Merchant acquirers will have to report their retailers' credit and debit card transactions to the Internal Revenue Service under the Housing and Economic Recovery Act of 2008, which President Bush signed into law Wednesday.
The reports could increase tax revenue for the federal government by preventing merchants from underreporting transactions, says Paul Martaus, president of the Mountain Home, Ark.-based consulting firm Martaus & Associates Inc.
However, mandatory reports to the IRS could prove time-consuming and costly for acquirers and ISOs, which may have to absorb the costs of collecting and securely storing merchants' information, Martaus says.
ISOs, which often serve as an information bridge between the payments industry and retailers, also might have to spend time teaching merchants about the requirement, he says, adding that many "retailers don't know this is coming."
Card-payment regulations and fees already confuse many merchants, says Sandra Farah, risk and operations director with Pinnacle Processing Group Inc., a Seattle-based merchant payment-services provider. Adding a federal regulation would create more uncertainty, she says.
Under the housing bill, acquirers would submit annual reports listing the name, address, taxpayer identification number, and gross value of credit and debit card transactions for each of their merchant customers. Depending on how the IRS handles the provision, "there is a very strong likelihood that the ISOs themselves are going to have to go to every merchant location in the country they have clients in and reprogram all the terminals," says Martaus. In the past, acquirers and ISOs have not collected all the information required by the new law, such as taxpayer-identification numbers, he adds.
'Serious Problems' For Acquirers
Acquirers and ISOs also may encounter difficulty getting merchants to part with sensitive information, says Farah. Merchants "don't even like to give personal information to an agent who walks in and tries to sell them service," she says.
The required reports could create "serious problems" for the acquiring industry, agrees Carla Balakgie, CEO of the Washington, D.C.-based Electronic Transactions Association. The association, which lobbied against the reports, "is disappointed that the merchant card information-reporting requirement made it into the housing" law, she adds. She did not return requests for elaboration on the problems the law could create for the industry by ISO&Agent Weekly deadline.
Consumers ultimately may pay for the change. "Acquirers and ISOs will have to absorb the cost of this," says Martaus. But they will pass the costs to merchants, who will increase product costs for consumers, he says.
Third-party settlement organizations, such as PayPal Inc., also will have to report their merchants' gross transactions, taxpayer-identification numbers, names and addresses. However, merchants that transact with third parties and have fewer than 200 transactions worth less than $10,000 annually are exempt from the provision, states the legislation.
As an unintended result of the law's passage, retailers might push for cash transactions at the point of sale instead of credit or debit cards, observes Martaus. "If someone told me anytime I took a credit card I had to report it to the IRS, I would lower my credit card transactions and take more cash," he says.
Before adopting the reporting requirement, the IRS will call for public comment, says Martaus. "If the industry is interested in its financial future, they will comment to the IRS," he says.
The Senate on Saturday passed the housing bill that contains the reporting provision; the House passed it last week. President Bush on Wednesday signed the bill into law. The IRS reporting provision will take effect Jan. 1, 2011.