BARTERING



Bartering is the exchange of goods and services without the use of currency. Although bartering has been used in commercial and private transactions since ancient times, its appeal notably increased in the waning years of the 20th century. Surprisingly, bartering has proved on a worldwide basis to be not only a complement to sophisticated marketplace economies but also a means of survival in moribund economies. In the United States for instance the dollar value of bartered transactions grew at an annual rate of about 15 percent in the ten years following 1988. Conversely, in degraded economies such as Russia and its former republics bartering plays an important role in nearly 75 percent of the business transactions involving major companies. The term "countertrade" can be used synonymously with "barter" but "countertrade" most often describes international barter.

Barter is a popular method of exchange in societies or social situations marked by a low money supply. Children may trade or barter their goods with one another and bartering was popular in early rural America. But bartering is also on the increase in developed marketplace economies with a ready supply of capital such as the United States. According to the International Reciprocal Trade Association (IRTA) over $7.5 billion in sales is transacted each year in the United States by the commercial barter industry. Over 300,000 companies, mostly small businesses, use commercial bartering services annually and the growth of the commercial barter industry is outpacing the rate of growth of America's gross national product.

At the commercial level, bartering is an inexpensive method of financing operations as it is based on the exchange of less productive assets for goods and services of more value. It is often easier to barter excess inventory or "downtime" than it is to exchange these goods or services for hard currency. The most important advantage of bartering, however, is its conservation of cash, which results in greater liquidity. Bartering can also be used advantageously by businesses that are seasonal in nature such as resort hotels. A bartered hotel room is more cost effective than an empty one. Bartering thus enhances liquidity and allows businesses to capitalize on unproductive assets and spare or unused capacity.

There are, however, a number of drawbacks to bartering. Bartering can have a high transaction cost caused by potential traders expending time, money, and effort in search of one another. A related problem is the double coincidence of wants." Any two individuals wanting to trade must have the exact goods each other wants. If a furniture maker wants to buy books, that person must find a bookseller who wants to buy chairs," according to economist R. Glenn Hubbard. Bartering also lacks a common unit of exchange and standardization. Unlike money, a commodity with value in one community may not be quite as valuable in another. Also an ounce of gold from one mine is the same as an ounce of gold from another but a pair of shoes may vary in quality from one cobbler to another. In these regards bartering is not nearly as efficient as a moneyed economy, as money acts as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. For these reasons bartering may serve as a complement to a sophisticated economy but certainly not as an alternative. Many of the above problems with bartering, however, have been alleviated by computerized barter exchanges which efficiently match the respective client needs while offering standardized "trade dollars" as a unit of account.

The growth of bartering in the United States is due to these barter companies or barter exchanges. In 1998 there were approximately 600 such companies—500 barter exchanges that act as clearinghouses for the exchange of goods and services amongst their clients and 100 corporate trade brokers that exchange trade credits for assets, and goods and services for part trade and part cash. Barter companies or barter exchanges provide an arena in which members exchange goods and services through pure barter or a combination of barter and cash. The most important function of a barter exchange is to match the needs of potential traders. The barter exchange earns its income from start-up membership and renewal fees and from commissions based on a percentage of the gross value of each transaction. The fee is usually between 5 and 10 percent. Some barter exchanges also charge a monthly administrative fee.

The operation of most barter companies is similar to that of credit card companies. Clients are issued a card and their barter accounts are credited or debited according to each transaction. Clients are made aware of available goods and services for trade through membership directories, trade brokers, fax-back sheets, and the Internet. Traders must receive authorization from the exchange and clients receive statements detailing their account activity for the previous month.

A trade dollar is the unit of account used by barter exchanges. As a unit of account or unit of exchange, trade dollars allow for the efficient recording of trades and the measure of debt and credit of each exchange member. If a trade between two members is not equal or reciprocated, trade dollars can be credited to an account for future use. Many of the regulations governing these barters are based on provisions of the Uniform Commercial Code. This is a model code governing commercial transactions in the United States. It especially applies to the sale of goods in the normal course of trade and negotiable instruments.

Generally it costs $200 to $500 to join a barter exchange. Clients are assigned a trade broker who is responsible for arranging trades for the client and keeping track of the trade dollars in their account. The broker makes a commission on each transaction and there may be a monthly maintenance fee of up to $30. Black Enterprise magazine detailed how bartering helped the career of Jamila Swift, a New York graphic designer. Swift joined Barter Advantage, Inc. in hopes of maintaining business liquidity, expanding her client network, and finding new and less expensive sources of needed goods and services. Swift accumulates trade dollars by designing letterheads and brochures for fellow barter exchange members. Her account of trade dollars is likewise debited when she makes use of goods and services proffered by fellow members. These goods and services include such things as dining out, medical care, automobile repairs, and hotel reservations. "It's another opportunity to get your business out there and get more exposure," Swift told Black Enterprise. She also claimed a 5 to 10 percent increase in income from bartering. The Journal of Accountancy also presented a barter exchange scenario: A printer uses his press downtime to do a $3,000 printing job for a fellow barter exchange member; with $3,000 in trade dollars the printer hires a landscaper to do work around his building; the landscaper uses the $3,000 in trade dollars to advertise his business on the radio; the radio station uses the $3,000 in trade dollars to purchase airplane tickets as part of a promotional campaign. All participants in these various transactions are of course members of the barter exchange, as trade dollars cannot be used outside of the respective exchange.

