The American Housing Rescue and
Foreclosure Prevention Act of 2008
(Act) was signed into law on July 30,
2008, as part of a comprehensive response to
the U.S. mortgage crisis. A section of the Act
requires that, beginning in 2011, merchant
acquiring banks as well as third-party payment card processors and certain other settlement organizations must annually report
the total amount of debit and/or credit card
transactions of individual merchants to the
Internal Revenue Service (IRS) and to the
merchants. In certain cases, the reporting
entity will also have to impose backup withholding on settlements with merchants.
Smart Business asked Zahara Alarakhia, a
partner of the Corporate Transactions and
Securities Practice Group at Munck Carter,
LLP, about the effects that the Act will have
on the acquiring industry.
Who is subject to the reporting requirement?
The new law requires information reporting of merchants that accept debit and/or
credit card transactions or that accept payments from a third-party settlement organization (PayPal, Google Checkout, etc.). The
requirement will not apply to those merchants selling less than $20,000 and effecting
less than 200 transactions per year. The purpose of including all third-party settlement
organizations was primarily designed to target online sales players. For instance, if an
eBay power seller makes more than $20,000
in a given year through 200 or more transactions, the IRS will receive information about
their sales. The IRS intends to use this information to investigate the possible underre-porting of the merchant’s income.
Who must report?
The payment settlement entity will bear the
burden of this reporting requirement. In most
cases involving debit or credit card transactions, this entity will be a bank that is a member of the Visa/MasterCard association and
that also contracts with merchants to act as
an acquiring institution for their debit and
credit card transactions. However, many
banks outsource the actual processing function to third-party entities. These third-party
payment card processors are also now
responsible for payment reporting. With
respect to third-party network transactions,
the third-party settlement organization that
facilitates these transactions would be
responsible for payment reporting. For
example, eBay would be a third-party payment network and PayPal would be a third-party settlement organization with the
reporting requirement.
What merchant information must be reported?
The payment settlement entity must report
the gross amount of each reportable transaction paid to a merchant, along with the name,
address and taxpayer identification number
(TIN) of the merchant. A reportable transaction includes any payment card transaction
(debit/credit card), regardless of whether the
card is physically present, and any third-party
network transaction.
What are some of the potential compliance
problems with the new law?
One potential compliance problem is linking the merchant’s TIN to its merchant
identification number (MID). Currently,
most acquiring banks and payment card
processors verify the TIN of a merchant
when an account is established. The TIN is
then deleted and an internal merchant identifier is assigned to the account. However,
multiple MIDs are often issued for merchants with multiple locations or branches.
The new law requires that these many MIDs
be linked to a single TIN. This not only
increases the complexity and cost of compliance for acquiring banks and third-party
card processors, but it also raises the likelihood of errors caused by mismatched merchant transactions with TINs.
Another potential compliance problem
would be matching merchant payments with
the correct TINs. Some business entities
have legal names but operate and advertise
under different names. For example, taxpaying sole proprietor ‘John Smith’ has a business called ‘ABC Landscaping.’ Reconciling
the merchant payment to the correct name
and TIN could result in inaccurate reporting
and subsequent legal and bookkeeping problems for both the acquiring bank or card
processor and the merchant.
What actions should the acquiring industry
consider before the reporting requirement
goes into effect on December 31, 2010?
There are many details not clearly spelled
out in the new law, such as how the law will
be enforced and what penalties will apply in
cases of noncompliance. The Treasury
Department will probably address these and
other issues in a set of regulations. In the
meantime, acquiring banks and card processors will need to train staff on the new
reporting requirements, modify or replace
technology systems in order to accurately
reconcile annual electronic receipts figures
calculated by the bank or processor and the
merchants, verify correct TINs, and consider
merging separately stored TINs and MIDs,
especially in the case of multiple locations or
franchises.
ZAHARA ALARAKHIA is a partner of the Corporate Transactions and Securities Practice Group of Munck Carter, LLP, where she focuses her practice on technology, electronic commerce and general corporate and securities law matters. She has extensive experience counseling financial services businesses with respect to their electronic banking, merchant-acquiring, electronic fund transfer, credit card,
debit card and stored value card businesses. Reach her at (972) 628-3641 or [email protected].
