Barterers Beware: Taxman wants his take

Barter KingsJan. 24, 2014

By John Hrabe

A&E’s “Barter Kings” make trading look easy.

In one recent episode, professional traders Antonio Palazzola and Steve McHugh started with a beer-making kit, and through a series of transactions, ultimately walked away with a food truck.

“This is a cashless society, everybody’s open to it, you just have to figure out why and how,” McHugh told his hometown paper in an interview last year. “It’s a great way to do things.”

With a depressed economy, more people are giving up buying new in favor of trading what’s old. The International Reciprocal Trade Association, the trade association for traders, estimates that as many as 400,000 companies exchange up to $4 billion worth of goods annually.

But, before down-and-out Californians try their hand at non-monetary trading, barterers beware. Money might not change hands but that doesn’t mean the exchange is exempt from state sales and use taxes.

“Simply trading your own property with someone else without being registered could lead to big trouble with the tax collector,” warned Board of Equalization member Michelle Steel, whose office helps taxpayers and small businesses navigate the state’s confusing web of tax laws. “These complex and rarely mentioned laws create serious pitfalls for Californians who are caught unaware.”

State law

Barterers who don’t collect sales taxes could be running afoul of state law. That’s because state law doesn’t differentiate between monetary and non-monetary transactions for purposes of sales and use taxes. To better understand the tax implications of bartering, I reached out to my former colleagues at the state’s sales tax board to help explain the rules.

“A ‘sale’ and ‘purchase’ includes bartering under the Sales and Use Tax Law,” confirmed Jaime Garza, deputy director of external affairs at the Board of Equalization, which collects more than $53.7 billion annually in taxes and fees. “Sales tax is due on items that are bartered, and generally would be calculated based on the amount agreed upon between the parties or the fair market value, whichever is greater.”

And you don’t have to be a frequent trader to be subject to California’s strict tax laws. If you make as few as three transactions per year, you’re legally obligated to comply with the state’s sales tax regulations.

“There is no threshold for the number of bartering transactions per year,” Garza said. “Generally, if you make three or more sales, including bartering, in a 12-month period, you are required to hold a seller’s permit, collect sales tax, and send it in to the BOE.”

The High Desert’s “Barter Kings” hit that three trade sales threshold in almost every episode. In the series premiere, according to Entrepreneur Magazine, “the pair worked their way up in a series of six trades from a framed gold Elvis record to a powerboat.” Yet, the show never records the traders collecting sales tax or displaying their seller’s permit.

Due to taxpayer confidentiality, the Board of Equalization would not comment on whether the cable reality show is complying with state tax law. There’s reason to believe that the professional barterers are fully aware of the state’s tax laws. McHugh and his wife, Cindy, own Express Super Pawn, a Hesperia pawn shop that is rebranded as “Express Trade” for the reality show. Pawn shops are one of the most heavily scrutinized retailers in the country because of the increased potential to deal in stolen merchandise.

Hypothetical example

While it’s unlikely that the Board of Equalization would launch a formal investigation into occasional traders, small businesses should be careful because a trade might become a side complication during an audit. The “Barter Kings” Hollywood treatment of bartering could get California copycats into trouble — which is why the tax agency offers this hypothetical example for how to tax trades.

“For example, assume that you are a retailer of electronic equipment and owe $500 for dental care. In place of cash, you provide a television set from your inventory as full payment. The transaction is considered a taxable sale, and you must report and pay tax based on the $500,” Garza explained.

Of course, many barterers are trading goods precisely because they lack cash. If forced to pay additional taxes out-of-pocket, it might not be worth making the trade.

“Sales price, in many barter transactions, is a subjective, non-monetary value, based on the need or desire each person has for the items that are up for trade,” Steel argues. “Someone may be willing to trade a jacket for a vintage record, but they may not be willing to pay $30 for the same item.”

In the long run, the state should update the tax laws to grant a specific exemption for occasional traders, if for no other reason than to avoid the paperwork nightmare.

“It’s never too soon to start bartering!” the “Barter Kings” encourage on their Facebook page. Well, technically, make sure to get a seller’s permit first.

 

9 comments

Write a comment
  1. us citizen
    us citizen 24 January, 2013, 14:26

    donate

    Reply this comment
  2. Sean Morham
    Sean Morham 24 January, 2013, 15:38

    Keep the dollars away from Big Daddy, the beast. Be cheap, don t buy anything other than essentials. It is great to start the week with a tank of gas, groceries bought at Wal Mart in the house, $15 in my pocket, and wake up Saturday with $10 of the $15. That means I added forty five cents to the gov t vaults during the week. For the month, less than $2 bucks. Income taxes, utilities, etc, all got to be paid. It is ok if the $2.00 goes to the pension fund, I will part with it. The beauty of compounding will make it grow. Hope Sacramento does not spend it before it gets there. I can only do my part. Some of the monthly savings go to International Charitable organizations, for the truly needy.

    Reply this comment
  3. Donkey
    Donkey 24 January, 2013, 17:14

    Yes, don’t feed the beast!! 🙂

    Reply this comment
  4. us citizen
    us citizen 24 January, 2013, 17:32

    Yep, Ill donate my time to you, for a piece of pie. Screw you CA.

    Reply this comment
  5. Dyspeptic
    Dyspeptic 24 January, 2013, 20:57

    Think of barter as an undocumented transaction, kind of like undocumented immigrants only better.

    Reply this comment
  6. Donkey
    Donkey 24 January, 2013, 22:26

    Dyspeptic, LOL!! 🙂

    Reply this comment
  7. Marten Purdy
    Marten Purdy 25 January, 2013, 06:08

    Today the tax man came and took my soul as compensation for due income taxes.

    Reply this comment
  8. Boscorelli
    Boscorelli 1 February, 2013, 02:55

    Either way it may not or may be considered Sales Tax, however Use Tax should apply. If items bartered are using bartered item items in Californa then Use Tax should come into play, meaning Use Tax Applies. Its not any difference how we can purchase on ebay from an out of State or Country, if posession is taken in California we must pay Use Tax since items are being used in California. We buy used items at Thrift Stores Pawn Shops we pay the Sales Tax at source.
    Barters are not any different.
    One must know the confusing Laws of Sales & Use Tax.
    Income Tax Marty, is Federal & State. Nothing to di with Sales & Use Tax

    Reply this comment
  9. Marten Purdy the metroman
    Marten Purdy the metroman 1 February, 2013, 12:55

    Today the taxman came and took my soul as compensation for due income taxes.

    Reply this comment

Write a Comment

Leave a Reply



Related Articles

Calif. sales tax revenue nosedives 33.5%

Aug. 14, 2012 By Chriss Street We were severely criticized last week by the left and the right for publishing,

Board of Equalization faces heavy criticism for mismanaged funds

Created to make California’s tax system work better, the Board of Equalization has found itself under a cloud of radical

Shutdown dents legislators' fundraising

Earlier this week, CalWatchdog.com mentioned some of the political implications that the partial government shutdown will have on Congress, particularly a