While there are no tax advantages or tax disadvantages to bartering there are tax consequences. "A trade dollar and a cash dollar are the same in the eyes of the IRS," according to Robert Meyer, publisher of Barter News magazine. Under the Tax Equity and Fiscal Responsibility Act of 1982, barter exchanges are legally designated custodians of the financial records of their members, who of course must pay taxes. As such, barter exchanges are third-party record keepers the same as credit card companies, banks, and stock brokerages and are required to file Internal Revenue Service (IRS) 1099-B forms which list the barter income of each client. According to the IRTA, barter income should be viewed as cash income and bartering should be considered a marketing or financial tool—not a tax tool. Barter income accrues whenever trade dollars are credited to an account from a transaction resulting in the "sale" of goods or services. The value of trade dollars is considered to be gross income for the tax year in which they are credited to a barter account. Unspent trade dollars are thus a tax liability because they are taxed as income when they are received. Business-related barter purchases are of course generally tax deductible and, contrary to popular myth, membership in a barter exchange does not automatically target a business or person for an IRS audit. In a noted 1997 case, pop artist Peter Max was charged by the IRS with tax fraud for bartering his art for services and property that he did not report as income. Max was charged with cheating the IRS out of taxes on $1.1 million worth of bartered art sales. The artist eventually pleaded guilty to single counts of conspiracy and tax evasion.

Bartering is often a necessity in societies where the money supply is deficient. This was true on the American frontier where agricultural and other goods such as liquor, furs, hardware, and firearms were readily traded. Although these goods were often bartered at stores, the accounts were kept in terms of dollars. A trapper could trade furs for shot and powder at a trading post but the storekeeper entered the transaction in his or her books in terms of dollars.

Bartering also becomes increasingly popular when economies undergo rampant inflation. Why hold on to money which decreases in value as opposed to hard goods which rise in value? That was the case in Russia in 1992 when that transitional economy began suffering from hyperinflation. As a result, according to the Wall Street Journal, by 1997 50 percent of industry sales in Russia were being conducted through bartering. In the city of Tatarstan, for instance, a truck factory settled its tax bill with 600 trucks that the company conveniently parked on the front lawn of the local administrative building. And in 1998 in the city of Kostroma, a sock manufacturer settled a tax bill with 600 pairs of wool socks that were turned over to the local police. Bartering also reaches down to the everyday consumer level with a local movie house accepting two eggs as the price of admission. In a very circuitous example the Wall Street Journal also told about a textile manufacturer in Kostroma who paid his electric bill with 400 wool blankets. The KostromaEnergo company donated the blankets to a children's camp and then took the deduction from their taxes. The original wool for the blankets came to Kostroma from a textile factory in Uzbekistan as part of a wool-for-machinery trade. Economists blame the growth of bartering in Russia on the void that followed the collapse of its central planning system. There were no managers skilled in marketing or distribution to fill this void. Another explanation is the shortage of cash which created a liquidity crisis. There is simply not enough currency to pay wages and bills, leaving bartering as the only alternative. Bartering, which began in Russia as a bad habit, has turned into a crippling addiction for which a cure has yet to be found.

The leading promoter of bartering in the United States is the International Reciprocal Trade Association (IRTA). The association was founded in 1979 to foster the common interests of those involved in commercial barter in the United States and worldwide. Its goals are to promote bartering as a legitimate and responsible form of commerce. It has also instituted a common code of ethics and a peer review regulatory system. The IRTA was also instrumental in passage of the 1982 Tax Equity and Fiscal Responsibility Act.

[ Michael Knes ]

FURTHER READING:

Brzezinski, Matthew. "Where Cash Isn't King: Barter Lines Pockets in Ex-Soviet States." Wall Street Journal, I May 1997, A14.

De Lisser, Eleena, and Rodney Ho. "Barter Exchanges Say Future Looks Promising." Wall Street Journal, 12 November 1997, B2.

Higgins, Andrew. "Twilight Economy: Lacking Money to Pay, Russian Firms Survive on Deft Barter System." Wall Street Journal, 27 August 1998, Al +.

Hubbard, R. Glenn. Money, the Financial System, and the Economy. Reading, MA: Addison-Wesley, 1995.

International Reciprocal Trade Association. "IRTA: The International Reciprocal Trade Association." Chicago: International Reciprocal Trade Association, 1998. Available from www.irta.net .

Kreuze, Jerry G. "International Countertrade." Internal Auditor, April 1997, 42-47.

Malitz, Phyliss. "The Business of Barter." Journal of Accountancy 185, no. 3 (March 1998): 72-74.

National Association of Trade Exchanges. "National Association of Trade Exchanges." Cleveland: National Association of Trade Exchanges, 1999. Available from www.nate.org .

Parks, Paula Lynn. "Capital Ideas: Bartering Bonanza." Black Enterprise, February 1999, 44.

Satov, Tamar. "Fair Exchange." CA Magazine, April 1997, 14-19.



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