The agent’s question today involves a big account – a 45 location fast food chain doing a few million per month and as many as 200,000 transactions per month. An irate customer felt there was extra tax charged.
AGENT: How do I explain that to satisfy the customer and the merchant? Most others in the industry with whom I’ve spoken have never had this scenario before.
JAMES: The reason others have never heard this complaint before is they’ve not been selling big accounts. I’ve dealt with this probably a hundred times before! However, the merchant is usually the one with the complaint rather than the customer.
Ordinarily, merchants call saying their accountant found that either too much or not enough sales tax was collected. Either one is very bad!
I plan to give you the short answer to an extremely complicated question. Then I recommend you read the eBook I just wrote about this exact topic. Go to ccsalespro.com/salestax to get that eBook.
There are two problems which need to be solved here.
#1. Compliance and understanding how this should work.
This is the simple problem to solve. The additional 4% being added in cash discounting is part of the regular price. Sales tax must be collected on the regular price.
Therefore, sales tax must be added AFTER the non-cash adjustment or service fee. The same is true in surcharging. Otherwise, the right amount of sales tax is not being collected.
The merchant isn’t collecting the right amount of sales tax either, which is a big deal. The accountant will be asking why tax figures are incorrect. And in the case of today’s question, the situation is even worse since there’s a customer involved who doesn’t understand.
#2. How do we charge the merchant so that all this comes out right?
This is the more difficult and complicated problem! Sales tax is different for each merchant. There are two big questions for agents:
- What should the merchant be charged?
- What should the daily discount be?
The amount being collected must be adjusted each time to offset charges.
There is a $10 transaction with 10% tax. Add the 4% = $10.40. Then add tax = $1.04.
When that transaction actually goes through, it’s $11.44. What percentage of that transaction amount should be collected? The agent needs to ensure that the correct amount is charged, making the amount charged and the amount collected the same. And the amount collected should offset the cost.
Long story, short: Although merchants technically collect 4%, they don’t collect 4% on the total transaction. They’re collecting 4% on the transaction pre-tax and before the 4% fee. Thus, merchants are collecting 4% on the $10, not the $11.44.
This means the amount you can charge the merchant and the amount you collect is significantly less than 4%. The real loss here is margin. When selling a big account, don’t automatically drop below 4%. As in the situation of the agent today, the amount collected will be 3.2% or 3.25%.
Taking into account that 3.2 or 3.25% being added to the entire $11.44, the agent should stay at the 4% range. The percentage will come down significantly.
Again, let me emphasize that adding the fee PRE-tax is the only legal way to do cash discounting.
Think through this process for a mega business:
- On a $10 transaction, add $1 tax, then add the service fee.
- The business didn’t pay tax on that service fee, but it’s part of the revenue.
- Sales tax is owing on total revenue. THAT’S A BIG PROBLEM!
- Depending on how the merchant’s software handles it, there may be an underpayment of the sales tax commitment.
- That is blatantly illegal.
For a $10,000 Mom-n-Pop shop, this wouldn’t matter much for the agent or the merchant. However, for a big business, this is a BIG deal!
The whole concept of cash discounting is built around the regular price. Cash discounting isn’t increasing the regular price. Rather, the regular price is decreased if consumers pay cash. Thus, sales tax always comes after the regular price.
Here are two important suggestions for dealing with the irate customer mentioned in our question today:
#1. Pull the customer in to help solve the problem. Reach out to say, “We’ve been having meetings; we hired a consultant. We take your concern very seriously. We want to run through with you our solution to ensure you agree this is the right solution.”
The customer should become part of your team to solve this problem. Otherwise, that customer will be your enemy. This reminds me of a quote from “The Godfather” – “Keep your friends close and your enemies closer.”
#2. Don’t be afraid to get complicated with this person in presenting your solution. When you read my eBook the fifth time, you might understand half of it! That’s okay. Realize the customer won’t understand it either.
The goal isn’t for the customer to understand and approve your solution. The goal is convincing the customer you care about the issue and have made the best, most logical, most compliant solution that you can.
If the person believes that, he / she will leave you alone.