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What Are Cash Discounts Rules And Regulations?

What Are Cash Discount Rules And Regulations?

In the world of ecommerce and business, cash discounts are very common but a lot of new businesses are not aware of what rules and regulations they need to follow in order to offer them to customers. 

So, what cash discount rules and regulations do you need to know? 

Here, we are going to be diving into this very topic. Check out the information below to work out whether or not cash discounts is something your business should consider trying out! 

What Are Cash Discounts?

First, let’s take a look at what cash discounts are so we are all on the same page. 

Cash discounts are basically a type of incentive businesses and sellers use to encourage buyers to pay for their products in a certain way. For ecommerce businesses, they are most likely to be seen as a form of early payment discounts to entice customers to pay off their bills in full early on in return for a lower price. 

However, there is another type of cash discount that is more literal. It is an enticement to encourage customers to pay in cash instead of using credit or debit cards. This is so businesses can save on administrative costs and paying service charges, and in return, customers who pay using cash are offered a lower price.

Both types of cash discounts are popular and used across the United States, but what kind of regulations are in place? What rules do businesses need to follow when implementing cash discounts? 

Cash Discount Rules And Regulations

Overall, there are not a lot of rules or regulations in place when it comes to cash discounts. This means that in general, businesses are pretty free to add cash discounts if they see fit. You don’t need a specific license or be a certain type of business to offer cash discounts.

This means that no matter what kind of business you run, you can offer cash discounts to your customers.

This is all thanks to the Durbin Amendment of 2010. 

This law is what first permitted businesses to offer discounts to customers as a way to encourage them to pay using alternative payment methods to credit and debit cards. This includes checks but is most commonly associated with cash, hence why the discounts businesses began to implement were known as ‘cash’ discounts. 

However, there is some wording to the law which businesses need to be aware of. 

Cash Discounts Must Be Applied Immediately

The law specifically states that the discount must be applied automatically at the time of sale. So, no offering customers the discount through later reimbursements or store credit – if you want to offer a cash discount to customers who pay their bills in cash over card, then the discount must be applied to the bill immediately.

Cash Discounts Must Be Visible On The Receipt

Not only that but the discounted amount and base fee must be present on the customer’s receipt at the end of the transaction. This is so the customer has clear evidence of the discount they received, and the business has evidence that it applied the discount correctly to the customer’s transaction. 

This, however, is a pretty basic rule that applies to all kinds of discounts, including cash discounts. 

Cash Discounts Must Be Clearly Signed To Customers

If a store wants to offer its customers a cash discount for paying with cash instead of a credit or debit card, then there needs to be clear signage displayed in the store to make it clear to customers that this offer is available. 

According to law, there needs to be clear signage both at the entry point of the business and at the point of sale (the check-out). This is so customers can clearly see that there is a discount offered to those who pay in cash, and they have all options open to them in a fair manner.

Some stores even go as far as offering a dual pricing model on their products, displaying both cash prices and credit/debit card prices. 

If your business is online, this also needs to be the case. Some businesses which sell their products locally sometimes offer discounts to customers who pay cash when the product is delivered – but clear ‘signage’ still needs to be available at the point of sale on the website.

Of course, most ecommerce businesses cannot offer this kind of cash discount due to limitations regarding location and delivery – but there is another type of cash discount ecommerces can offer. 

Cash Discounts Change The VAT 

Ecommerce businesses sometimes offer a cash discount whenever an invoice is paid within a specific time frame as an incentive to get the buyer to pay their bill sooner. However, a lot of businesses tend to forget that a cash discount affects the VAT that is charged. 

When invoicing a customer, the VAT needs to be calculated from the discounted amount – not the original base price. If you calculate the VAT from the base price instead, then you are overcharging your customers.

This is an honest mistake a lot of new businesses can make – so make sure that you do the math correctly and calculate the VAT from the discounted price of the goods, not its base price. 

This rule also applies to traditional traders and businesses as well as ecommerce businesses.

For more detailed resources on all things credit card processing, go to our payments content hub

Frequently Asked Questions

Where Is Cash Discount Legal?

Cash discounts are legal throughout the entire United States. All states allow for businesses to offer cash discounts to their customers.

What Are The Disadvantages Of Cash Discounts?

Credit or debit cards are a lot more convenient for your customers, and you can risk angering some by offering more affordable prices to certain customers and not others. Plus, there is a larger security risk with handling cash.

Are Cash Discounts Taxable?

No, they are generally discounted from the taxable sales price. See above for more information relating to cash discounts and VAT.