ESTIMATION OF WHO LESALER MARKUPS

.................................................................. 6 6.4 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

...................................... 7 6.4.1 Estimation of Mechanical Contractor Markup Probability Distribution

................ 8 6.5 SALES TAX

........................................................................................................................... 9 6.6 NATIONAL ACCOUNTS

................................................................................................... 11 6.7 OVERALL MARKUPS

........................................................................................................ 12 6.8 RESULTS

............................................................................................................................. 13 REFERENCES

.............................................................................................................................. 14

LIST OF TABLES

Table 6.1.1 Distribution Channel Shares

.................................................................................... 2 Table 6.3.1 Wholesaler Expenses and Markups

......................................................................... 6 Table 6.4.1 Mechanical Contr actor Expenses and Markups

....................................................... 8 Table 6.5.1 State Sales Tax Rates

............................................................................................. 1 0 Table 6.5.2 National Average Weighted Sales Tax Rates, based on Estimated Commercial Refrigeration E quipment Shipments by State

................................... 10 Table 6.7.1 Baseline Markups by Distribution Cha nnel and Overall Weighted Average Markup, Including the Weighted Aver age Sales Tax Multiplier for Supermarkets

.......................................................................................................... 12 Table 6.7.2 Incremental Markups by Distributi on Channel and Overall Weighted Average Markup, Including the Weighted Average Sales Tax Multiplier for Supermarkets

.................................................................................................... 12

LIST OF FIGURES

Figure 6.1.1 Distribution Channels and Sh ares for Commercial Refrigeration Equipment

................................................................................................................ 1 Figure 6.4.1 Cumulative National Sales-Weighted Distribution of Mechanical Contractor Markups for Commercial Refrigerati on Equipment Sales to Supermarkets

............................................................................................................ 9 Figure 6.5.1 Cumulative National Sales-Weighted Di stribution of Sales Tax Rates for Commercial Refrigeration Equi pment Sales to Supermarkets

.............................. 11

iiiCHAPTER 6. MARKUPS FOR EQUI PMENT PRICE DETERMINATION

6.1 INTRODUCTION

To carry out the life-cycle cost (LCC) calculations described in Chapter 8, the U.S. Department of Energy (DOE) needed to de termine the cost to the customer of baseline commercial refrigeration equipment (CRE). This cost was determined for both baseline equipment and more-efficient equipment th e customer would purchase following the promulgation of new standards. However, the customer price of such equipment is not known since it depends on how the equipment is purch ased. What is known is the manufacturer’s selling price (MSP) for both baseline equipment a nd the more-efficient equipment as determined in the Engineering Analysis (Chapter 5). By applying a multiplier called a “markup” to the MSP, DOE was able to estimate the customer price of equipment purchased through various distribution channels. This chapter describes how DOE derived the markups.

The cost to the customer depends on how th e customer purchases the equipment. DOE defined three distribution channe ls, as shown in Figure 6.1.1, to describe how the equipment passes from the manufacturer to the customer. In the first distribution ch annel, the manufacturer sells the equipment directly to the customer thro ugh a national account. In the second and third distribution channel, the manufact urer sells the equipment to a w holesaler, who in turn may sell it directly to the customer or th rough a mechanical contractor. The wholesaler in this case can be a refrigeration wholesaler focu sing on refrigeration equipment, or a grocery warehouser (supply chain distributor) who sells food and store equi pment to the retailer. Table 6.1.1 gives the distribution channel shares (in percentage of to tal sales) through each of the three distribution channels for remote-condensing and self-contained equipment. The distribution channel shares are based on estimates provided by Carrier Corpor ation to DOE during the public review of the Advanced Notice of Public Rulemaking (ANOPR) for commercial refrigeration equipment.

