he barter business is going strong in many parts of the country, among individuals and businesses. The idea is to trade products and services instead of buying them for cash. Many people think they get a better deal that way (although that's not always the case).
Many people also see barter as a nice way of avoiding taxes.
Barter has two faces: exchanges among businesses, which may involve a good deal of money, and exchanges between individuals.
The individual side of barter is usually modest and local. You might join an exchange for $50 and receive a catalogue in which other members list the products or services they're willing to trade. A lawyer might draw up a will in return for having his driveway blacktopped. A car dealer might do a tune-up in return for a couple of free dental appointments. You negotiate these deals yourself.
Under the tax code, the car dealer is supposed to report the value of the "free" tune-ups as income, just as the dentist is supposed to report the value of the dental appointments. The rule says that your income includes "the fair market value of services received in return for services rendered."
In practice, this sort of thing is rarely reported and rarely caught by the Internal Revenue Service. But there is always the possibility that it might be caught, especially if you are listed in a barter directory.
Some barterers have developed the theory that their exchanges are merely "gifts." Informal personal trade, such as doing a neighbor's typing in return for babysitting would generally be considered a nontaxable favor.
But true barter arrangements, whether arranged personally or through a directory, definitely lead to taxable income, according to the IRS.
The business side of barter is where the money is. An office supply company, for example, will "trade" typewriters to another exchange member, in return for "trade credits" in the exchange's "bank." The company can then use those credits to buy, say, airline seats from another exchange member.
Memberships cost anywhere from $150 to $1,000 a year. The exchange may take 5 to 10 percent of each transaction, in cash or in trade credits. Members get monthly statements of their accounts.
Many businesses take up barter purely as a way of finding new customers or moving unsold goods. But tax motivations also may be involved.
Officials at the barter exchanges insist that their business clients are generally reporting transactions properly. "They know we have records, and that the IRS might ask for them," says Daryl Michaels of the Barter Exchange in New York.
The IRS took the Pittsburgh Trade Exchange to court, and recently won the right to look at its records. The purpose of the lawsuit was to discover members' names and transactions, to see if they are ducking taxes. In a couple of cases against other exchanges, the IRS has had some first-round setbacks.
A few barter exchanges may have misled members with respect to taxes. The Comstock Trading Co., endorsed by Howard Ruff, said in its sales brochure: "Declare your own tax cut. It's 100 percent legal. The IRS loses." Comstock goes on to quote one Charles M. Wilson as saying, "Barter stops sales taxes the way hanging stops the horse thief." (Comstock is now out of business, according to a spokesman for "Ruff Times.")
But Randy Richardson of the Pittsburgh Trading Exchange says, "There are no tax advantages or disadvantages to bartering. Companies have to collect sales taxes on bartered goods just as if the goods were sold." But sales taxes do not go through the exchanges. Members have to collect from each other in cash.
A fledgling trade association for the barter exchanges--the International Association of Trade Exchanges (IATE)--is talking to the IRS about some form of tax reporting. The exchanges probably will be asked to report members' income from barter on Form 1099s, the way banks report interest income on savings accounts.
There's a good deal of contention, however, as to how that income should be valued. IATE spokesman Paul Suplizio expects a proposal from the IRS within six months.
If a businessman looks beyond taxes, he might find that barter isn't always what it's cracked up to be. While many companies barter successfully, many others find that they don't get the same value out of the trading system that they put in. If your barter exchange ever went out of business, the value of the "trade credits" you have in the "bank" could be completely lost.