Complimentary (comp) programs entitle guests to receive products or special discounts at your restaurants. Whether used as a goodwill gesture for guests or to extend a privilege to employees, providing comps is a part of doing business.
Many restaurants manage their comp programs by issuing paper certificates as a quick, flexible, on-the-spot solution to a comp situation. However, these paper certificates are easy targets for fraud and abuse which can greatly increase the cost of a comp program.
Others opt to use gift cards as a means to comp guests. Like paper certificates, gift cards are readily recognized, convenient to issue, and easy for guests to redeem. Unfortunately, comp programs follow distinct financial accounting procedures. Failure to isolate comp transactions from standard gift card transactions creates a “double taxation” penalty that can overstate your sales tax and income tax burden by as much as 12%!
Comps make ideal donations for charitable events like raffles, drawings, or auctions
Discounted or budgeted meal purchases can be offered to all or key employees
Comps can be used to reward stellar guests or compensate for poor experiences
Comps are an effective tool for promoting store openings or attracting new visitors
Instead of being paid with cash, people like your plumber or electrician can be given comps
Common pains of comp programs: Fraud and Control
Comps typically represent 3-5% of total sales — a meaningful slice of your business — yet they are often not well controlled or properly processed. The main risks of poorly administered comp programs include fraud and abuse, as well as improper financial accounting.
Fraud and Abuse - No One Wants to Lose Money
Inadequate measurement and control of comp programs can result in fraudulent behavior. Paytronix customers report that one in 10 controllable comp dollars is commonly lost to fraud. Paper certificates lack inherent controls and are particularly susceptible. Fraud is not limited to paper-based systems, though. A discount button on your POS system without appropriate controls also invites overuse and abuse.
Improper Financial Accounting = Increased Tax Burden
Improper processing of comp transactions can also cause you needless financial losses. Recording the value of comp transactions requires specific accounting treatment. When mishandled, you will fall victim to the “double taxation” penalty.
Fundamentally, this taxation penalty occurs because the comp value is a restaurant expense, not revenue. When you fail to appropriately recognize this expense, you artificially inflate your revenues, overstate your net income, and thereby overstate your income and sales tax liability. This overstating is a costly and unnecessary expense.
Gift Cards, the Common Offender
This taxation penalty often arises when comp situations are handled by issuing a gift card. A gift card is the wrong device for comp transactions. Comp cards and gift cards are both valuable elements in retaining and attracting guests. But, they are distinctly different instruments.
A gift card is sold to guests, represents taxable revenue, and appears on the balance sheet as an accounting liability until redemption.
The value on a comp card is recognized as an accounting expense. A comp should appear as a discount that lowers the subtotal of a guest’s check and reduces the amount of tax associated with the transaction. The comp is given to a guest – not sold – and therefore should be reflected as a business expense, not as revenue.
Consequences of Mixing Gift and Comp Cards
Companies not working with Paytronix have sometimes had to restate earnings to correct for improper comp treatment. This is because they could not differentiate their comp and gift card balances and were forced by auditors to expense 25% of the combined outstanding balance.
Many chains try to backout the comp transactions in their general ledger, but it is difficult to differentiate these transactions and to accurately account for the amount of comps extended. For example, some companies require that receipts be mailed to corporate for processing. This is a labor-intensive process where lost and unidentified receipts understate the true comp amounts.
Plus, you cannot back out the sales tax. States generally conduct audits based on POS reports, not general ledger data. Assigning proper tax rates gets very complex when a check has different items with different tax rates and is paid with comp and other tenders.