By Rob Drozdowski
Electronic Transactions Association
With the first session of the 110th Congress nearly complete, prospects for legislation impacting the merchant acquiring industry remain uncertain. Congress returned after Thanksgiving for an abbreviated session to focus on completing major spending and tax bills before the December holiday break.
When members return in January, they will do so in the context of a struggling economy, an unpopular war, a mortgage market facing its biggest challenges since the savings and loan crises, and a presidential election. And while much of the buzz has been around legislation that might create new costs and compliance burdens for the acquiring industry, there are some proposals that would provide welcome relief and clarity to our industry.
Here is a look at some of the federal legislation the Electronic Transactions Association is watching closely and the prospects for its enactment over the next 12 to 14 months.
Congress is considering a proposal to require merchant acquiring banks to report the value of aggregate credit and debit card sales to the Internal Revenue Service.
The proposal has been included in the past two Bush Administration budget plans. Aimed at reducing the tax gap (the estimated more than $200 billion difference between what taxpayers should pay and what they actually pay in federal taxes), it is estimated to bring in more than $10 billion over the next decade. Because of the extensive audit trail produced by electronic payments, the IRS believes this proposal could address suspected underreporting of total sales revenue by providing information that could be used to estimate expected cash transactions.
Businesses found to have a larger than expected cash/card payments ratio might be subject to closer scrutiny by the IRS. This could include audits, information requests and so forth.
While no legislative language has been proposed, it is clear there is significant Congressional interest in this proposal. With lawmakers facing massive budget shortfalls on every spending measure, a proposal that raises $10 billion in revenue without increasing taxes is very attractive.
Through the efforts of the ETA and others in the financial services industry, the key decision-makers on the House Committee on Ways & Means and the Senate Finance Committee are beginning to understand the challenges involved in creating a workable solution.
It now appears that the proposal will not be considered this year. However, the U.S. Government Accounting Office, at the request of those committees, is conducting a study on this and other proposals focused on reducing the tax gap. It can be expected that the issue will return again next year with even greater specificity.
While the ETA believes the proposal, if enacted, would provide misleading information to the IRS and create a costly new reporting requirement that could increase consumer prices; the industry may be faced next year with the prospect of considering criteria that would make the proposal more workable (no withholding, adequate implementation time and so forth, for example).
With several House and Senate committees considering data security/breach notification legislation and no progress being made to reconcile the various bills and committee jurisdictions, prospects for a comprehensive, preemptive data security law during this Congress are dim to nonexistent.
Moreover, there is a real concern that any data security legislation with a prospect for passage at this time - while well intentioned - may not be fully preemptive and could be inundated with provisions that would have unintended consequences for the industry.
Therefore, the legal framework for data security and breach notification is likely to be governed by the more than 30 inconsistent state laws for the foreseeable future. This may be preferable to an overreaching federal law. As the old idiom goes: better the devil you know, than the devil you don't.
On Nov. 15, 2007, The Senate Committee on the Judiciary approved more narrowly focused legislation to increase the penalties on identity theft. The Identity Theft Enforcement and Restitution Act (SB 2168) was then passed by the Senate on Nov. 15 and must be considered by the House before it can be passed into law.
It has bipartisan support of lawmakers and the backing of several consumer and business advocacy groups. The act would allow identity theft victims to seek restitution for remedying the harm they suffered from those who committed the crime and allow prosecution under Federal identity theft laws of criminals who impersonate businesses in order to steal sensitive personal data.
Under current law, such impersonation is prosecutable only if perpetrated against an individual. The act would also make it a felony to employ spyware or keyloggers (software that captures computer users' keystrokes). This new law could provide lawmakers with an attractive alternative to demonstrate that they are doing something about identity theft.
With a number of frivolous class action lawsuits targeting the confusion over the printed receipt requirements of the Fair and Accurate Credit Transactions Act (FACTA), Rep. Tim Mahoney, D-Fla., introduced the Credit Card and Debit Card Receipt Clarification Act of 2007 (HR 4008), which would clarify that any merchant who complied with the truncation requirement for credit card numbers on a receipt but left on the expiration date would effectively not be in violation of FACTA.
The penalties associated with violating this provision can be massive and include up to $1,000 per transaction, along with punitive damages and attorney's fees. As such, the issue has attracted predatory litigation, even though there has been no demonstrated harm to consumers. Moreover, many ISOs are finding their merchants being targeted by unscrupulous competitors seeking to leverage confusion over the requirements to make a quick sale.
The legislation has received some bipartisan support on Capitol Hill and is supported by many industry groups. However, passage appears unlikely at this time.
While the proposal would be welcome relief for the industry, the process is complicated by the fact that it involves amending FACTA, which was enacted in 2003 to update the Fair Credit Reporting Act after a lengthy legislative process that left few involved satisfied.
In fact, regulators are just now, after four years, issuing the last of the key implementing regulations, and there appears to be little interest in reopening FACTA at this time, as many other changes would be offered up as amendments.
Moreover, the legislation received what is known as a "sequential referral" in the House, which means the bill would impact the jurisdiction of multiple committees which can be difficult to pass as it must be considered by each committee.
As part of broader reform of credit/debit card disclosure requirements and card issuer practices, the House Financial Services Committee is considering legislation to require consumers to be notified prior to an electronic funds transaction that would overdraw an account.
The Consumer Overdraft Protection Fair Practices Act (HR 946) would prohibit issuing banks from charging an overdraft protection fee in connection with any payment initiated by a debit card at a POS terminal.
In the event it is "not feasible" to provide an overdraft notice at the POS, the issuing bank "may not charge an overdraft protection fee" in connection with such payment.
It is possible some type of credit and debit card reform could pass next year; however, the focus of this legislative effort should be on the issuing bank.
The acquiring industry can expect legislators and regulators (the FDIC is leading a study on overdraft incidents) to challenge the industry to provide consumers with more real-time information at the POS, especially in connection with debit card related transactions.
Among the other issues the ETA is keeping close watch on that do not appear ready for serious consideration by Congress are attempts to reform the patent law system and the criteria used to determine whether an individual is classified as a contractor or an employee for federal tax purposes.
The issue of employee versus contractor classification is of particular concern to the ISO and merchant level salesperson community, which is dominated by independent contractor relationships.
However, the recently introduced Independent Contractor Proper Classification Act (SB 2044) appears to be more of warning shot to the business community from presidential candidates Sens. Barack Obama, D-Ill., and Hillary Clinton, D-N.Y., asserting that they would seek to close perceived tax loopholes instead of raise taxes and fight for worker benefits.
In the coming months, the ETA looks forward to sharing with readers of The Green Sheet some of the issues we believe may impact our industry. We invite you to become engaged in the political process to help shape the future.
Rob Drozdowski is a Senior Director with the Electronic Transaction Association in Washington, D.C., responsible for government affairs and external relations. He was formally Vice President of Payments & Technology Policy with America's Community Bankers and served on the staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs. Contact him at 202-828-2635, ext. 203 or rob.drozdowski@electran.org.
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