Manufacture r

National Accoun t

Customer Customer Wholesaler or Wholesaler Distribution

Mechanical Contractor (New Construction or Replacement)

Customer Figure 6.1.1 Distribution Channels and Shares for Commercial Refrigeration Equipment

1Table 6.1.1 Distribution Channel Shares Remote Condensing Equipment New and Replacement Construction National Account Distributor Contractor 70% 15% 15%

Self-Contained Equipment New and Replacement Construction National Account Distributor Contractor 30% 35% 35%

The following equation describes how DOE determined the equipment price if a customer purchases directly from the manufacturer through a national account:

EQP CUST = MFG BASE x MU NATL ACCT x (1+ ST) Eq. 6.1

where: EQP CUST = equipment price to the customer ($), MFG BASE = manufacturer selling price of baseline equipment ($), MU NATL ACCT = national account markup, ST = sales tax rate.

The following equation describes how DOE determined the equipment price if a wholesaler sells the equipment to the custom er through the wholesaler distribution channel:

EQP CUST = MFG BASE x MU WHOLE x (1+ ST ) Eq. 6.2

where:

MU WHOLE = wholesaler markup

The following equation describes how DOE determined the equipment price if a mechanical contractor sells the equipment to the customer through the wholesaler distribution channel:

EQP CUST = MFG BASE x MU WHOLE x MU MECH CONT x (1+ ST ) Eq. 6.3

where:

MU MECH CONT = residential and light commercia l mechanical contractor markup

The markup multiplier to the equipment price is thus lessened for shorter distribution channels.

For each of the markups presented above, DOE further differentiated between a baseline markup and an incremental markup, as described be low. The overall markup is then the product of all the markups plus sales ta x within a distribution channel.

6.1.1 Baseline Markups

DOE defined baseline markups as cost multipliers that relate the purchase cost to selling price for each step of the distribution channel.

2If sold to a customer by the manufactur er through a national account, the following equation defines the equipment price:

EQP NATL ACCNT BASE = MFG BASE x MU NATL ACCT BASE x (1+ST) Eq. 6.4

where: EQP NATL ACCNT BASE = national account price to the custom er of baseline equipment ($), MU NATL ACCT BASE = national account markup on baseline equipment.

If sold to a customer by a wholesaler-distributor:

EQP WHOLE BASE = MFG BASE x MU WHOLE BASE x (1+ST) Eq. 6.5

If sold to a customer by a mechanical contractor:

EQP MECH CONT BASE = EQP WHOLE BASE x MU MECH CONT BASE Eq. 6.6

where: EQP WHOLE BASE = wholesaler price of baseline equipment ($), EQP MECH CONT BASE = mechanical contractor price of baseline equipment ($), MU WHOLE BASE = wholesaler markup on baseline equipment, MU MECH CONT BASE = mechanical contractor markup on baseline equipment.

The use of the markups resu lts in the wholesaler ( EQP WHOLE BASE ) and mechanical contractor ( EQP MECH CONT BASE ) prices of baseline CRE equipment.

6.1.2 Incremental Markups

Incremental markups are cost multipliers th at relate incremental changes in the manufacturer selling price of highe r efficiency equipment that result, in this case, from efficiency improvements, to changes in the wholesaler or co ntractor sales price, as shown in the following equations:

If sold to a customer by the manufactur er through a national account, the following equation defines the increase in equipment price above that of baseline equipment:

EQP NATL ACCNT INCR = MFG INCR x MU NATL ACCT INCR x (1+ST) Eq. 6.7

where: EQP NATL ACCNT INCR = incremental equipment price to the national account customer ($), MFG INCR = change in the manufacturer sel ling price of higher efficiency equipment brought about by an increase in efficiency due to new standards ($), MU NATL ACCT INCR = national account incremental markup.

3If sold by a wholesaler directly to a customer or by a mechanical contractor after passing through a wholesaler:

EQP WHOLE INCR = MFG INCR x MU WHOLE INCR x (1+ ST) Eq. 6.8

EQP MECH CONT INCR = EQP WHOLE INCR x MU MECH CONT INCR Eq. 6.9

where: EQP WHOLE INCR = incremental wholesaler price ($), EQP MECH CONT INCR = incremental mechanical contractor price ($), MU WHOLE INCR = incremental wholesaler markup, MU MECH CONT INCR = incremental mechanical contractor markup.

