Protecting the Consumer and the Taxpayer CHAPTER THIRTY-FIVE

Protecting the Consumer and the Taxpayer

CHAPTERTHIRTY-FIVE

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The Need for Consumer Protection

• A consumer purchases goods and services for personal use (not for business use).

• Goods and services have become more complex, and consumers need help to make informed choices.

• Consumer protection includes:– Laws to prohibit unfair competition

– Laws that set minimum standards of quality

– Laws that ensure weights and measurements are accurate and that a process to resolve wrongs done to a consumer exists


Regulation ofBusiness Practices

• Both federal and state governments have passed laws that prevent false and misleading advertising.

• At the federal level, the Federal Trade Commission (FTC) is charged with enforcing rules against false and misleading advertising.

• The FTC determines what trade practices are unfair, misleading, or harmful to the consumer. – The FTC can order the company to stop the offending

practice, and

– The FTC can sue for damages and request refunds for consumers.


Regulation of Business Practices (continued)

• False advertising: – Lies to the consumer about product characteristics

– Fails to include information that the consumer needs to know to make an informed choice.

• Misleading advertising: – Bait and switch is a form of misleading advertising.

– In bait and switch advertising, a retailer offers a low -price product in an advertisement, but when the customer comes to the store, no low price product is available, and the sales staff seeks to sell a higher-priced version of the product advertised.


Regulation ofBusiness Practices (continued)

• It is misleading to consumers to:– Advertise sale items that are not in stock or that

are not available in sufficient quantities to meet consumer demand.

• States do allow the business to qualify the sale to limited quantities by using terms such as “while supplies last” or “six per store.”

– Generally, if a store runs out of a sale item the customer must be given a “rain check.”

• A “rain check” is a certificate or coupon that allows the customer to obtain the product at the sale price at a later date.



• One type of ad that borders on illegal but is not is called “puffing.”– The merchandise being offered for sale is often

listed as the “World’s Best” or “Nature’s Finest.”

– These statements are merely statements of opinion and not statements of fact.

– As such these types of advertisements are legal.


• Right to fair pricing: – Activities of business can lead to unfair pricing of

products.

– Price fixing is where a number of businesses come together to charge similar prices for similar products.

• This practice minimizes competition and creates artificially high prices for goods.

• Consumers are hurt by paying higher prices for goods or services.



• Loss leaders: an item sold below cost

• A loss leader entices a consumer to go to that store to purchase products.– Other goods are then sold at inflated prices.

• Loss leaders can also be used to damage competitors.– The loss leader is run by a store long enough to drive

competitors out of business, because the competitors cannot afford to compete at the reduced prices.

– With the competitors gone, the remaining store can charge whatever price it likes.



• Price misrepresentation: when retailers put inflated prices on goods, then offer the item at a so-called discount. – Often the “discount price” is higher than the price

offered by other stores.

– The Automobile Information Disclosure Act requires disclosure of the true list price of automobiles and what that price includes.



The Right to RefuseUnordered Goods

• Sending a consumer unordered goods is an unfair practice.– Goods arrive by mail with a notice that tells the

consumer either to send back the goods or to keep and pay for the goods.

– No responsibility to the sender. Generally, if a person receives unordered goods they may keep the goods or throw them away with

• This is not true if the person has an agreement with the sender such as a book or a record club.


The Right to CancelCertain Contracts

• To protect consumers, the law allows the consumer to cancel certain contracts.– The Truth in Lending Act and Federal Trade

Commission regulations permit cancellation when:• A contract for a credit purchase involves using the

consumer’s principal residence as security for the loan – Cancellation of a mortgage to purchase a home is usually

not permitted.

• Sales are made door-to-door or away from the seller’s place of business. The consumer has three days to cancel.


The Right to CancelCertain Contracts (continued)

– In each situation, the lender or the seller is required to give the consumer a Notice of Cancellation form.

– Failure to give the Notice of Cancellation form to the consumer may extend the time available for the consumer to cancel the contract.


The Right to UnderstandWritten Contracts

• Several states and congress have passed laws requiring that contracts be written in “plain English.”– The law applies to consumer contracts involving:

• Money,

• Goods, or

• Services valued at less than a set amount.

• The law requires contracts to be written in clear language using words with common and everyday meanings.


Truth in Savings Accounts

• The Truth in Savings Act requires banks and other institutions:– To provide clear and uniform disclosure of:

• Rates of interest paid on deposits

• Fees that may be charged against such accounts

– To pay interest based upon the daily balance in such accounts rather than the balance at the end of the month


The Right toSafe Merchandise

• The Food and Drug Administration (FDA) sets standards for the preparation, manufacture, label, and sale of:– Foods,

– Drugs, and

– Cosmetics.

