I get contacted pretty often by companies asking if they can submit to my blog, or if I’d be willing to tout their product, website, app, etc. Generally, the answer is “no” — I started this blog as a sort of collection of searchable bookmarks for myself, to save the research and resources that I’ve found helpful in my own practice and for clients; not as a marketing tool, and certainly not as a platform for folks to sell their solutions.
However, once-in-a-while, the information that I’m sent is so valuable and useful that… well, it fits all my criteria for bookmarking and sharing, and I feel lucky that the resource landed in my lap. This is one of those posts.
I have mixed feelings about personal finance site The Simple Dollar — though much of the content is excellent, some of it is oversimplified, and certain articles seem to encourage readers to believe they can handle challenging financial situations without the advice of a professional.
But this article is the best I’ve ever seen on the topic of credit card processing for small businesses. If you are starting a small business and haven’t yet made the decision about whether or not to accept credit cards; or if you’re at the point in your business’ development where it’s time to make the leap, but you’re not sure in which direction; or if you’re already accepting cards but are worried you’re paying too much: read it. It’s comprehensive, full of information and examples, and if you’re willing to take the time to study it and take notes, you will not regret the investment. In fact, it will likely save you time — and definitely money — in the long run.
“Due to the lack of transparency and hidden fees scattered throughout the credit card processing industry, there is a gross misconception of how debit and credit card processing work. This creates a challenge for many small business owners because making an uneducated decision could cost time and money. For this reason, The Simple Dollar has developed a guide that aims to help small businesses gain in-depth knowledge about credit card payment processing, along with practical strategies to manage their fees and get the most out of their services.”
They offer advice on how to find the lowest possible credit card processing cost:
Isolate the markup
Choose a pricing model (pass-through pricing is cheapest)
Compare multiple processors with fees up-front and in writing
Calculate the total cost
Negotiate favorable terms (they even offer a list of terms they specifically recommend working on)
As well as suggestions on how to keep costs low, including tips for avoiding punitive interchange rates:
Track the processor’s fees
Avoid — Processing expired credit cards, Duplicating transactions, Setting a minimum or maximum limit on your transactions, Charging a usage fee for credit card transactions, Displaying full account numbers on your receipts, Processing Internet transactions with your retail merchant account, Running your personal card through your merchant account, and Splitting one transaction into several smaller transactions
UPDATE 2/17/17 — I spoke to Jennifer at the City of Chicago, and she was able to answer many of my outstanding questions. I’ve updated the original post with these edits.
UPDATE 2/12/17 — a retail client highly recommends buying bags wholesale from Howard Packaging in Skokie; her sales rep is Marc Moder. She says, “My vendor is charging the tax… I will happily refer anyone to them. The owner of the company apparently loves dealing with small businesses and undercutting Uline prices.”
I’m all for taxation as a way to effect public policy. But it has to be manageable. It’s amazing how challenging it can be to follow the rules for collecting and remitting a particular tax. Take the City of Chicago’s new “checkout bag tax”, for example. Great idea — encourage folks to bring their own bags by making it more expensive to use a bag given to them by the store.
This new tax replaces a ban on “flimsy” plastic bags which targeted chain stores, who quickly found a loophole in providing higher-quality “reusable” plastic bags. But now it affects paper as well as plastic, and small business as well as big box chains. (See a great DNA Info article on the topic, here.)
And unfortunately, the rules surrounding this new ordinance are complex, and for most businesses, will be impossible to follow to the letter.
Here’s what I understand about how it’s supposed to work (please note that I’m not an expert and don’t work for the city — but unlike most folks, I forced myself to read the entire ordinance and all the information I could get my hands on, as well as called the City of Chicago’s Department of Finance to get clarification):
(Steps One and Two are to get retailers “caught up” with the tax for bags that are already in stock.)
1. For starters, each retailer must count all their bags — paper AND plastic — in stock at the end of day on January 31, 2017.
2. Then retailers pay the tax in advance on this existing inventory.
Supposedly, licensed retailers were mailed a “Floor Tax Return” by the City before December 31, 2016. If you did not receive one, but you do use bags, email email@example.com with the subject line “Floor Tax Return Request”. In the body of the email, include your business name and address. They will send out a form that looks like this (click on each page to see a larger version):
A couple of important notes when filling out this return —
a) Once they get a copy of the return to you, you’ll see that you have to include your “Department of Finance Tax Account Number”. This is located in the bottom-left corner of your business license, under the mayor’s signature.
b) On Page 1, Section 1, Line 1, where it asks for the number of checkout bags on-hand, only note the number of bags that a) you intend to use in the City (if you sell at conventions in the suburbs, for example, don’t count those), and b) don’t fall under one of the exceptions (e.g., separating frozen goods, produce or bulk items, household products; selling to SNAP recipients — see #6 below).
c) If you’ve called your bag wholesaler and have determined that they either do or do not intend to charge the city bag tax moving forward, it’s a good idea to note this information on the bottom of Page 1 of the Floor Tax Return, in Section 2, where they ask for the wholesaler’s information. The city will be following up with these vendors, trying to convince them to charge the tax.