In these equations, MU NATL ACCTINCR, MU WHOLE INCR and MU MECH CONT INCR refer to the incremental national account, incr emental wholesaler, and increm ental mechanical contractor markups, respectively, which are ap plied to the incremen tal MSP. The use of the incremental markups results in the incremental wholesaler ( EQP WHOLE INCR ) and incremental mechanical contractor ( EQP MECH CONT INCR ) prices.

6.1.3 Overall Markups

Overall markups, including both overall base line and overall incremental markups, relate the manufacturer selling price to the customer price as indicated by the following equations:

EQP CUST BASE = MFG BASE x ( WT NATL ACCNT BASE x MU NATL ACCT BASE + WT WHOLE BASE x MU WHOLE

BASE + WT MECH CONT BASE x MU WHOLE BASE x MU MECH CONT BASE ) x (1+ ST )

= MFG BASE x MU OVERALL BASE Eq. 6.10

EQP CUST INCR = MFG INCR x (WT NATL ACCNT INCR x MU NATL ACCT INCR + WT WHOLE INCR x MU WHOLE

INCR + WT MECH CONT INCR x MU WHOLE INCR x MU MECH CONT INCR ) x (1+ ST )

= MFG INCR x MU OVERALL INCR Eq. 6.11

EQP CUST = EQP CUST BASE + EQP CUST INCR Eq. 6.12

where:

MU OVERALL BASE = overall weighted baseline markup that is the product of all the weights and baseline markups fo r each step of the distribution channel, MU OVERALL INCR = overall weighted incremental mar kup that is the product of all the weights and incremental markups fo r each step of the distribution channel, EQP CUST BASE = baseline customer price ($), EQP CUST INCR = incremental customer price ($), EQP CUST = total customer price ($), WT NATL ACCNT BASE = weight (percent) of baseline equipment sales through national accounts, WT WHOLE BASE = weight (percent) of baseline e quipment sales through wholesalers,

4WT MECH CONT BASE = weight (percent) of baseline e quipment sales through mechanical contractors, WT NATL ACCNT INCR = weight (percent) of higher e fficiency equipment sales through national accounts, WT WHOLE INCR = weight (percent) of higher e fficiency equipment sales through wholesalers, WT MECH CONT INCR = weight (percent) of higher e fficiency equipment sales through mechanical contractors.

The use of the overall baseline and overall incremental markups results in the baseline customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ). For a particular higher efficiency level that increas es manufacturer selling price of equipment, the total price of equipment to the customer ( EQP CUST ) is the sum of the baseline customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ).

6.2 BASIC ASSUMPTIONS USED TO ESTIMATE WHOLESALER AND MECHANICAL CONTRA CTOR MARKUPS

DOE derived the wholesaler and mechanic al contractor markups from three key assumptions about CRE costs. DOE based the wholesaler markups on industry balance-sheet data and based the mechanical contractor markups on U.S. Census Bureau data for the plumbing, heating, and air condit ioning (PHAC) industry. 1 DOE obtained the industry balance sheet data from the Heating, Air conditioning & Refrigerat ion Distributors International (HARDI), the trade association representing w holesalers of refrigeration a nd heating, ventilating, and air conditioning (HVAC) equipment. DOE put the U.S. Census Bureau Plumbing, Heating, and Air-Conditioning Contractors data th at was used for developing m echanical contractor markups into the same format as the balance sheet data for wholesalers. These balance sheets break out the components of all costs in curred by firms that supply and in stall PHAC equipment. The three key assumptions used to estimate markups using these financial data are given below.

1. The firm balance sheets accurately represen t the various average costs incurred by firms distributing and installing CRE equipment.

2. The wholesaler and contractor costs can be divided into tw o categories: (1) costs that vary in proportion to the MSP of CRE equipm ent (variable costs), and (2) costs that do not vary with the manufacturer selling price of CRE equipment (fixed costs).

3. Wholesaler and contractor pr ices vary in proportion to whol esaler and contractor costs included in the balance sheets.

