[Editor’s note: Welcome to the Underground Economy series, which delves into the business of illicit, under-the-table, or otherwise accepted-but-not-quite industries. The previous installment explored the world of migrant workers in the U.S.–check it out here. Today’s installment deals with the street vendor industry!]
By some estimates, the underground economy accounts for about 12% of the nation’s real gross domestic product. Unclaimed income from various sources is included in this figure. For example, income from sex workers, undocumented immigrants, and cash-based businesses account for major players. Interestingly, street vendors comprise a portion of this group since many operate predominantly in cash exchanges. But actual figures are hard to come by when it comes to street vendors and the underground economy. And given other hurdles that they just face, the actual portion of their income that goes unclaimed may be small. Regardless, it’s worth exploring this sector in gauging the potential link between street vendors and the underground economy.
Naturally, street vendors vary in terms of the products they sell. In today’s urban environments, street fairs, arts and craft shows, and farmer’s markets are abundant. Likewise, the rise in food vendors and food trucks have further contributed to an increase in the total population. As such, different street vendors operate in cash to varying degrees. Digital transactions are also notably more mobile, which has reduced the overall number of cash-based businesses. These developments as well as IRS practices may mean street vendors and the underground economy aren’t as connected as previously. This doesn’t mean that cash received is universally claimed. But it does suggest the economic impact may not be that profound.
A Snapshot of the Urban Street Vendor
Anyone who has been to a major city has likely encountered street vendors of some type. Many sell various wares like art, jewelry and souvenirs. Others comprise the vast array of street food vendors. Thus, it’s a bit difficult to paint a uniform picture of the typical street vendor. However, as a general rule, many are immigrants, and most earn a meager income. The average earnings of street vendors tend to be between $30,000 to $40,000 annually. Of course, some make less, and others make more. But based on their general income level, it might seem reasonable to link street vendors and the underground economy. This is particularly true for those primarily running cash-based businesses.
Certainly, there are incentives to pocket some cash and decide not to report all of one’s cash income. However, street vendors have much more to worry about than their take-home earnings. In most major cities, legal rules and restrictions are significant, and police actively enforce them. In New York City, there are over 12,000 street vendors, yet only 6,000 permits are issued by the city. That means many operate under the threat of police fines and confiscation of their goods. Even those with permits must abide by various regulations that dictate stand placement, size and more. And given that many are immigrants, fines that require in-court appearance may also pose risks related to immigrant documentation. Given this, skimming off the top of their cash-based businesses adds to the existing pressures most are under. Thus, street vendors and the underground economy may not be as significant as expected.
IRS Oversight and Threats
Like many cash-businesses, street vendors can be difficult to track in terms of their actual revenues. After all, who’s going to know if some is set aside and not claimed? When it comes to street vendors, however, this is not as easy as it seems for a few reasons. Knowing that this risk is substantial, the IRS has some specific strategies to keep street vendors honest. The most obvious one is bank deposit analyses, which compares deposits and income statements with actual reporting. The IRS also looks at imbalances between incomes reported and living expenses. These types of mismatches trigger audits, and the threat of these audits deter tax fraud to a significant extent. This is one strategy that reduces street vendors and the underground economy in total.
Naturally, many street vendors don’t receive 1099 income statements. Likewise, the IRS will only detect bank deposit mismatches if an audit is actually performed. But the IRS has other ways to screen street vendors in cash-based businesses for tax fraud. A major one involves business financial ratios, which has set norms for specific street vendor businesses. If income claims fall short of these norms, the IRS become suspicious. In addition, the IRS also is cracking down on digital cash payments like Cashapp and Venmo. Beginning in the 2023 tax year, Venmo and Cashapp will be required to report payments that exceed $600 during the year. These approaches are additional reasons why the association of street vendors and the underground economy is limited.
Economic Oversight or Support?
This is not to imply that there is not a connection between street vendors and the underground economy. Some may only be involved in traditional cash-based businesses, only receiving cash payments. In these instances, they may fail to report any income or even file if they are an undocumented immigrant. However, the percentage of these types of street vendors is small. Consumers are increasingly used to paying with debit and with credit cards, even at street fairs and food stands. Refusing to accept such payments can significantly reduce one’s opportunities for success. And once such payments are accepted, the IRS has a way to track income more reliably. This is the inherent oversight that exists governing street vendors and the underground economy.
The bigger issue when it comes to street vendors and the underground economy isn’t really one of oversight. It’s actually one of limited support. Many cities impose such harsh regulations over street vendors that it makes it hard to thrive. Rather than treating street vendors as small businesses, which they are, they are often targeted as a nuisance. Unfortunately, this approach undercuts their income and ability to make a living. And these are the types of pressure that encourage those in cash-based businesses to under-report earnings.
By changing policies that better support these small businesses, proactive measures can be pursued for better results. The bottom line is that street vendors comprise a small part of the underground economy. And instead of seeing them as part of the economic problem, they should be seen as a bigger piece of the solution.