Merchant acquirers and small-business advocates told lawmakers last week that requiring banks to report credit card receipts paid to merchants would have devastating effects on their industries.
Their comments came during a hearing convened by the House Committee on Small Business to explore an Internal Revenue Service proposal that surfaced last year. The IRS has said reporting the receipts could generate an additional $10 billion in revenue over the next 10 years because some small businesses avoid taxes by neglecting to report income (ISO&Agent Weekly, 2/8/07, 5/15/07).
The IRS would use the collected data to establish the percentage of credit and debit card sales expected for merchant categories. It would find an average and evaluate a merchant's tax filing to determine how the reported sales compare with the average.
The proposal would require merchant acquirers to report the aggregate value of electronic transactions received by every merchant annually, Kim Stubna, director of public policy at Greenwood Village, Colo.-based First Data Corp., told the committee.
Merchant acquirers would have to link transactions now associated with merchant account numbers with merchants' tax identification numbers. That would require costly operational changes, Stubna said. In addition, the merchant acquirer would have to link merchant identification numbers of branch or franchise locations to a single tax identification number.
"It will be extremely expensive and time-consuming to reprogram our systems to comply with the new mandates," Stubna said.
In her testimony, Stubna estimated it would take 3,000 hours for First Data to reprogram each of its processing systems, which handle multiple merchants.
Moreover, under the proposed rule, acquirers in some cases would be required to withhold 28% of a small business' cash flow until they could verify tax identification number . Stubna said withholding 28% of cash flow would create a great hardship for most small businesses.
"It would not be implausible for this proposal to discourage some merchants from accepting electronic payments and steering customers toward cash and checks–making it that much more difficult for the IRS to achieve its main objective to identify entities that under-report their taxable income," Stubna said.
At Fifth Third Processing Solutions, a unit of Cincinnati-based Fifth Third Bancorp, Donald Boeding noted what he sees as other problems with the IRS proposal.
Boeding says the process of matching a merchant's card processing account number with its taxpayer identification number is burdensome. "It could take years for banks to complete a matching process, at significant time and expense," Boeding said.
Additionally, processors would need to verify the tax identification number against variations of a merchant's business name and connect businesses run as separate units but tethered to the same owner.
The IRS has a system that performs such matches, but Boeding doubts its usefulness.
"There is very likely very limited, if any, experience within most payment-processor companies in working with this IRS system on the large-scale basis likely required under this proposal," Boeding testified.
Though the Electronic Transactions Association, a Washington, D.C.-based trade group representing the acquiring industry, did not testify, it calls the proposal "vague" and says it could cause acquiring banks to report misleading information to the IRS.
The trade group calls the information-gathering challenge "virtually impossible for merchant-acquiring banks."
Many merchant banks rely on third-party processors for card payment services, so those third-party companies house the transaction data the IRS wants, the ETA says. That would complicate the reporting process, it adds.
"Without providing explicit requirements, compliance with this proposal might simply be impossible in such a manor that the data doesn't raise more questions than it provides answers," the ETA says.