In support of the first assumption, the balanc e sheets itemize firm costs into a number of cost categories, including direct costs to purchase or install th e equipment, operating labor and occupancy costs, and other operating costs and profit. Although wholes alers and contractors tend to handle multiple commodity lines (including air conditioners, furnaces, and boilers) the data provide the most accurate available indication of CRE equipment costs.

Previous DOE analysis of th e HVAC wholesalers, contractors, and consultants, including information obtained from the trade l iterature, support th e second assumption. 2,3 This analysis indicates that wholesaler and c ontractor markups vary according to the quantity of labor and

5materials used to distribute and install applia nces, with markups on labor tending to be much larger than markups on materials. The analysis implies that thes e distribution channel markups vary more in relation to sales volume than in relation to other factor s, including appliance efficiency. Distribution channe l labor inputs also vary more with sales volume than with appliance cost or efficiency. DOE assumed a di vision of costs between those that do not scale with the manufacturer selling price (labor and occupancy costs), and t hose that do (operating costs and profit). This division of costs led to the estimate of wholesaler and mechanical contractor markups described below.

In support of the third assumption, the HVAC wholesaler and cont ractor industry is competitive and customer demand for commercial heating and air conditioning is relatively inelastic (i.e., the demand is not expected to decrea se significantly with an increase in price of equipment). The large number of wholesaler firms listed in the 2002 Census indicates the competitive nature of the market. For exam ple, there are almost 1400 wholesalers of refrigeration equipment, and 87,000 HVAC contractors. 4 Following standard economic theory, competitive firms facing inelastic demand either set prices in line with costs or quickly go out of business. 5

6.3 ESTIMATION OF WHOLESALER MARKUPS

Wholesalers report median data in a conf idential survey that HARDI conducted of member firms. 6 In the survey, HARDI itemizes reve nues and costs into cost categories, including direct equipment expens es (cost of goods sold), labo r expenses, occupancy expenses, other operating expenses, and profit. It reports data for various industry segments, including the Controls and Refrigeration industry segment in te rms of industry median values. DOE presents these data for Controls and Refrigeration in te rms of specific types of expense within these categories in Appendix C. Table 6.3.1 summarizes these expenses as cost per dollar sales revenue in the first data column. As shown in this column, the direct equipment expenses (cost of goods sold) represent about $0.73 per dollar sales revenue. In other words, for every $1 wholesalers take in as sales revenue, they use $0.73 to pay the direct eq uipment costs. Labor expenses account for $0.16 per dollar sales re venue, occupancy expenses account for $0.03, other operating expenses account for $0.05, a nd profit accounts for $0.03 per dollar sales

revenue. Table 6.3.1 Wholesaler Expenses and Markups*

Description Wholesale Firm Expenses or Revenue Per Dollar Sales Revenue Per Dollar Cost of Goods Sold Direct Cost of Equipment Sales: Cost of goods sold Labor Expenses: Salaries and benefits Occupancy Expense: Rent, maintenance, and utilities Other Operating Expenses: Depreciation, advertising, and insurance Profit $0.73 $0.16 $0.03 $0.05 $0.03 $1.00 $0.214 $0.042 $0.071 $0.042 Baseline Markup ( MU WHOLE BASE ): Revenue per dollar cost of goods sold 1.369 Incremental Markup ( MU WHOLE INCR ): Increased revenue per dollar increase cost of goods sold 1.113

* Source: Heating, Airconditioning & Re frigeration Distributors Internationa l. 2005. 2005 Profit Report (2004 Data).

6The last column of Table 6.3.1 shows the data converted from costs per dollar revenue into revenue per dollar cost of goods sold. DOE did this conversion by dividing each cost category in the first data column of Table 6.3.1 by $0.73 (i.e., equipment expenditure per dollar revenue). The data in the last column show that, for every $1.00 the wholesaler spends on equipment costs, the wholesaler earns $1.00 in sales revenue to cover the equipment cost, $0.214 to cover labor costs, $0.042 to cover occupanc y expenses, $0.071 for other operating expenses, and $0.042 in profits. This totals to $1.369 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline markup ( MU WHOLE BASE ) is 1.37 ($1.37 ÷ $1.00).