Fill out and mail in the Floor Tax Return with a payment of 5-cents per bag by March 3, 2017 (7-cent tax minus a 2-cent credit for your troubles). It’s a $100 fine if filed late — even if you had zero bags in stock at that point (but you do use them); even if your store did not sell or use checkout bags prior to February 1, 2017 (but you plan to in the future); and even if the store decides NOT to use any bags moving forward (but you used to). If you didn’t use bags before the tax and won’t use them moving forward, you’re exempt from filing the form.
The floor tax return, site schedules (a page for each of the retailer’s various locations — must be filled out even if there is only one), and payment must be mailed to:
Chicago Department of Finance
City Hall, Room 107
121 North LaSalle Street
Chicago, IL 60602
(The rest of the steps are how this will work moving forward.)
3. Wholesalers of paper AND/OR plastic bags (not retailers) must register with the City by February 1, 2017.
4. Wholesalers of paper AND/OR plastic bags (not retailers) must charge their customers (the retailers) 7-cents-per-bag minus a 2-cent credit for the retailer’s effort, and remit that 5-cents-per-bag to the City using Form 2737. (I don’t know of any clients who received this, and I cannot find a copy online; I presume the City only sends it out if they determine you are a bag wholesaler.)
5. The retailers pay this net 5-cents-per-bag tax as part of the invoices from the wholesalers for buying paper AND/OR plastic bags.
(This is where it gets complicated.)
6. There are a million exceptions for bags that are exempt from the tax — so the retailer will need to apply to the wholesaler for a credit for each of these exceptions, to be applied to the next invoice — but how in the world are they going to be able to track them or document them in case of a City audit? Examples include:
Paper and plastic bags ordinarily intended and designed for use by customers inside a store to:
– package loose bulk items, such as fruit, vegetables, nuts, grains, candy, cookies or small hardware items
– contain or wrap frozen foods, meat or fish, whether prepackaged or not
– contain or wrap flowers, potted plants or other damp items
– segregate food or merchandise that could damage or contaminate other food or merchandise when placed together in a bag
– contain unwrapped prepared foods or bakery goods
As well as:
– plastic bags with a retail price of at least fifty cents ($0.50) each
– bags that are used to carry items purchased with SNAP (food stamps)
Retailers should take a credit for these tax-exempt paper and plastic bags on the next bill received from their wholesalers. The wholesaler in turn should claim a credit for the tax amount refunded to their retailers on the next monthly payment to the City. On this topic, the City says, “It shall be presumed that checkout bags sold or used by wholesalers and stores are subject to the tax imposed under this chapter until the contrary is established. The burden of proving that such checkout bags are not taxable hereunder shall be upon the person so claiming.”
7. The retailer is permitted to pass along the 7-cents-per-bag tax to the end consumer, in which case the bag tax needs to be stated separately on the receipt to the consumer; I recommend that retailers work with their accountants or bookkeepers to make sure this is set up correctly in their POS systems. The City has provided a lovely placard to post for your customers so they understand what’s going on.
(Remember, this is a 7-cent tax minus a 2-cent credit for the retailer’s troubles, so the amount collected from consumers is 7-cents, but the amount remitted to wholesale bag sellers or, in many cases, directly to the City, is a net 5-cents.)
8. However, the retailer may choose to absorb the cost themselves, in which case it does not have to be stated separately on the receipt.
(This is where it gets even more complicated.)
9. However, either way,it is the retailer’s responsibility to make sure that their wholesalers who sell them bags are in fact charging them the bag tax. But this has a couple serious drawbacks:
(a) If the retailer buys bags online or in a non-traditional outlet, the chances are pretty low that the wholesaler will be registered to collect and remit sales tax, leaving the retailer in the position where they have to do all of it voluntarily, filing Form 2737 with the City, which is even more time-consuming than the rules and process I noted above.
(Note: if you are a retailer in this situation, you must contact the City of Chicago’s Business Contact Center at 312-747-4747 or by e-mail at RevenueDatabase@cityofchicago.org to register to collect and remit the bag tax. However, I was told by the City Department of Finance that they would prefer not to have thousands of small businesses registering with them; they’d rather convince the wholesalers to charge the tax. They said if you don’t receive an affidavit from the City asking you to register, you’re off the hook as long as you’ve declared your wholesaler to them on the Floor Tax Return, step #2 above.)
