Smart Cards Pose Tax Problem for Merchants

By O'Sullivan, Orla | ABA Banking Journal, December 1996 | Go to article overview

Smart Cards Pose Tax Problem for Merchants


O'Sullivan, Orla, ABA Banking Journal


A consensus is emerging that the success of smart cards hinges at least as much on merchants accepting them as on consumer acceptance

Increased tax liability is one reason for merchants' muted enthusiasm--besides the fact that merchants are the only ones so far being asked to pay for using smart cards.

"There's a resistance to forms of payment besides cash," said Bruce Brittain, whose firm Brittain Associates, Inc., polled merchants that participated in the smart card test during the 1996 Summer Olympics in Atlanta. Some merchants admitted to understating their cash receipts so as to reduce their tax burden, he said. (Smart cards leave an electronic audit trail by recording deductions in card value each time merchandise is purchased.)

On the flip side, franchisors may push for the adoption of smart cards in their stores, since some Atlanta operators told Brittain, "We want to collect more fees from our franchisees." (The franchisor's cut of the receipts will be reduced if the franchisee understates his receipts.) Other sources said they heard the same thing.

The wish to under report receipts may pose a greater obstacle to smart cards when they undergo their next major test in New York City next year, because more "Morn and Pop" stores will be participating, Mr. Brittain said.

Brittain's joint-venture partner in the Olympic research was Business Dynamics Inc., another Atlanta-based consultant. Jim Shanahan, a partner in the firm, said banks must change their "arm wrestling" attitude toward merchants who are "not nearly as enthusiastic as consumers" about the cards. Moreover, his research reflects the views of merchants who typically were not asked to pay for using the cards whereas they will be in future.

Mike Love, vice-president of First Union National Bank, Charlotte, N.C., disagrees with Shanahan's assertion that "merchants hold the key to the kingdom." First Union, one of three banks participating in Atlanta's ongoing pilot, thinks merchant acceptance will follow consumer demand. As evidence of that demand, he cites another First Union pilot, under way in Jacksonville, Fla. For two years attendees at the Jacksonville Jaguars' home games have been able to use smart cards to make purchases in the stadium. Now between 12% and 15% of Sunday purchases are made by smart card, he said.

Two things both sides agree on is that merchants need more training and more card-reading terminals. (Citibank, which will be one of New York's two issuing banks, said Atlanta's experience taught it the need for merchant acceptance and training. …

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