DOE also used the data in the last column to estimate the incremental markups. The incremental markup depends on which of the cost s in Table 6.3.1 are variable and which are fixed. For example, for a $1.00 increase in the manu facturer equipment price, if all of the other costs scale with the manufacturer selling price (i.e., all costs are variable), the increase in wholesaler price will be $1.43, implying that the incremental markup is 1.43, or the same as the baseline markup. However, if none of the other costs are variable, then a $1.00 increase in the manufacturer selling price will lead to a $1.00 increase in the wholesaler price, for an incremental markup of 1.0. DOE assumes that th e labor and occupancy co sts will be fixed and that the other operating costs and profit will scal e with the manufacturer selling price (i.e., be variable). In this case, for a $1.00 increase in the ma nufacturer selling price, the wholesaler price will increase by $1 .11, giving a wholesaler incremental markup ( MU WHOLE INCR ) of 1.11 ($1.11 ÷ $1.00).

DOE recognizes that there is a possibility of case-to-case devia tion in the markups developed from the above financial data. Based on the analysis of U.S. Census Bureau data for wholesalers, DOE calculated a standard devia tion of 4.2 percent. DOE assumed that the variation determined for the base line markup applied to the incremental markup as well. For the baseline markup of 1.37, a standard deviation of 4.2 percent translates into an abso lute value of 0.06 and for the incremental markup of 1.10, a standa rd deviation of 4.2 per cent translates into an absolute value of 0.05. However, the national data on distribution of CRE units suggests that only about 14 percent of new units sold actua lly pass through wholesalers. The case-to-case deviation of wholesale markup thus has a very sm all impact on the overall cost of equipment and can be neglected. DOE applied the same baselin e and incremental markup to all sales of CRE units passing through wholesalers. Further deta ils of these data are shown in Appendix C.

6.4 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

DOE derived markups for mechanical contract ors from U.S. Census Bureau data for Plumbing, Heating, and Air-Condi tioning Contractors (PHAC) (N orth American Industry Classification System 238220). This sector includes establishments primarily engaged in installing and servicing plumbi ng, heating, and air-conditioning e quipment, which may include new work, additions, alterations, maintenance, and repairs. The U.S. Census Bureau data for the PHAC sector include detailed sta tistics for establishments with payrolls, similar to the data reported by HARDI for wholesalers. The primary difference is that the U.S. Census Bureau reports itemized revenues and expenses for the PHAC industry as a whole in total dollars rather than in typical values for an average or repres entative business. Because of this, DOE assumed that the total dollar values that the U.S. Census Bureau reported, once converted to a percentage

7basis, represented revenues and expenses for an av erage or typical contrac ting business. As with the data for wholesalers, Tabl e 6.4.1 summarizes the expenses for mechanical contractors, as expenses per dollar sales revenue, in the first data column (Appendix C contains the full set of data). The direct cost of sales represents a bout $0.66 per dollar sales revenue to the mechanical contractor. Labor expenses account for $0.17 per dollar sales revenue, occupancy expenses account for $0.02 per dollar sales re venue, other operating expenses account for $0.03, and profit makes up $0.12 per dollar sales revenue.

DOE converted these expenses per dollar sales into revenue per dolla r cost of goods sold, by dividing each figure in the first data column by $0.66. The data in the last column show that, for every $1.00 the mechanical contractor spends on equipment costs, the mechanical contractor earns $1.00 in sales revenue to cover the equipment cost, $0.26 to cover labor costs, $0.03 to cover occupancy expenses, $0.05 for other operating expenses, and $0.18 in profits. This totals $1.52 in sales revenue earned for every $1.00 spen t on equipment costs. This results in a mechanical contractor baseline markup ( MU MECH CONT BASE ) of 1.52 ($1.52 ÷ $1.00).

