a spanner in the works
Damn it. Another charge-back.
Terry Bennett ran a home-based mail order company selling a famous brand of spanners. Terry had worked for a major steelworking company before his company had been bought by a larger company who manufactured in China, and already had their own sales force. When Terry looked into the Chinese manufacturer, he came to agree that it was a pretty good decision. He found the spanners he was already selling being manufactured in China for cents on the dollar, compared to what they cost to make in Detroit.
So when Global Steel mangement emailed a redundancy offer, Terry took his filofax filled with contacts from 12 years selling precision toolware and, aged 41, formed a company of his own. He converted his garage into a warehouse, and stocked it the ceiling with ring spanners, open-ended spanners, combination wrenches and flare-nut wrenches in various combinations from 1/4″ to a full 1″ in diameter, the most popular sizes sold throughout the USA.
Business was good, but Terry soon learnt that while he was good at selling spanners, he wasn’t quite so skilled at managing the “business” side. Two things that got his goat in particular were greedy credit card companies, and the rampant taxation he only just realized he was subject to.
If a regular person notices a fraudulent charge on their credit card, and contacts their issuing bank, the bank will usually give the customer their money back. That’s very nice of the bank, but don’t think they’re left holding the bag: the bank takes the money they’re refunding back from the merchant. The merchant usually has no hope of regaining their sold goods, so have little choice but to “write off” this stock as stolen, or “spoilage” as his accountant had called it.
Even despite these semi-regular thefts, credit card companies took a small amount on every transaction. Then the IRS took his income tax. Then he filed state taxes, and quarterly reports. It seemed everybody wanted a piece of Terry’s success, and he could afford it - business was good - but mostly, he resented it. Perhaps it was this festering resentment that one day gave him an idea.
One morning in June, Terry found a page in his filofax of a mostly-avoided customer that always nickle-and-dimed him for the best deal. He calculated the price of his entire inventory at a little over forty thousand dollars, and charged it all to the customer. Terry breathed a sigh of relief as the American Express corporate card spat out an authorization slip. Now he just had to wait.
A couple of days later, forty thousand dollars appeared in his bank account. A few days later again, he received a registered letter from American Express that the charge was unauthorized, and would reverse it unless they received evidence to the contrary within 14 days. For 14 days, Terry did nothing, and the transaction was reversed.
A few clicks of the mouse in his accounting software and forty thousand dollars worth of stock was marked as spoilage. He would’ve had a heart attack if it was real. But it wasn’t, really … he still had the stock in his basement. Over the next few weeks he packaged it, and registered several ebay accounts to sell it. Forty thousand dollars worth of spanners is a lot, but the internet is a big place. In individual lots, he would easily clear them, selling below retail.
Three weeks, and a lot of hard work later, he had over thirty-five thousand dollars in his bank account. Terry smiled as he considered it. Thirty-five thousand dollars for forty thousand dollars worth of spanners didn’t sound like a good deal on the face of it, but Terry was pleased. It was stock he’d stolen from himself, with a perfect alibi … the same credit card fraud he’d been the victim of many times. If he’d sold his stock legitimately, at least forty percent would’ve been whittled away by the government, the bank, the IRS. He’d picked up thirty-five thousand dollars tax-free, and scored a nice deduction for his business through the spoilage account for his upcoming taxes.
Terry picked up the phone, and called China. He would need some more spanners.
May 28th, 2008 at 11:50 pm
Actually, even if he never got caught, he didn’t “score” anything other than an instance of attempted credit card fraud, a breach of contract with his credit card merchant account provider, and several counts of federal tax fraud. There’s no loophole here. He just broke the law. He could have saved some time and skipped the credit card transaction and chargeback all together. There was no business transaction, so there was no effect on the taxability of the business. The fact is, he still owes tax on the income. Interestingly, the author seems to understand this but chooses not to let the facts get in the way of a good ‘urban legend in the making’ when he writes “If he’d sold his stock legitimately, at least forty percent would’ve been whittled away by the government, the bank, the IRS.” Of course, the author should also check in with him after a few months and ask how his internet business is going if he is no longer accepting credit cards. Good luck with managing the cost of payments and bad debt. Accepting credit cards has a cost because the service provides a value. If it didn’t, credit cards wouldn’t exist. It’s basic economics.
May 29th, 2008 at 9:51 am
Thanks for visiting. You’re right of course, and several times while I was writing this I had to rewrite entire paragraphs to make it vague enough to be (hopefully?) believable. Also, I had no real knowledge of American taxation laws so I fudged a lot of that part as well.
Hope you enjoyed it!