Tax Bill Could Be Greater Threat Than Interchange Proposal for Acquirers

The Credit Card Fair Fee Act of 2008 has gotten lots of press for its plan to regulate interchange, but merchant-acquiring industry lawyers say that bill has little chance of passage. The far greater threat is a tax proposal for finding merchants' supposedly underreported cash receipts?a proposal that could forcibly enlist merchant processors into giving the federal government financial data about their merchants. The interchange bill introduced in the U.S. House of Representatives by House Judiciary Committee chairman John Conyers Jr., D-Mich., and committee member U.S. Rep. Christopher B. Cannon, R-Utah, would establish a three-judge panel to impose interchange pricing if merchants and the bank card networks couldn't agree on acceptable rates (Digital Transactions News, March 10). The bill, however, has a host of flaws that likely will prove fatal, according to two card-industry lobbyists who reviewed legal issues Thursday for an audience at the Electronic Transactions Association's 2008 Annual Meeting & Expo in Las Vegas. “My sense is that this one doesn't have a very long lifespan,” said Chris Baugher, a partner in the Atlanta office of McKenna Long & Aldridge LLP who has worked with the card networks and other payment clients on cross-border issues and other matters. He said President Bush probably would veto the bill in the unlikely event it passed Congress. The ETA's lobbyist, David P. Goch, was even more blunt, calling the bill “d.o.a.” He said its many problems include potential disruption of long-established statutory and case law governing contracts, its targeting of just Visa Inc. and MasterCard Inc. while leaving other payment networks unregulated, and its contradictory plan to give partial anti-trust exemptions to the parties that set interchange under its auspices while assuming that the current interchange-setting system is anti-competitive. “It's like the Frankenstein of bills,” said Goch, a partner in the Washington, D.C. office of Webster, Chamberlain & Bean LLC. Instead, the real threat is a revenue-generating item that first appeared as two lines in the Bush Administration's budget proposal for fiscal 2007, which started Oct. 1, 2006. The proposal went nowhere at the time but now is quietly making headway in the back halls of Capitol Hill and seems likely to pass eventually in some form, according to Mary Dees Griffith, chairperson of the ETA's government-relations committee. The proposal, which is still being refined in House and Senate iterations, would force so-called “qualified payment facilitators” to disclose information about their merchant clients' receipts to the Internal Revenue Service for tax purposes. The administration's idea was to help identify taxable but unreported or under-reported sales. When first proposed, the administration estimated the measure would raise $225 million over nine years, Dees said. But, in seeking new revenues to offset farm subsidies, the proposal is now estimated to generate $10.8 billion over nine years, she says. Besides the questionable revenue projections, problems with what some are calling the “credit card offset” in the current farm bill range from the definition of just who would be a qualified payment facilitator?Dees said it potentially could include everyone from independent sales organizations to banks?to vast new reporting requirements that would be imposed on the payments industry. Payment facilitators might need to file forms similar to current 1099 income forms for each merchant. Despite the proposal's flaws in the eyes of the merchant-acquiring industry and what turned out to be an unsuccessful lobbying effort to kill it last year, Dees indicated the offset is likely to gain support as Congress searches for new revenues to mitigate massive budget deficits, even if it's not this year. “At this time it does not seem like this will go away,” she said. Thus, the ETA, whose core membership is ISOs, has adopted a defensive position of trying to influence whatever proposal emerges so that it does the least damage. The ETA has joined with the American Bankers Association and the National Chamber of Commerce in trying to educate Congressional staff members and others about how merchant processors and others would be affected. Goch noted that while payment processors once went about their business in obscurity, the retailer-initiated tussles over interchange in recent years have raised the industry's profile, the downside being that many politicians now view the industry as worthy of government attention. “The oversight, the desire to regulate?it's here to stay,” he said.