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Table of Contents

Lead Story

New payment player flexes muscle

News

Industry Update

Interchange dodges a bullet

Two more terminal types under PCI SSC umbrella

Small-business confidence rising

Contactless faring well

Terrorism funded with stolen data

Flying for wishes, Isaacman sets record

Visa Inc. interchange rates as of April 2009

Features

Data security dominates ETA Expo

Selling Prepaid

Prepaid in brief

The Fair Gift Card Act of 2009:
Good intentions, disastrous results

Brad Fauss
Springbok Services Inc.

The ISO challenge: Selling prepaid

Drilling down on the prepaid-unbanked relationship

Views

Protect merchants with the basics

Biff Matthews
CardWare International

The drive toward integrated solutions

Robbie Lopez
VeriFone

Extending security beyond assessments

Michael Petitti
Trustwave

Education

Street SmartsSM:
What does your billboard say?

Jon Perry and Vanessa Lang
888QuikRate.com

What it takes to thrive in business

Curt Hensley
CSH Consulting

PCI: Taking the proper path

Tim Cranny
Panoptic Security Inc.

Facing the elephants

Jeff Fortney
Clearent LLC

Company Profile

Merchant Cash and Capital

New Products

Private pathway for POS data

AprivaNet
Company: Apriva

Boundless processing

Whizpay
TalentBeat

Revenue streams through referrals

VendorVantage
AdvanceMe Inc.

Inspiration

Capitalizing on distractions

Miscellaneous

2009 Calendar of events

Departments

Forum

Resource Guide

Datebook

Skyscraper Ad

The Green Sheet Online Edition

May 11, 2009  •  Issue 09:05:01

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New payment player flexes muscle

The Internal Revenue Service has been sitting on the edge of the payments industry pool for decades, wading ankle deep and making small ripples. However, in July 2008, the IRS jumped in with a splash when President Bush, as part of his fiscal year 2009 budget, signed HR 3221, The American Housing Rescue and Foreclosure Prevention Act of 2008, into law.

The new law is designed in part to provide additional tax credits for first-time home buyers, finance the construction of low-income housing and broaden deductions for state and local property taxes. But a provision was added to the bill that could generate supplementary revenues of up to what the IRS estimates will be $9.5 billion over 10 years - and this time its target is electronic transactions.

"We're not under the radar anymore," said Jeff Fortney, Vice President, ISO Sales, Clearant LLC. "The Fed says that they've needed to improve our banks and financial institutions for a long time, so what better time to do it than now? And we're being singled out because we're easy. We're the homely, introverted girl at the dance that never gets anyone to dance with her. But to everyone's surprise, she's got money in her pocket."

Becoming the enemy

The law could directly impact merchant acquirers, payment processors and even ISOs that settle electronic transactions. Beginning Jan. 1, 2011, payment settlement organizations will be responsible for compiling merchant transaction reimbursement volume for submission to the IRS; they will be required to complete annual information returns for all calendar years starting with 2011.

This requirement is seen as a means to close the gap between taxes the government believes it should be collecting and what it actually receives.

HR 3221's Section VII, entitled "Revenue Provisions: Information returns for merchant payment card reimbursements," requires "institutions that make payments to merchants in settlement of payment card transactions" as well as "information returns for payments in settlement of certain third-party transactions that operate in a manner similar to card transactions to file a return" with the IRS.

Paul Martaus, President of consulting firm Martaus & Associates, sees this law as the U.S. government putting the onus on the payments industry to monitor merchants. "I believe this law makes the payments industry the merchant bank," Martaus said. "Moreover, it makes them an agent of the Fed to spy on and basically rat out the retailers."

Down the road

Fortney believes this law might be the beginning of more oversight. "If we're responsible for telling the IRS what we're paying our merchants and becoming an involuntary regulatory agency, won't this open the floodgates for other regulation?" Fortney asked.

"And what will be the penalty if the bank misquotes or the financial institution forgets to send the information on? Who is liable? Those are my concerns, and these issues have yet to be addressed."

The law, as it is now written, contains no reporting guidelines and is causing confusion, anger and trepidation among those who will be charged with addressing reporting issues - including the costs associated with it. Reporting guidelines are expected to be published by the IRS later in 2009.

Payment industry professionals - and even organizations that represent merchants and consumers - are uncertain as to how this law is going to be implemented, regulated and monitored, how settlements with alternative payment options will be addressed, and who will be the responsible reporting parties.

Under pressure

Consternation over the law's obtuse language has caused finger pointing in all directions - and blame has been laid by various parties on the Merchant Payments Coalition, the National Retail Federation, The Electronic Transactions Association, NACHA - The Electronic Payments Association, Visa Inc., MasterCard Worldwide and the American Banking Association.

