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Overhead tax

Q

I would appreciate a detailed explanation of the "overhead tax" imposed on
computer equipment purchases at UCAR. I understand that there is a 50% tax
on computer purchases less than $5,000. Where does that money go? I heard a
rumor that it was being used to purchase home systems for F&A employees.

Because of the tax, purchasers typically load up computers with unnecessary
extras (big screens, speakers, etc.) so that the cost exceeds $5,000. This
is getting hard to do now that computers are relatively cheap. When totaled
up UCAR-wide, this seems to be a huge waste of money. In addition, when the
computer order is padded up like this, F&A doesn't get their tax anyway.
I've seen cases where the hardware price dropped and the order had to be
bulked up again. Wouldn't it make more sense to have a flat tax rate (how
about 10%?) and have UCAR only buy the hardware that it needs?

Answered on October 20, 2004

A

In order to respond to this question, an explanation of why UCAR applies
indirect cost (or overhead) rates to all sponsored agreements is needed.
UCAR is primarily funded by the federal government and, therefore, is
required to comply with various Office of Management and Budget (OMB)
circulars, one of which is OMB Circular A-122, "Cost Principles for
Educational Institutions; State, Local, and Indian Tribal Governments; and
Non-Profit Organizations." OMB Circular A-122 requires that UCAR administer
an indirect cost rate (overhead) for costs that cannot be directly
identified with a specific program including direction on how rates should
be calculated (OMB Circular A-122).

Many activities are funded by these indirect, or overhead, funds, including:

1. Employee Benefits-medical, FICA, TIAA/CREF, non-worked time including
vacation, sick leave, and holiday

2. Communications-telecommunications, networking/network security

3. Facilities-maintenance, custodial, building debt service

4. UCAR General & Administration (G&A)-UCAR Presidents Office, F&A,
Corporate Affairs, library

5. NCAR Indirect-NCAR Director's Office, division administrative budgets,
bid and proposal

6. UOP/EO Indirect-UOP Director's Office, EO Director's Office, program
administrative budgets, bid and proposal

UCAR spends several months each year collecting data from across the
organization in preparation for developing indirect budgets and rates.
These rates are reviewed at several administrative and management levels
and, finally, by the UCAR President's Council, prior to submission to the
National Science Foundation for review and approval. The methodology for
developing indirect cost rates is detailed in the document titled
"Management Guidelines for the Development of the Indirect Cost Rate Proposal".

As in many of the divisions and programs, some UCAR F&A employees work from
both office and home. When computers purchased by F&A for office use are
upgraded or replaced, F&A employees may seek authorization to take an old
computer home to be used for business purposes. These employees usually
need a home system for when they cannot get into the office, or to work
nights and weekends. In many cases, however, the old systems are so slow
and inefficient by the time they are available for home use that employees
select to purchase their own computers, at their own expense, without
benefit of UCAR discounts.

We are aware some divisions and programs "load up" computers with
unnecessary extras so that the cost exceeds $5,000 and they avoid paying
overhead. We have even seen groups pay more in extras added to avoid
overhead than the overhead would have cost. The irony is that, as noted
above, the costs covered by the overhead revenue are real costs necessary
for UCAR/NCAR/UOP to function, and groups avoiding overhead still depend on
these services and resources to support their research. These services and
resources include electricity to run computers and keep the lights on,
payroll to ensure that employees get paid, and purchasing and accounts
payable so that divisions and programs can purchase and pay for the
equipment and materials to perform research. These are all functions
critical to the success of the NCAR and UOP mission.

Of course, not all divisions and programs choose to "load" their purchases
to avoid overhead. The groups that do might spend less for overhead than
for the cost of the extras. We have seen divisions and programs add $3,000
to a $2,500 purchase to avoid overhead. In the long run, after multiple
purchases, they may be losing rather than saving program funds through this
approach. Ultimately, this is a decision that must be made in the division
or program.

Another matter to consider is that when divisions and programs "load"
extras to avoid overhead, the resulting item becomes classified as a fixed
asset because it exceeds the $5,000 threshold. It then requires years of
reporting and tracking, thereby increasing staff workloads. The UCAR
Property Office estimates we track and report on more than 300 assets that
were loaded to force them over $5,000 to avoid paying overhead.

Although we need a methodology to fund indirect costs, the method required
by OMB A-122 would not be UCAR's first choice. UCAR has approached OMB over
the years to propose other, more effective methods (from UCAR's point of
view); however, OMB has not been receptive. Until OMB is willing to
consider a different method for indirect cost recovery, UCAR is required to
comply with OMB A-122 as it currently exists. As we all know, federal
funding comes with strings, one of which is compliance with the applicable
circulars and federal regulations.

-Melissa Miller, Director, UCAR Budget and Finance