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The Equity Factor

In the Battle of Paper and Plastic, Who’s the Biggest Culprit?

Who loses with cash-only businesses?

(Photo by Roman Oleinik)

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The other day I made an impromptu stop at a high-end candy store in Brooklyn — the kind where you scoop loose sweets from glass jars into a bag — and racked up a $25 bill. When I handed the cashier my credit card, a dark cloud came over her face.

“Cash only,” she said, tapping on the little index card taped onto the glass counter.

When I apologetically told her I didn’t have any cash, she grabbed the bag from me and said, “What a waste!” (Food laws require edibles be discarded after being served.)

As I walked out of the store, I couldn’t help but wonder: What is driving a seemingly growing number of small businesses in New York City to turn away cashless consumers? In 2013, CNBC reported that the 55 percent of small businesses in the U.S. that only accept cash are collectively missing out on $100 billion in sales annually. Are credit card companies to blame, or are these businesses saving money cooking the books?

One of my friends, who knows several people who own their own businesses, said emphatically, “If you have a cash-only business, you are in the business of screwing the government out of taxes.” This sentiment was echoed by several people when I asked them what they thought of businesses that deal only in cash.

The recent, highly publicized case of New York Congressman Michael Grimm, who pleaded guilty to fraudulently under-reporting more than $1 million of his Manhattan restaurant’s sales and wages (workers were paid off the books, in cash), only reinforces such suspicions.

A spokeswoman from the New York City Department of Finance (DOF) said that the Office of Tax Audit is “intent on pursuing” taxpayers who fail to file or under-report, and this pursuit has not undergone any change under Mayor Bill de Blasio’s administration.

“The administration and DOF Commissioner [Jacques] Jiha … support the concept that taxpayers should bear tax burdens in an evenhanded … and transparent … manner. Therefore, emphasis in doing everything we can do to uncover and vigorously pursue those who do not report cash earnings, or under-report cash earnings, is one of the goals of the Office of Tax Audit,” the spokeswoman said.

The spokeswoman stated that the department “does employ audit techniques aimed at ferreting out non-reporting or under-reporting of cash-only businesses.” Those techniques involve an “evolving use of data,” but at the end of the day, auditing the taxpayer is “often time-consuming and difficult.”

To boot, widely reported cuts in the IRS budget have led to a notoriously understaffed branch of government that can’t keep up with every unfiled or suspect tax document. As Governing recently reported in an article about using big data to find dodgy filings, “it takes time and money to put together the technology and the expertise to combat the growing sophistication of fraudsters.”

NYC’s DOF Office of Tax Audit confirmed that they do not track cash-only businesses separately.

“There are statistical and data analytic approaches that assist in making logical assumptions of which taxpayers that earn cash as part of their conduct of business in NYC may be under-reporting,” said the spokeswoman.

Combining predictive analysis and a consideration of the circumstances, the department uses that data to determine which filing or non-filing taxpayers should be audited by the city. She added that NYC now receives “certain information that is helpful in making better predictive observations that goes into … deciding which taxpayers should be audited,” but declined to comment further.

Last year the New York Times told the story of a small business owner whose accounts were seized by the IRS solely on suspicion of under-reporting.

So how can the city’s tax sentinels possibly weed out the dishonest businesses? The answer is, they can’t. The IRS has actually made an effort to target small businesses that accept credit cards, and are suspected of not reporting cash transactions.

Yet two friends of mine who run small businesses in New York City said that while they accept other forms of payment, they give discounts for cash-paying customers, saying that the price reduction works out to the same amount they would get after card fees. As their incentives imply, it’s a war against credit cards.

It’s not just the small businesses that are fighting back with credit card companies’ high transaction fees. Costco announced recently that they’ll stop taking American Express beginning next year.

The burden that small businesses claim outweigh the revenue they lose in going cash-only is embodied by the Merchants Payment Coalition (MPC), a group of retailers representing 2.7 million stores who are trying to make high credit card fees a thing of the past. The group’s site claims that merchants pay $50 billion annually in swipe fees, and that up to four of every 100 dollars spent on a credit card “go to the banks, even though it costs only a few pennies to process the transaction.”

But that doesn’t stop cash-only businesses from transferring the onus to the consumer, who will likely have to pay several dollars to withdraw from an ATM — which may be “conveniently” located in the store. To add insult to injury, average ATM fees have seen continued increases over the past few years.

The grumblings of tax season are in full swing, and I personally assuage the pain of handing over more money with the reminder that it’s meant to go toward the greater good — roads, schools, sanitation. But perhaps the ideas underlying the disdain many consumers have with where their tax money goes (controversial wars, bank bailouts, lobbied bills wrapped up in partisan self-interest) is the same kind of resentment small businesses feel toward forking over their earnings, only doubly so: They withstand the oft-punishing tax rates the government applies to small businesses (while billion-dollar companies enjoy tax breaks and loopholes), as well as the oppressive transaction fees imposed by credit cards.

Either those systems will have to change if small businesses are to survive, or we better start memorizing where our banks’ ATMs are.

The Equity Factor is made possible with the support of the Surdna Foundation.

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Jane K. Callahan is a freelance writer with a background in investigative journalism. Her work focuses on cultures and subcultures, with an emphasis on politics and economics.

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Tags: small businesstaxes

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