The Green Sheet Online Edition
April 12, 2010 • Issue 10:04:01
Acquirers await final draft of IRS rules
The payments industry is in a holding pattern while awaiting a final version of new rules from the Internal Revenue Service governing reporting requirements.
Most provisions of the rules, which would require payment processors and third-party networks to report annually the total dollar amount of card-based sales transacted by individual merchants, are expected to take effect Jan. 1, 2011. (See "Uncle Sam's finger in the payment pie," The Green Sheet, Dec. 14, 2009, issue 09:12:01.)
Meanwhile, the payments industry has weighed in on problems posed by the proposed rules.
The IRS, which posted the rules at www.irs.gov/pub/irs-news/reg-139255-08.pdf, invited public comment on them until Jan. 25, 2010, and then held an open hearing Feb. 10. The agency did not respond to requests for information on the comments and the hearing.
The IRS has not given the Electronic Transactions Association any indication of when the rule language will be finalized, said Mary Bennett, Government Relations Director for the ETA.
The reporting buck stops where?
The rules would require that "gross amounts" processed be broken down into monthly totals, which creates a gray area around how to account for chargebacks and refunds.
The ETA especially wants clarification from the IRS on who has ultimate responsibility for reporting the numbers to the government. Merchant banks, ISOs and processors, any of which could be considered responsible, are all involved in the process, Bennett said.
"I believe the IRS would say the merchant's bank has the ultimate responsibility for reporting, because they have the means ... and the funds," she said. "But on a day-to-day basis, the bank may not know as much as the processor about the sales as they are happening."
Bennett said the ETA's tax working group met recently with the IRS in the hopes of clarifying who would be responsible for reporting card payment totals, or gross amounts.
First Data Corp. confirmed that a representative of the company had attended a March 15 meeting with the IRS, along with representatives from Visa Inc., American Express Co., Elavon Inc. and Data Delivery Services Inc.
"While members of the IRS panel asked a few questions during the public testimony, they did not provide much feedback about whether or not they plan to make any changes to the proposed regulations," Cara Crifasi, First Data's Director of Communications, said in an e-mail.
The purpose of the meeting was to present public commentary on the proposed regulations, Crifasi stated.
Not a pretty global picture
The ETA's biggest concern, however, is the impact the rules will have on processors' international competitiveness.
The rules will require acquirers to obtain W-8 forms from foreign companies to verify they are based outside the United States, Bennett said.
These forms, which she described as comparable to articles of incorporation, would be mandatory before acquirers could sign new foreign clients.
"That would be a tremendous competitive disadvantage for all U.S. processors," Bennett said. "And that's a huge barrier" to signing new clients abroad.
It would also make life difficult for U.S. processors that already have a large constituency of foreign clients for whom they process cards. The forms would be required of current clients as well.
Foreign merchant acquirers would not be required to report to the IRS the payments made to merchants that do not have U.S. addresses as long as the acquirer has no reason to believe the merchant is a U.S. resident, according to the ETA's comments to the IRS.
The ETA asked the IRS to make its documentation requirements uniform for all merchant acquirers - foreign and domestic - to level the playing field.
The ETA went further, suggesting that all acquirers be permitted to "presume that the merchant is foreign without the need to obtain additional documentation substantiating foreign status.
Any other rule would create an unintended loophole in the law with the strong likelihood that U.S. merchants will flee U.S. acquirers for foreign ones in order to avoid this new burdensome reporting and backup withholding regime," the ETA said in a comment to the IRS.
The American Bankers Association agreed that the tax documentation requirement would prove "burdensome," according to its comments submitted to the IRS Jan. 25.
The ABA stated that it believes the new rules misinterpret Congress' intent regarding the exclusion for foreign addresses.
Requiring only U.S.-based processors to obtain such documentation from foreign merchants would impose big administrative burdens on U.S. merchant acquirers, "especially those that are primarily in the business of foreign merchant acquisition, by requiring that they obtain, retain and renew valid Forms W-8 from thousands of foreign merchants for whom there is no indication whatsoever of U.S. status."
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.