Wednesday, July 30, 2008
For the better part of two years, the Electronic Transactions Association has fought to defeat HR 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008. HR 3221 contains a provision requiring merchant credit and debit card transaction information to be turned over to the Internal Revenue Service, thus allowing the IRS to extrapolate total cash volume receipts to determine if merchants underreported their income.
However, on July 24, 2008, the United States House of Representatives passed HR 3221 by a vote of 272 to 152.
Reportedly, this same provision was incorporated into three other bills unrelated to the payments industry and touted as a way to pay for the bills – including the 2008 Farm Bill (Public Law Version 6124), the 2007 Energy Bill (HR 6) and the Joint Economic Committee's 2001 Alternative Minimum Tax for Individuals – in the hopes that one of the bills will pass.
According to a spokesperson for the ETA, the U.S. Senate closed debate on the bill this week as well and will present the bill for a vote, possibly before the end of July 2008. If the Senate passes the bill and the President signs it into law, it will take effect at midnight on Dec. 31, 2010. The President indicated he will sign HR 3221 into law if it is approved by Congress.
The section of HR 3221 relating to the payments industry would require merchant acquiring entities (acquiring banks, processors and ISOs) and third-party settlement organizations (an online payment service like PayPal, a wholly-owned subsidiary of eBay Inc.) to report the name, address, taxpayer identification number (TIN), and gross amount of reportable payment transactions of each payee once a year to the IRS.
In other words, the acquiring companies would have to take their transaction stream and keep a record of how much of that was cash income for each merchant – and report that information to the IRS. In proposals submitted to the Congressional Budget Office in 2006, 2007 and 2008, the IRS projected a significant underreporting of income on the part of merchants.
"ETA recognized that this proposal would create serious problems for the acquiring industry as soon as we became aware of it, and we monitored its status, knowing that eventually it might show up as an offset in a spending bill," said Carla Balakgie, Chief Executive Officer of the ETA.
"When it started to get traction in late spring, the ETA joined with several other organizations, including the American Banking Association, The Financial Services Roundtable and the U.S. Chamber of Commerce, to oppose it."
ETA submitted testimony to the House Small Business Committee, conducted several meetings with congressional staff and even delivered letters – signed by more than 50 ETA member companies – to members of Congress. Additionally, 1,200 individual letters were sent to Congress by individuals using grassroots tools on the ETA Web site.
Balakgie added that ETA members are disappointed the merchant card information reporting requirement made it into the housing bill, but because it is so high profile and had so much bi-partisan support, there was simply too much momentum behind it to stop it from being passed.
Ultimately, acquirers and ISOs will incur any additional costs if HR 3221 becomes law. The processors and the acquiring banks already have the merchant account data, but reports to the IRS must include the TIN. However, acquirers normally don't have TINs for their merchants, which means they're going to have to retool their software and their operations to generate and segregate the TINs.
Subsequently, ISOs and acquirers may have to absorb all the costs associated with collection, processing, storage and security of very sensitive merchant account data.
These additional costs, according to the ETA, will ultimately be passed to each successive link in the payment transactions chain. The processors and acquiring banks will pass their costs to their ISOs, who will pass the additional costs to the merchants, and from there to consumers.
"The next step," said an ETA spokesman, "is that we're going to have to start watching the IRS because they're going to put these things out for public comment and say how they want this to work. This means that the ETA, its members and other people in the industry are certainly going to have to weigh in and try to – at least on some level – to soften the impact [on our industry] as much as we can."
Editor's Note: On July 26, 2008, the Senate convened for a rare Saturday session and approved the bill by a 72 to 13 vote. HR 3221 now goes to President Bush, who is expected to sign it as early as this week.
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