Entrepreneurs in the Rocky Mountains have rediscovered the ancient business of bartering, and they are making trades worth millions, both locally and nationwide.
A Denver exchange recently engineered a $3.2 million deal in which national radio advertising was exchanged for diamonds, real estate and cars. Another transaction, in the negotiating stage, involves swapping a $400,000 ranch in Walden, Colo., for one of comparable value in San Luis Obispo, Calif.
Businessmen are acquiring signs, having repairs made, papering their office walls, replenishing their inventories, traveling and advertising on a barter basis.
One can trade oil wells, television time, hypnosis, gynecological treatment, dentistry, condominiums.
Bartering is seen as an answer to inflation and the sadly diminishing dollar, to the problems of high interest, too much inveintory, too much cash flow, too many bouncing checks, too many accounts receivable.
At least five trade exchanges, each claiming membership of hundreds of merchants, have opened in the Denver area. The president of one, the seven-month-old North American Trade Exchange, claims business is so good she plans to open offices in Houston, Dallas, the Pacific Northwest and, perhaps, Hawaii, within six months. Already, her firm has four offices in Colorado.
Exchange Enterprises, headquartered in Salt Lake City, has 35 offices, including one in Denver. It does not advertise; membership grows by referral, said Paul Meyer, vice president of the locally owned exchange.
Although the Internal Revenue Service is showing interest, wide-scale bartering among merchants is such a relatively new phenomenon that some state tax officials have not even heard of it.
"That's news to me' said Jim Davis, assistant chief of taxation, Colorado Department of Revenue, when questioned about trade exchanges and taxes. "I have to plead ignorance. If it's fairly new, sometimes it takes us awhile to find out about these things."
Ted Middle Jr., chief auditor for the state department of revenue, said he has not seen much large scale business trading.
"It's hard to find. No invoice. No movement of money. I suppose unless someone did a tremendous amount of this, you'd never find out."
Stanley Williams, supervisor of the state's income and withholding taxes section, was similarly unaware of the extent of trade exchange. "This area is a new one to me," he said.
It has been reported that some businessmen turn to bartering to avoid taxes, using the argument that since the trades involve property or services of equal value, federal income tax can be avoided.
Not so, says the IRS. Bartering is merely the elimination of one step of a transaction - the cash step - according to IRS spokesman Tony Bombardiere in Washington. "What we do is bring it back a step and see how it works out. If someone is gaining an economic advantage, it may be an income situation. And income, regardless of whether it takes the form of cash, goods or services, is taxable."
Payment for goods and services is generally taxable to the recipient, whether such payment is made in cash or in some nonmonetary form.
Thus if a painter accepts a car repair from a mechanic in exchange for painting the mechanic's house, the painter would have to report - and pay tax on - the value of the car repair just as if he had received the same amount in cash.
And, just as cash expenditures for personal living are not deductible from cash income, bartered transactions do not escape tax just because goods or services of equal value are exchanged.
"If I'm an auto mechanic and I do $500 worth of work, whether you pay me in cash or not, I'm receiving $500 worth of income. The important thing is fair market value. I'm charging you the same $500 I'd charge anyone else," said Robert Morris, An IRS public affairs officer here.
However, in a business situation, if two firms trade inventory of equal market value, there is no applicable tax if there is no gain. If both parties remain in the same economic position before and after the bartering of business goods, there would be no income tax, Bombardiere said. The same deductions which apply in a cash situation would apply in a bartering situation.
Marilyn N. Gallagher, director of The Trade Exchange in Denver, acknowledged that the IRS has paid her firm a couple of visits. "They haven't found anything. We don't take care of our members' tax returns. It's up to them to handle them any way they want.
"I think IRS is just getting interested in general in trading, why people are bartering so much, are they using that as a way of avoiding taxes. Really, it's not a tax avoidance, sometimes it's a delay in tax. If you sold something and got cash for it, you might have to claim it on capital gains, but if you trade it for an equal or like thing, it's not necessarily a tax thing."
Sales taxes are collected, Gallagher said. She has hired a financial strategy firm to further explore tax-related issues, she said.
Gallagher estimates that The Trade Exchange will do $1.5 million worth of general membership bartering, trading goods and services usually valued at less than $1,000 retail, this year. Since January, she added, the firm has brokered other, larger, exchanges totalling in the neighborhood of $10 million to $15 million.
She said the firm has disassociated itself from the Washington-based International Trade Exchange, ITE, which has received unfavorable publicity about owners' backgrounds. It does, however, trade with some ITE franchise members.
Her firm has reciprocal trade agreements with others in Dallas, Kansas City, Philadelphia, Boston, Cincinnati, and dozens of other cities. Negotiations are underway with potential trading partners in London, who she said, may be interested in gemstones, Colorado ski areas and travel.
The Trade Exchange does not circulate a list of members. Rather it matches clients with others providing the goods or services they require, taking a 10 percent commission from the buyer, five percent in trade credit, and five percent in cash. There are membership and annual fees.
Members use a special credit card for transactions, which are recorded by computer. If a member sells, say, $100 worth of tires to a member dentist, he gets $100 worth of trade credit. He could pay for dentistry, office equipment, or perhaps, $100 worth of meals in member restaurants.
Gallagher estimates that based on a 50 percent profit margin, a merchant gets a dollar's worth of buying power for 57 1/2 cents, including the exchange's commission.
A competitor, North American Trade Exchange, uses the term trade units instead of trade credits. Elizabeth Strand, president, estimated the exchange will do $2 million worth of trading in the first year.
"The economics of trading are very dynamic. Multiple trades can be very profitable." Trading is at a "phenomenal" level nationally, she said - "in the billions."
Harvard Business Review reports that bartering is popular internationally. Pan American Airways paid for an hour-length Spanish language film, and traded it for commercials in Spanish-speaking countries. Brazil barters shoes for Russian turbans.
Bartering is going to be very strong, Strand said. "It's a new way of doing business."