However, to be safe — in the case where your wholesaler refuses to charge the tax — I recommend switching vendors. A client has recommended Howard Packaging in Skokie as one who both charges the tax and values working with small businesses.
(b) If the retailer isn’t passing the tax along to customers, then the entire point of the tax — to create an incentive for consumers to bring their own bags — is moot. It will just be a revenue-raiser for the City and nothing more.
For the record, other non-taxable examples of bags and bag usage include:
– bags provided by a dine-in or take-out restaurant to contain food or drink purchased by the restaurant’s customers
– bags provided by a pharmacist to contain prescription drugs
– bags sold in packages containing multiple bags intended for use as garbage bags, pet waste bags or yard waste bags
– bags of any type that customers bring to a store for their own use or to carry away from the store goods that are not placed in a bag provided by the store
– newspaper bags
– dry cleaning or garment bags
– plastic liners that are permanently affixed, or designed and intended to be permanently affixed, to the inside of a particular bag
This means that small businesses in Cook County — which includes the City of Chicago — need to make plans to update their POS and sales tax systems so that they don’t get caught charging the old, lower rate to customers, but paying the new, higher rate to IDOR. It’s surprising how often I see this happen, so: businesses, mark your calendars! Accountants, reach out to your clients! A 1% spread over the course of a month or a quarter could mean a lot of cash out-of-pocket for companies, especially retail stores, that do not plan ahead.
As for why this is happening:
“The immediate problems is pensions. The city of Chicago alone has a $20 billion unfunded liability and when Moody’s Investors Service dropped the city’s debt rating to junk, it forced $2.2 billion in accelerated debt payments. So Cook County has to borrow more money now at higher interest rates to pay those newly due bills AND it has to increase sales taxes to that whopping 10.25% rate effective in January to help pay the interest on it all.”
As for what it means for the poor, and for our communities… well, this is entirely my own opinion, so feel free to stop reading here if what you wanted to know about were the ramifications for accounting.
But, in my opinion, it’s important to remember that sales tax hikes, unlike income taxes, affect even the poorest among us. If you don’t make a lot of money, then you have to spend 100% of it just to keep going. That means 100% of it is subject to sales tax. It’s not the same for someone with disposable income, who can choose not to buy something because sales tax makes it too expensive.
Lastly, this hike is entirely to shore up a pension fund that they’ve known for years was underfunded. An emergency measure now, when this is obviously something that bad planning caused in the first place, smacks of crappy governance.
But that’s just my opinion. The important take-away as a small business owner or accountant? UPDATE YOUR POINT OF SALE AND SALES TAX SYSTEMS BEFORE JANUARY 1.
I was both disappointed and relieved when, while at a Point-of-Sale Software (POS) experts panel discussion a few months ago, I went up to the microphone and said that I hadn’t found a single online POS system that functioned properly with regard to its integration with QuickBooks — and the answer I got was, “that’s because there isn’t one; not yet.”
The unanimous reaction among the experts was that QuickBooks POS for Desktop is really the only system that truly and fully integrates with QuickBooks accounting software (there are other POS packages out there that integrate functionally, though not as fully — but they are also all desktop systems that work with QuickBooks desktop software). None of the zillions of online offerings (Square, Vend and the like) have functioning integrations (although they claim to), leaving QuickBooks Online as a less-attractive option for those who depend on POS data. (This doesn’t mean it can’t be done — I have plenty of clients for whom I have written up a recurring periodic journal entry that they book manually, or we’ve hired a developer to write a script to do the job. But these are time-consuming or expensive options by comparison.)
Armed with this knowledge, I must say I was thrilled to read the reviews when the newest version of QuickBooks POS for Desktop was released. They’ve apparently increased stability and reintroduced formerly-removed features (that actually work this time around). For those clients of mine who will have to make the shift away from QB 2012 this year (see my post on support ending in May 2015), I’m going to recommend they upgrade to the newest POS version as well.
I’m looking forward to sharing more about the amazing experiences I had at the back-to-back accounting conferences I just attended. However, one short post in the meanwhile:
It is SUCH a relief to find out that so many of the workarounds I’ve created for my clients — most notably, recurring daily journal entries to capture data from online Point of Sale systems (although there were at least two other topics) — aren’t because I was just “missing something” or confused about how these systems (Square, Vend, etc.) work. The fact is, they simply don’t function properly. The “integrations” with QuickBooks Online aren’t what they purport themselves to be, and I have it on good authority that the most expert POS consultants in the world are using the same exact workarounds that I thought I’d invented. It may not be “good” news, per se, but it’s such a relief!