Table 6.4.1 Mechanical Contractor Expenses and Markups*

Description Mechanical Contractor Firm Expenses or Revenue Per Dollar Sales Revenue Per Dollar Cost of Goods Sold Direct Cost of Equipment Sales: Cost of goods sold Labor Expenses: Salaries (indirect) and benefits Occupancy Expense: Rent, maintenance, and utilities Other Operating Expenses: Depreciation, advertising, and insurance Net Profit Before Taxes $0.66 $0.17 $0.02 $0.03 $0.12 $1.00 $0.26 $0.03 $0.05 $0.18 Baseline Markup ( MU WHOLE BASE ): Revenue per dollar cost of goods sold 1.52 Incremental Markup ( MU WHOLE INCR ): Increased revenue per dollar increase cost of goods sold 1.23

* Source: U.S. Census Bureau. 2002. Plumbing, Heating, and Air-Conditioning Contract ors: 2002. Report EC 02-231-238220, Table 4 . Detailed Statistics for Establishments: 2002.

DOE was also able to use the data in th e last column in Table 6.4.1 to estimate the incremental markups by being able to separate the fixed and variable costs. For example, if all of the other costs scale with the equipment price (i.e., all costs are variable), the increase in mechanical contractor price will be $1.52, implyi ng that the incremental markup is 1.52, or the same as the baseline markup. However, if none of the other costs ar e variable, then a $1.00 increase in the equipment price wi ll lead to a $1.00 increase in th e mechanical contractor price, for an incremental markup of 1.0. DOE assumes th e labor and occupancy costs to be fixed and the other operating costs and profit to scale with the equipment price (i.e., be variable). In this case, for a $1.00 increase in the equipment price, the mechanical contractor price will increase by $1.23, giving a mechanical contractor incremental markup ( MU MECH CONT INCR ) of 1.23 ($1.23 ÷ $1.00).

6.4.1 Estimation of Mechanical Contract or Markup Probability Distribution

Mechanical contractor costs di ffer in various regions of the country for reasons including availability of labor, cost of living, union ve rsus non-union workforce, and others. Because many mechanical contractor cost s differ systematically by state, DOE characterized the markups developed from U.S. Census Bureau data with a probability distribution based on a state-by-state

8analysis of U.S. Census Bureau data for PHAC c ontractors. The state-by -state analysis provided a distribution on the relative markups of mechanical contract ors in the United States. DOE then applied the State-level index to the single-point base line and incremental markups calculated above to create State-level markups. Because th e state-by-state distributio n of CRE units varies by type of customer (e.g., supermarkets may be mo re prevalent relative to convenience stores in one part of the country than another), a national- level distribution of the mechanical contractor markup index is different for each class of building.

Figure 6.4.1 shows the cumulative probability distribution of the State markup index that DOE used to characterize the mechanical cont ractor baseline and in cremental markups for supermarkets.

Mechanical Contractor Markups for Supermarkets

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1.35 1.4 1.45 1.5 1.55 1.6 1.65 1.7 MarkupCumulative Percentage Mechanical Contractor Markup for Supermakets

Figure 6.4.1 Cumulative National Sales-Weighted Distribution of Mechanical Contractor Markups for Commercial Refrigeratio n Equipment Sales to Supermarkets

6.5 SALES TAX

The sales tax represents State and local sales taxes that are applied to the customer price of CRE units. The sales tax is a multiplicative factor that increases the customer equipment price. DOE derived sales taxes representative of the combined State a nd local sales tax rates from the Sales Tax Clearinghouse, 7 shown in Table 6.5.1. The State level combined tax rates can be applied to the estimated value of State le vel CRE equipment shipments to obtain the total purchase cost to the customer located in any state.

The distribution of sale s tax rates ranges from a minimu m of zero percent to a maximum of 9.4 percent with a mean valu e of 6.8 percent. DOE applied sales taxes to the customer equipment price irrespective of th e distribution channel and the market in which the customer is located.

A weighted-average national level sales tax rate is calculated by multiplying the shares of state level shipments for each of the four sectors by the tax rate s in Table 6.5.1. This provides a

9weighted national average sales tax rate for th e four sectors based estimated CRE equipment sales to each of the four s ectors as shown in Table 6.5.2.

