The Green Sheet Online Edition
March 28, 2011 • Issue 11:03:02
IRS filing fees: Revenue and contractual shakeup
Remember when Payment Card Industry (PCI) Data Security Standard (DSS) fees first came on the payments scene? Get ready for another round of general confusion over a new fee for merchants in our industry: the IRS reporting fee. Every time a new fee is levied on merchants, each level of the sales stream reflects on each party's respective rights pertaining to the new fee.
The purpose of this article is to help ISOs and merchant level salespeople (MLSs) avoid frustration over fees ISOs and processors may charge merchants for preparing the forms that now must be filed pursuant to IRS Regulation 139255-08, which was developed in accordance with the Housing and Economic Recovery Act of 2008.
Should fees be charged?
It's hard to ascertain how much it will cost acquirers to calculate the annual gross processing amount for each merchant and file the appropriate information with the IRS.
That said, the cost of delivering a service is not always directly related to the price charged for the service. Consider PCI compliance, for example. In many cases, PCI-compliance service for merchants consists of merely providing them a one-time questionnaire for which an ISO or processor charges a monthly fee for the term of the merchant agreement.
Keeping that in mind, I will not hazard an opinion as to whether it is right or wise to charge merchants for filling out and filing the IRS forms. Instead, acquirers, ISOs and MLSs should decide for themselves if it makes business sense to do so.
What should be charged?
As far as I know, the acquirer and merchant filing requirement is an annual obligation. That said, expenses related to plenty of annual requirements are commonly broken down into monthly fees. I think ISOs should expect acquirers to want to charge monthly fees related to the new IRS forms. It may, however, be challenging to reconcile merchants to the notion of paying a monthly fee for an annual tax form.
That said, anything more than a fee of a few dollars per month would probably be difficult to sell to merchants. Also, the price should not be greater than similar fees charged for other services that provide more perceived value to merchants.
For example, a merchant's monthly processing statement fee, which really is a monthly deliverable to the merchant, obviously takes more effort to compile than an annual statement of gross processing. Therefore, the monthly fee, if any, for the IRS form should not be more than that charged for the merchant's monthly statement.
How should the fee be shared?
The answer to this question lies in the string of contractual relationships from the acquirer down to the individual agent. The problem is that many of those contracts do not contemplate, specifically, how new fees are to be divided between the various interested parties. Indeed, some agreements specifically exclude ISOs or MLSs from any share in new fees.
For example, if you are an MLS, and your contract says that you will earn, say, 50 percent of all fees listed on a certain Schedule A to your agreement, in all likelihood, the Schedule A does not list an IRS fee. Consequently, you may not have a legal claim to a share of any part of the IRS fee - or any other new fee for that matter.
I recommend a close reading of the schedules to your agreements well in advance of the levying of IRS fees, if any, so that all parties have a realistic expectation of their respective entitlements. In the event that a contract does not mention this point and the parties are unable to agree on how to split the new fee, I recommend sharing the fee in a manner consistent with the way in which other fees to merchants are shared under the agreement.
For example, if an MLS is earning 50 percent of all net revenue to an ISO on the MLS's merchants, it stands to reason that the MLS could be entitled to 50 percent of the ISO's net receipts from the IRS fee.
What about the long term?
While I cannot predict the future, I am inclined to believe that the popularity of charging an IRS reporting fee is likely to decline over time. At first, the temptation will be to charge a few dollars a month. Then, through ordinary competition, some ISOs might elect to absorb the fee.
In the very long run, some merchants might question why they are being asked to pay for a tax filing that is imposed on processors by law. Rather than speculate, it's probably best to simply recommend that all participants in our industry discuss with their business partners whether IRS fees will be charged, and if so, how they will be sold to merchants and how they will be shared.
What can ease frustration?
The IRS fee is an important opportunity for ISOs and MLSs to discuss their respective rights to an IRS reporting fee, as well as to other fees that may arise in the future.
Instead of reliving the surprises, disappointments and conflicts that some ISOs and agents experienced over PCI fees, there is a chance now to plan for the new IRS fees and avoid the fallout that inevitably follows unwelcome surprises.
Healthy communication now among all parties concerned will help smooth the implementation of additional merchant fees should they be deemed necessary.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at email@example.com or call him at 514-842-0886.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.