HR 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008, was signed into law by President Bush on July 29, 2008. The new law contains a provision requiring merchant acquiring entities and third-party settlement organizations to turn over merchant credit and debit card transactions to the Internal Revenue Service. It will take effect Dec. 31, 2010.
The major outline of the provision compels acquirers to report to the IRS the aggregate dollar amounts of credit and debit card transactions for each merchant who has more than $20,000 in transactions and more than 200 transactions per year. Add-itionally, reports must be filed using the merchants' taxpayer identification number (TIN).
Reportedly, this 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 them would pass.
The Electronic Transactions Association actively opposed reporting merchant transaction data to the IRS and joined other groups to enlighten Congress about the problems such a provision would create.
"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 grass-roots 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 bipartisan support, there was simply too much momentum behind it to stop it from being passed.
Now that the law has passed, it will be assigned to the U.S. Department of the Treasury (the parent organization of the IRS) for implementation. According to an industry insider, the Treasury Department will decide the actual reporting mechanism insofar as when to file the reports, how they will be reported and how often; moreover, it will meet with industry experts to determine the best way to structure the regulations.
Once the Treasury Department suggests implementation of regulations that make sense in terms of IRS parameters, it will issue what is known as a Notice of Proposed Rule. This notice, said the insider, is a first draft of the regulations submitted for public comment, typically available for only 60 days. At that time, comments and suggestions about rules, deadlines, or expenses are encouraged.
After the proposed rule notice comes out and the Treasury Department closes the public comment window, the ETA plans to publish a copy of the rules and solicit comments from acquirers, processors and ISOs about the adverse effects of these proposed rules on the payments industry. Treasury will then make a final ruling based on those suggestions and apprehensions.
Reportedly, a congressman once said businesses don't pay taxes, consumers do. However, directly after it takes effect in 2010, the acquiring banks will incur the initial expenses.
According to the insider, part of that expense is that IRS reports must now be filed by the TIN, something ISOs don't presently do. Now ISOs will have to get the TIN information, install the programming to go through these transactions, figure out which transaction is from which merchant, match that up to the merchants' TIN, then aggregate it that way.
The insider said matching transactions to TINs will create problems for ISOs. It will be an expensive undertaking to figure out how to secure data and sequester it in a way that doesn't increase the vulnerability of that data. In addition, the law requires that some mechanism must be developed and installed to prevent transactions from being counted twice.
This provision was devised for cases in which a payment is split by the processor. ISOs will now have to go back through transaction streams and identify all transactions, match them with the merchant's TIN, and ensure it doesn't get double counted.
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 ETA thinks it is unlikely any real movement on the law and the Treasury Department's rules implementation of HR 3221 will happen until 2009 - under a new presidential administration and Treasury Secretary.
The ETA's main objective and the Notice of Proposed Rule submission is to get the word out to the payment professionals' community and encourage them to voice their concerns.
"The passage of the law and the signing of it by President Bush is not what we wanted to see and was not the outcome we were after," said Thomas Goldsmith, Director of Communications and Public Relations for the ETA.
"This is an opportunity for the ETA to play a role in mitigating at least some of the effects of this legislation.
"By working with the Treasury Department to make sure that the regulations they draft at least minimize the burden on the acquiring industry.
"We plan to play an active role in that regulatory progress and we will keep our members informed of progress on the regulations and alert them to participate in the process when it's appropriate."
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