Table 6.5.1 State Sales Tax Rates

State Combined State and Local Tax Rate State Combined State and Local Tax Rate State Combined State and Local Tax Rate Alabama 8.10% Kentucky 6.00% North Dakota 5.70% Alaska 1.40% Louisiana 8.70% Ohio 6.80% Arizona 7.15% Maine 5.00% Oklahoma 8.05% Arkansas 8.20% Maryland 6.00% Oregon 0.00% California 8.00% Massachusetts 5.00% Pennsylvania 6.25% Colorado 6.35% Michigan 6.00% Rhode Island 7.00% Connecticut 6.00% Minnesota 6.85% South Carolina 6.90% Delaware 0.00% Mississippi 7.00% South Dakota 5.50% Dist. of Columbia 5.75% Missouri 7.05% Tennessee 9.40% Florida 6.70% Montana 0.00% Texas 8.00% Georgia 6.95% Nebraska 6.00% Utah 6.60% Hawaii 4.35% Nevada 7.50% Vermont 6.05% Idaho 6.05% New Hampshire 0.00% Virginia 5.00% Illinois 8.40% New Jersey 7.00% Washington 8.50% Indiana 7.00% New Mexico 6.35% West Virginia 6.00% Iowa 6.75% New York 8.25% Wisconsin 5.40% Kansas 6.90% North Carolina 6.80% Wyoming 5.35%
Table 6.5.2 National Average Weighted Sa les Tax Rates, based on Estimated Commercial Refrigeration Equi pment Shipments by State

Supermarkets and Grocery Stores (44511) Convenience and Specialty Stores (44512, 4452, and 4453) Gasoline Stations with Convenience Stores (44711) Warehouse Clubs and Supercenters (45291) Weighted Sales Tax Rate by Retail Sector 6.92% 6.84% 6.94% 6.85%

Weighted Sales Tax Rate all Retail Sectors 6.92%

Because the state-by-state di stribution of CRE units vari es by type of customer (e.g., supermarkets may be more prevalent relative to convenience stores in one part of the country than another), a national- level distribution of the sales tax markups is different for each class of building.

Figure 6.5.1 shows the cumulative probability dist ribution of the state tax rates that DOE used to characterize sales tax markups for supermarkets.

10Sales Tax Rates, CRE Sales to Supermarkets

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%

Combined State and Local RatesCumullative Percent ofEquipment Sales Sales Tax Rates

Figure 6.5.1 Cumulative National Sales-Weight ed Distribution of Sales Tax Rates for Commercial Refrigeration Equi pment Sales to Supermarkets

6.6 NATIONAL ACCOUNTS

Equipment purchased through national accounts constitutes about 70 pe rcent of the usual distribution of CRE equipment to customers. Large customers of CRE equipment use national accounts to circumvent the typical distribution channe l, thereby allowing them to negotiate significantly lower equipment prices directly with the manufacturer. The manufacturer in turn must cover additional expenses related to the di stribution (as opposed to the manufacture) of the equipment, but gains in terms of negotiating agreed upon sales volumes with the customer.

To capture the price savings realized from equipment purchased through national accounts, DOE derived a national account markup, assuming that the resulting equipment price increase was one half of that realized from a distribution through the w holesaler channel. In other words, if the price increase resulting from the wholesaler markups is $100, the national account markup is such that the price increase is one-half of that, or $50. DOE based the use of a national account markup that is one-half of that r ealized from the wholesaler distribution channel on the assumption that the resu lting national account equipmen t price must fall somewhere between the manufacturer selli ng price (i.e., a markup of 1.0) a nd the customer price under the wholesaler distribution channel. Because DOE did not know typical values for the actual national account equipment price, it chose a value of one-half.

To illustrate the developmen t of the national account mar kup further, this section provides the following example of how DOE deri ved it. For example, using a baseline manufacturer selling price of $1,000 for a CRE unit delivered to a supermarket and baseline wholesaler markups of 1.370, the resulting baseline customer equipment price for sales through a wholesaler (without sales taxes) is $1,370 ($1,000 x 1.370). The dollar value increase due to the above distribution channel markups is $370 ($1,370 - $1,000). Under the assumption that national account customers realize equipment price increases equal to one-half of that through the wholesale distribution channe l, the dollar value of the equi pment price increase under the national account is $185 (one-half of $370). The resulting equipment price is $1,185

11($185 + $1,000), which results in a deduced nation al account baseline markup of approximately 1.185 ($1,185 ÷ $1,000). A similar calculation results in a deduced national account incremental markup of 1.057 ($1,057 ÷ $1,000).

