Merchant Acquiring

Processors, Not ISOs, To Bear The Brunt Of Legislation

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Processors, not ISOs, likely will handle many provisions of a law that takes effect next January requiring acquirers to report merchant credit and debit card transactions to the Internal Revenue Service, says Henry Helgeson, co-CEO of Merchant Warehouse Inc., a Boston-based ISO.

Merchant acquirers will have to report their retailers’ credit and debit card transactions to the IRS effective Jan. 1, 2011, under the Housing and Economic Recovery Act President George W. Bush signed into law in July 2008.

While they may not be the ones to handle implementation of the law, ISOs will be in a “precarious situation” because they are not tax experts, yet merchants likely will call them with questions regarding the IRS requirement, Helgeson says.

Reporting merchants’ transaction data “really is something that falls to the processors,” contends Helgeson. “The ISOs aren’t necessarily dodging the bullet, but the real bullet goes to the processors.”
Processors will have to take the data in their merchant files, match the information to transaction revenue and submit it to the IRS, says Helgeson. “It’s not something you can expect the average ISO to do,” he says. “It’s easier to take the file from the processor and do it that way.”

Because the IRS has not yet fully decided on the details of the regulation, “we don’t know what the ISOs’ potential responsibility is in all this,” says Paul Martaus, president of the Mountain Home, Ark.-based consulting firm Martaus & Associates Inc.

However, ISOs likely will have to educate their merchant clients about the regulation and potentially will have to work with processors to gather accurate merchant data for reporting.

“I could see a couple of changes having to be made in the industry during the account-boarding process,” notes Helgeson. ISOs may need to alter their merchant applications to ensure they are collecting necessary information that will meet IRS requirements.

Additionally, “ISOs are going to have to educate merchants,” Helgeson says.

“ISOs need to educate themselves and their merchants,” agrees Mary Bennett, director of government and industry relations for the Electronic Transactions Association, a Washington, D.C.-based trade organization. “The merchants don’t have a solid sense of what this means.”

The regulations have the potential to affect many organizations, says Bennett. “Everyone will have a different role to play, but some are more prepared than others,” she says.

Indeed, most ISOs are unaware of the regulations, says Helgeson.

Merchant-service providers today should be verifying their clients’ taxpayer identification numbers with the IRS. They “need to get their current clients done as quickly as they can,” says Bennett. As the deadline draws near, more verifications will flood the agency and slow the process, she notes.

“The IRS system is not state of the art,” she says. “It’s not built to take the volume of this.”

Industry Reaction

Some payments organizations want the U.S. Department of the Treasury and the IRS to clarify aspects of the law, and they want penalty fees mitigated in the early stages of enforcement, according to comments submitted to the government agencies.

“This is not coming as a surprise to anyone,” says Martaus. However, “there are so many open questions, everybody is posing questions to the IRS” to get clarification, he says.

The Electronic Transactions Association, Elavon Inc., American Express Co. and First Data Corp. were among the organizations to submit comments on the proposed rules for the law. The IRS issued a draft of the proposed regulations Nov. 23 and closed the comment period Jan. 25.

“The [Electronic Transactions Association] and a lot of businesses sent in comments to the proposed bill,” says Bennett.

The regulations have the potential to affect many organizations, including independent sales organizations and processors, she says. “Everyone will have a different role to play, but some are more prepared than others,” says Bennett.

The association filed multiple comments with the agencies, including a recommendation that the IRS set a minimum reporting threshold that would exempt merchants processing fewer than $20,000 in transactions annually from the reporting requirement and a request that the agency waive penalties related to compliance failure for a two-year period.

The association also suggested the agency improve its system for matching taxpayer identification numbers to merchants in anticipation of an increased volume of verification requests.

AmEx similarly requested a minimum reporting threshold and a penalty waiver, among additional recommendations.

Multiple companies provided recommendations and requested clarification regarding the proposal’s treatment of non-U.S. merchant-service providers.

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