But according to Rachelle Bernstein, Vice President and Tax Counsel of the NRF, it's really much simpler.

"This came from the IRS and was in President Bush's budget for two or three years," Bernstein said. "I think the impetus for this law came from the pressure that was continuously put on the Treasury and the IRS to come up with solutions for closing the tax gap. And the IRS, no matter what administration is in power, always thinks as an independent institution."

Bernstein believes that, for the IRS, the best thing it can have is better compliance through more in-depth reporting, so it is always looking for more ways to do this - hence the introduction of this provision.

"This has little or nothing to do with paying for other expenditures," Bernstein added. "In Washington, as soon as somebody comes up with a tax loophole, it gets put on every single bill going forward. And it [merchant transaction reporting] would have gotten passed on the next bill if it didn't happen on this one."

Joe Samuel, Senior Vice President, Public Policy & Community Relations, First Data Corp., believes the Bush Administration identified various segments of the merchant community it believed were underreporting taxable income.

"We saw this coming and fought the proposals for over three years," Samuel said. "We joined with the ABA and other trade associations to oppose this measure, but ultimately the government asserted that it could raise billions of dollars in additional revenue, which is the key reason it was passed by Congress and signed into law."

#h4 IRS opens to comments

The IRS' deadline for comments regarding implementation of HR 3221, The American Housing Rescue and Foreclosure Prevention Act of 2008, was Mar. 18, 2009. But according to Don Rocen, Tax Attorney for Miller & Chevalier Chartered, after the proposed regulations are published, there will be another comment period of approximately 30 days.

When the next round of comments is submitted and reviewed, financial institutions will have the opportunity to testify at an open invitation hearing in Washington, D.C., later in 2009. Rocen said final proposals regarding implementation will be made at that time unless suggested refinements are substantive enough to warrant another round of comments.

You can obtain information regarding section 6050W of the U.S. tax code and the prerequisites for implementation of HR 3221 at the following Web sites: www.irs.gov/localcontacts/index.html, www.irs.gov/irb/2009-09_IRB/ar11.html, and www.irs.gov/irb/2009-10_IRB/ar09.html.

You may also want to contact your tax attorney or Barbara Pettoni of the Office of Associate Chief Counsel, Procedure and Administration for the IRS, at 202-622-4910.

The grandest of ironies

Some industry experts expressed dismay over the government's ability to play the "good cop, bad cop" role: placating merchants and their representative organizations - then implementing laws to generate additional revenues that could adversely affect those same merchants.

John C. Nix, Senior Vice President, International Sales and Marketing for Data Delivery Services Inc., said, "One thing I find interesting is that when the government stepped in on behalf of the Wal-Mart case years ago, where they were basically attacking interchange ... you have the government, who has been on the merchants' side for years, and all of a sudden they're now getting into the tax business on transaction reporting.

"They want to lower interchange to make merchants happier, but on the flip side they're now increasing [the merchants'] tax liability and making many players in the payments industry responsible for that. The livelihood of the [payments] industry is already being threatened. Now this added burden. As you can see, it's a very strange dichotomy."

Double trouble

On Feb. 20, 2009, the IRS issued Notice 2009-19, asking for comments on future guidance concerning the rules for transaction settlement information reporting. In an April 23, 2009, "text daily" to the NRF, concerns relating to the implementation of section 6050W of the IRS tax code were submitted by several credit card companies, banks and universities.

Section 6050W requires card service providers and third-party processors to provide the IRS with information returns for any merchants with sales of more than $20,000 a year or more than 200 transactions annually. These rules pertain to credit and debit transaction processors as well as third-party payment settlement companies like PayPal Inc., which processes transactions for banks that have contracts with merchants to accept their cards.

Many of the groups that wrote to the IRS pointed out the possibility of duplication between section 6050W and other sections of the tax code. According to Darren Parslow, Visa's Head of Global Commercial Products, every payment card transaction reported under Sections 6041, 6041A and 3402 will wind up being reported a second time under 6050W as it is now written.

"Reporting under various code sections will create confusion for taxpayers who receive two returns for one transaction," Parslow said. "In those instances, there is a possibility of double withholding of up to 56 percent in a single transaction." Visa recommended the IRS change the rules to exempt reporting under the other code sections if the transaction is reported under 6050W.

Visa also urged the IRS to develop a new form to be used solely for reporting under the new tax code to reduce confusion and double reporting of income on Form 1099-MISC under tax code 6041. Furthermore, Visa asked the IRS to be lenient with the transition and penalty rules for the first year or two and requested the IRS engage in aggressive, consistent outreach to the payment settlement community.

Industry ripe for confusion

"Clearly we agree everyone needs to report all their income," Bernstein said. "What we have addressed in these comments are problems about how the system might overreport for merchants who are fairly paying their taxes, and why poor implementation could cause more audit activity. The real issue is what the best solutions are for honest merchants."