6.7 OVERALL MARKUPS

DOE multiplied the wholesaler, mechanical contractor, and national account markups described above by the weighted average sales tax multiplier to obtain the overall baseline and incremental markups shown in Table 6.7.1 and Table 6.7.2 DOE based overall markups on one of three distribution channels according to how the equipment is purchased: through a national account; a wholesaler; or a wholesaler and a mechan ical contractor, and the State into which the CRE unit is delivered. Table 6.7.1 presents thre e overall markups for the overall baseline markup for both remote-condensing and self-conta ined equipment, and Table 6.7.2 presents the same information for overall incremental mar kups for supermarkets, as an example.

Table 6.7.1 Baseline Markups by Distribution Channel and Overall Weighted Average Markup, Including the Weighted Average Sales Tax Multiplier for Supermarkets

Wholesaler Mechanical Contractor

(Includes Wholesaler) National Account (Mfg Direct) Overall Weighted Average MarkupRemoteCondensing Equipment Self-Contained Equipment Distributor(s) Markup 1.370 2.082 1.185 1.347 1.564

Sales Tax Multiplier 1.068 1.068 1.068 1.068 1.068

Overall Markup 1.465 2.226 1.267 1.440 1.672

Table 6.7.2 Incremental Markups by Distribution Channel and Overall Weighted Average Markup, Including the Weight ed Average Sales Tax Multiplier for Supermarkets

Wholesaler Mechanical Contractor

(Includes Wholesaler) National Account (Mfg Direct) Overall Weighted Average MarkupRemoteCondensing Equipment SelfContained Equipment Distributor(s) Markup 1.114 1.370 1.057 1.112 1.186

Sales Tax Multiplier 1.068 1.068 1.068 1.068 1.068

Overall Markup 1.191 1.465 1.130 1.189 1.268

DOE used the overall markups to estimate th e customer price of baseline equipment, given the manufacturer cost of ba seline equipment. For example, if the manufacturer selling price of a baseline remote-condensing CRE unit is $1,000, DOE can multiply this by the

12weighted-average overall baseline markup to estima te that the baseline customer price of the CRE unit sold is $1,440. Similarly, DOE used the overall incremental markup to estimate changes in the customer price, given changes in the manufacturer selling price above the baseline due to increases in equipment efficiency. For example, if a new standard for remote-condensing equipment increases the CRE manufacturer se lling price by $100, DOE can multiply this price ($100) by the weighted-average overall incremen tal markup (1.189) to estimate a customer price increase of $119.

6.8 RESULTS

The overall baseline and overall incremental markups are presented in section 6.7. These markups will be used with the MSPs to generate customer prices for commercial refrigeration equipment. Supporting data for the calculati on of baseline and incremental markups are provided in Appendix C.

13REFERENCES

1 U.S. Census Bureau. 2002. Plumbing, Hea ting and Air-Conditioning Contractors (PHAC):

2002. Report EC-02-231-238220.

2 Lawrence Berkeley National Laboratory (LBNL) 2004. An Analysis of Price Determination

and Markups in the Air-Conditioning and Heating Equipment I ndustry. LBNL-52791.

3 Mark Metoyer as reported in Mark Skaer, “What should you charge? Try These Tested

Formulas,” Air Conditioning, Heating and Refrigerator News, March 26, 2001.

4 U.S. Census Bureau. 2002. Electrical, Ha rdware, Plumbing, and Heating Equipment and

Supplies: 2002. Report EC-02-421-17.

5 Pindyck, R. and D. Rubinfield. 2000. Microeconomics, Prentice-Hall.

6 Heating, Air Conditioning & Refrigeration Distributors International (HARDI). 2008. 2008

Profit Report (2007 Data).

7 The Sales Tax Clearinghouse. Accesse d https://thestc.com/STRates.stm

.

14