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Electronic Transactions Association
April 3, 2007
Honorable John Lewis
Committee
on Ways & Means, Subcommittee on Oversight
U.S.
House of Representatives
1102
Longworth House Office Building
Washington
D.C. 20515
Dear Representative
Lewis:
The Electronic Transaction Association[1]
(“ETA”) is pleased to submit our comments to the Subcommittee on Oversight
regarding the Hearing on Internal Revenue Service Operations and the Tax Gap.
Specifically, ETA would like to address a proposal in President Bush’s FY2008
Federal Budget for the U.S. Department of Treasury that would require merchant
acquiring banks to report aggregate credit/debit card reimbursements made to
merchants.ETA Position
ETA strongly recommends that the Subcommittee
consider the effects this new reporting requirement would have on merchant
acquiring banks, small businesses, and individual consumers. While ETA supports
efforts to ensure greater tax compliance, the merchant acquirer reporting proposal
as stated is vague and could lead to misleading information being provided to
the IRS. Moreover, the estimates provided by Treasury (approx. $10 billion
over 10 years) are unsubstantiated and likely significantly overstated. In
order for this proposal to provide actionable information to the IRS for
compliance purposes, ETA believes it would require an exhaustive amount of
information that would be a significant burden on the merchant acquiring
payment industry. The increased costs of complying with these burdensome
reporting requirements would be born by consumers.
The Proposal/Background
In the FY2008 Federal Budget, the President
has proposed requiring merchant acquiring banks to report to the IRS annually
on aggregate credit and debit card reimbursement payments made to businesses.
A similar proposal existed in the FY2007 Federal Budget; however no action was
taken in the last Congress. The purpose of requiring this reporting is based
on the belief that small businesses are underreporting their income for a
variety of reasons, including tax avoidance and lack of understanding related
to the tax law. It has been proposed that by requiring merchant acquiring
banks to provide reports on payments to merchants, the IRS could compare actual
reported credit and debit card sales with reported tax filings, thereby
allowing the IRS to extrapolate what a business’ cash transaction income should
be. If the reported income on tax returns is not as it should be, the IRS would
conceivably be able to target audit resources at those businesses that appear
to have underreported.
Reporting Requirements Unfair to Small
Businesses and Merchant Acquiring Banks
The rapid growth of credit, debit, and stored
value card use as a percentage of sales will constantly and materially change
as the shift in consumer payment preferences evolve. This evolution—along with
consumer payment preferences that vary significantly by business type, region
and other factors—reduce the reliability of card transactions alone as a
measure of business total sales. ETA believes that the burden that this
reporting requirement would place on merchant acquiring banks, as well as small
businesses, will vastly outweigh any benefits gained from such reports.
Furthermore, as this would be a system of guessing, it is ripe for abuse. With
thousands of businesses currently operating in the U.S., it is not practical to
expect that the IRS could become an expert on the spending habits of
individuals and businesses.
While ETA supports increased compliance by
small businesses when filing their tax returns, it is not a simple process for
merchant acquiring banks to send the credit and debit reimbursement information
to the IRS that would be meaningful. For example, there are cash back options
on purchases; returns/chargebacks; tips/merchandise on a single transaction;
redemption of gift cards purchased in one tax season and redeemed in another; retained
merchant fees (e.g., terminal rental, custom services, etc); and many more such
examples that illustrate why a single aggregate number may provide misleading
information. Implementing a reporting system that would provide useful
information to the IRS would cost merchant acquiring banks millions of dollars
and countless hours to gather information for an effort that is fundamentally
flawed.
In addition, most merchant banks would likely be
required to rely on third parties, such as payment processors and other third
party service providers to provide information that the IRS wants. This
proposal will have far reaching efforts and unintended consequences.
Source of Budget Estimates Unclear
The uncertainty over the benefits of this reporting
requirement is most evident in the Federal budget proposals from FY2007 and
FY2008. In the FY2007 report, the Treasury estimated that the reporting
requirement would help generate $9 million in 2007, $92 million during the
years 2007-2011, and $225 million during the years 2007-2016. In contrast, the
FY2008 report stated that the reporting requirement would help generate $113
million in 2008, $3.3 billion during the years 2008-2012, and $10.8 billion
during the years 2008-2017. Both the FY2007 and FY2008 report are based on
data gathered from the 2001 tax year, and there is no explanation for how the proposed
revenue estimate jumped astronomically from 2007 to 2008.
Disincentive for Small Merchants to Accept
Credit and Debit Cards
ETA believes that the proposed merchant acquirer
reporting requirement may have the unintended consequence of driving away
traditional cash-based merchants from accepting payment cards. The proposal would
punish the vast majority of small businesses that are in compliance with
reporting because of the indiscretions of those few that underreport. Those few
dishonest small businesses that knowingly underreport may choose not to accept
payment cards in the future when it is known that credit and debit card
expenditures are reported to the IRS and any misrepresentation could be
revealed upon review. Therefore, this approach would only increase the costs
associated with credit and debit card usage without identifying any additional
taxable income that would not have already been reported.
Finally, the increased costs of compliance for
merchant acquiring banks will be passed on to the merchants and eventually
borne by consumers in the form of higher prices for goods and services.
Conclusion
ETA requests that the Subcommittee undertake a
critical evaluation of the proposed merchant acquiring bank reporting requirement.
ETA believes that as proposed, the reporting requirement would: (1) provide
potentially misleading information to the IRS; (2) create a costly new
reporting requirement that would increase consumer prices; and (3) drive small
businesses away from accepting payment cards.
The ETA stands ready to assist the
Subcommittee as it considers this proposal. Should you have any questions or
need additional information, please contact Rob Drozdowski of my staff at (202)
828-2635 or Rob.Drozdowski@electran.org.
Sincerely,
Carla Balakgi
Executive Director
[1] ETA, founded in 1990, is the nation’s oldest and
largest organization of businesses representing the merchant acquiring industry
that enables merchants to offer electronic payment services to consumers. With
over 500 member companies, ETA’s diverse membership, including state/federal
chartered financial institutions, merchant service providers (also know as
independent sales organizations), and credit card companies, is part of the
backbone of the American economy that facilitates electronic payments.
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