However, Melody Wigdahl, Global Merchant Sales Director at UseMyBank Services Inc., does not believe the new law is directed at "traditional" processors or financial institutions. She thinks it is meant to corral alternative payment processors that cater to the thousands of home-based Internet businesses.

"These days it is not uncommon for a small business to operate entirely through their PayPal account," Wigdahl said. "And since those funds are easily accessible with a PayPal debit card, you don't even need to transfer funds into your bank account.

"Unfortunately, there is a potential for massive amounts of double reporting of income. And it's not the processors' fault- it's more that the IRS, with this provision, doesn't really understand or take into account the business niche that companies like this service," she added.

IRS, modern day TIN man

Anne Davenport, Tax Director for North Carolina's Wake Forest University, said in her comments to the IRS that it is not possible for a financial organization's accounts payable (AP) department to get a taxpayer identification number (TIN) for a credit card vendor because the transaction is completed before it gets to them.

"When we make a payment, it goes to the bank, not to the vendor, so we have no incentive to make a credit card vendor provide a TIN," she said. "Since the vendor has already been paid, AP departments have no way to provide backup withholding if no TIN is provided. But the final responsibility should be with the gatekeeper of the money - the bank," Davenport added.

On April 3, 2007, Carla Balakgie, Executive Director of the ETA, wrote a letter to the U.S. House of Representatives Committee on Ways and Means, Subcommittee on Oversight, stating that the burden this requirement would place on the payments industry - as well as small businesses - will outweigh any benefits from information reports.

Balakgie suggested the law is "ripe for abuse" and that "it is not practical to expect the IRS to be an expert on the spending habits of individuals and businesses."

She added that while the ETA supports increased tax compliance, sending transaction reimbursement information to the IRS would be meaningful if there were no other intangibles that could affect merchant income.

But, as the ETA reported, transaction volumes can be adversely affected by cash back options on purchases, returns and chargebacks, redemption of gift cards purchased in one tax season and redeemed in another, and retained merchant fees (terminal rentals and customer services) that illustrate why a single aggregate number may provide misleading information.

The price of regulation

In the long-term, Samuel believes significant additional costs could be incurred by payment processors and merchant acquirers if they are designated as the responsible reporting parties by the IRS. "Processors generally have not tied a merchant's TIN or Social Security number with transaction data," he said.

Samuel added that merchant identification numbers were established to identify merchants and transaction data and have no relation to a particular TIN or Social Security number. Consequently, the law could result in significant additional administrative and personnel costs to match TINs with merchant locations and their transaction data.

"Additionally, the law's provision mandates acquirers and processors to impose withholding penalties of 28 percent on merchants whose TIN or SSN does not match what is on file with the IRS," Samuel said.

"This could put increased financial pressure on already struggling merchants who could face higher payment acceptance costs to offset the costs acquirers and processors will have to bear to comply with the law."

Wigdahl believes additional costs could be incurred for new reporting infrastructures but feels that those costs should be minimal. She is more anxious about her merchants.

"If there is a case of double- or overreporting, how are small businesses going to defend themselves in the case of an audit or litigation?" she asked.

"This is more troubling to me than any cost to the industry. This could truly be a nightmare for many people who may have to hire additional outside help. It is definitely a hot topic in online small business forums, and they are seriously concerned."

An easier way

Martaus believes some people ascribe to the Fed a knowledge base that is beyond its understanding. "These guys are clueless about Visa and MasterCard," he said. "They only know those are the brands. They don't know that those companies run systems, run settlements. In my estimation, they're thinking banks.

"But really, that would be the most logical way to implement this. At the end of the day, the bank gives the merchant the money, which means that the bank can monitor how much money they gave the merchant and report that.

"The merchant bank, in other words, the bank of deposit that settles the transactions, should be the reporting institution," Martaus added.

"The bank of deposit should have the TIN on file because they are the ones that have to give the merchant a Form 1099 reporting for credit card transactions associated with all transaction volumes that go out to the IRS."

Martaus said this could be done daily, weekly or monthly; additionally, every organization servicing merchants is required by law to have a TIN.

According to Martaus, this should, in theory, make for an efficient, cost-effective means of reporting merchant transaction volume to the IRS. "But I am giving you my interpretation of the easiest way to do it," he said.

"No one knows what will happen in the implementation phase of the law right now. However, with the government, nothing is ever straightforward; they could break the moving parts of an anvil."

So stay tuned, payment professionals. The IRS is no longer an unseen menace lurking in dark waters. It is visible just below the surface. Regardless of how implementation is finalized, payment professionals have work to do. And no matter what guidelines are enforced, we're all likely to get splashed.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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