Critics Decry a Costly Merchant-Reporting Rule, But It’s Now the Law

A revenue-generating proposal that would force merchant acquirers to report their clients' card-based sales to the Internal Revenue Service was signed into law Wednesday by President Bush. The provision, which critics say will impose a costly burden on the entire acquiring business at a time when the industry is under pressure to cut transaction costs, was part of the American Housing Rescue and Foreclosure Prevention Act of 2008. The merchant-reporting requirement, which takes effect Dec. 31, 2010, is included as a revenue-offset in the housing bill, which provides assistance for financially strapped homeowners and a potential bail-out for mortgage giants Fannie Mae and Freddie Mac. The measure's backers say it will generate $9.8 billion in revenue over 10 years. Under the merchant-reporting requirement, any organization that processes credit or debit cards or third-party network transactions must report to the Internal Revenue Service the total number of credit and debit card transactions for each merchant that has more than $20,000 in transaction volume and more than 200 transactions per year. Reporting will be done by taxpayer identification number (TIN). Reportable transactions include any payment card transaction, regardless of whether the card is physically present, and any third-party network transactions, including automated clearing house, PayPal, and Google Checkout transactions. The merchant-reporting requirement has been criticized by everyone from privacy advocates to small businesses and merchant processors worried about implementation costs and penalties for mistakes. “It's going to cost the industry upwards of hundreds of millions of dollars,” says Larry Seyfried, senior tax legislative representative for the American Bankers Association. “This is not a simple industry, this is not something that can be done by adding a column to an Excel spreadsheet. This is going to require a lot of time and effort by acquirers across the country taking important personnel away profit-generating ideas and forcing them to work on this.” The Electronic Transactions Association also criticized the requirement. “If the proposal is to be truly effective, it will require an exhaustive amount of information, which would be virtually impossible for merchant-acquiring banks to produce…(A)ny proposal of this nature would either be inadequate or too costly, and any additional burdens on small businesses and merchant-acquiring banks would not have a significant revenue benefit to the federal government,” the ETA said in written testimony to a House committee. The Bush Administration proposed the reporting idea two years ago in its budget plans. So-called qualified payment facilitators would be required to disclose information about their merchant clients' annual receipts to the IRS for tax purposes. The administration's idea was to identify taxable but unreported or under-reported sales. Opponents previously succeeded in preventing the requirement from being added to a number of bills, including a farm-subsidy proposal and unemployment-insurance-extension legislation.