• The FDA:– Tests new drugs before they can be sold to the public

– Examines advertising and labels to ensure the public is properly informed


The Right toSafe Merchandise (continued)

• The Consumer Product Safety Commission (CPSC) has primary responsibility for product safety. The CPSC:– Sets standards for most hazardous products,

including poisons and flammable fabrics

– Conducts research into product safety

– Sets standards of product safety

– Provides information to consumers on product safety


• The Consumer Product Safety Commission (CPSC) has primary responsibility for product safety. The CPSC (continued):– May ban from the market products that present

the danger of death or injury to consumers

– Can require labels on products to warn consumers of potential product dangers

– Can require manufacturers to recall hazardous items and correct the problem

The Right toSafe Merchandise (continued)


The Right to Proper Labelingand Packaging

• Federal law requires that manufacturers give consumers correct information about their products.

– Information required to be provided to consumers includes:

• The nature of the product, including information on product ingredients for health reasons

• The quality of the product, including date to indicate product freshness

• The quantity of the product, to allow the consumer to compare prices

• The price of the product

• The manufacturer of the product


The Right to Proper Labelingand Packaging (continued)

• Congress has addressed specific labeling issues over the years to protect the public.– Cigarette and small cigar manufacturers have to put labels

on their products warning of the dangers of these products.

– Manufacturers of products that can harm young children are required to put them in “child proof” containers.

– Wool products’ labeling must indicate the country in which the wool was processed.

– Fur labeling is required to state whether the fur has been dyed and use the English name of the animal from which it was taken.

– Textile fibers must include mandatory content disclosure labels.


The Right to PurchaseQuality Vehicles

• Due to the expense of an automobile and its necessity for many people in their daily lives, many states have enacted “lemon laws.”

• Lemon laws vary from state to state but basically include the following:

– When a purchaser informs a dealer of certain defects within a certain time, the dealer must have a reasonable opportunity to repair those defects.

• If the car cannot be repaired after a certain number of attempts or the car has been in the shop a certain number of days, the owner is entitled to a refund or a new car.


The Right to PurchaseQuality Vehicles (continued)

• Lemon laws often require that the purchaser of the car and the dealer submit to non-binding arbitration to resolve the problem.

• Some states and the FTC have laws that apply to the sale of used cars. – The rights and responsibilities are similar to those for a new

car, but there is a limited time period to raise claims.

– For used cars, the lemon laws apply only to sales of used cars by dealers.

• The rules do not apply to the sale of used cars between individuals.


Remedies for Violation of Consumer Protection Laws

• Government agencies are primarily responsible for enforcing consumer protection laws.

• Sometimes a consumer may sue on his or her own behalf

• He or she may also participate in a class-action suit – This is a suit where injured consumers join together to

pursue a lawsuit against a manufacturer.

– A class action suit allows those with a claim too small to pursue individually to seek relief with a group of similarly affected individuals.


Overbooking Flights

• Airlines overbook flights, which means that a person with a reservation may be denied a seat on the plane.

– Usually, the airline will seek volunteers to give up seats for compensation.

– If no one volunteers, some passengers will not be allowed to board.

– In that situation the airline must provide compensation or free air travel unless:

• A flight is available that will put the passenger at his or her destination within an hour of the original flight time.

• The flight is cancelled due to weather, safety, or operational reasons.


Flight Delays

• When traveling by air you have entered into a contract for transportation.

• Most air travel contracts have no specific benefits if a flight is delayed. – Usually if the language is in the contract it will say

something to effect of “The airline is not responsible for delays or failure to make connections or operate any flight according to schedule.”

• Some airlines per airline policy will provide a phone call, meal or hotel if the flight is delayed for a significant period of time.


Lost, Delayed, or Damaged Baggage

• For travel within the United States airlines typically limit their liability for lost or damaged luggage to $2,500 per passenger.

• International Flight Responsibility – Death or injury of passenger is limited to $75,000

– Liability for lost or damaged luggage is limited to approximately $9.07 per pound of checked baggage.

• To take advantage of this protection the weight of the luggage must be noted on the airline ticket.


Liability on International Flights

• Warsaw Act– Liability for death or personal injury

– Liability for lost luggage


Rights of a Taxpayer

• IRS terms – the taxpayer has the right to be treated fairly, professionally, courteously, and promptly

• Publication 1

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Protecting the Consumer and the Taxpayer CHAPTER THIRTY-FIVE