MasterCard Worldwide Comments on Credit Card Transaction Reporting Rules

MasterCard Worldwide ("MasterCard")¹ submits this comment letter to the Internal Revenue Service ("IRS") in response to the notice inviting comments regarding guidance for payment settlement entities and other affected persons concerning the requirements in section 6050W of the Internal Revenue Code ("Code") ("Notice"). MasterCard appreciates the opportunity to offer its comments on the Notice.

Summary

Section 6050W of the Code does not impose any obligations on MasterCard. Section 6050W and the Notice each, however, raise issues of significant interest to us. In particular, our comments below address: (i) definitional issues relating to "payment card" and "third party payment network;" and (ii) the need for regulations to ensure that the new requirements under section 6050W do not result in redundant and wasteful reporting regimes.

Background

It may be useful to provide some basic information at the outset about MasterCard's payment card network. MasterCard licenses financial institutions to use the MasterCard service marks in connection with a variety of payment systems, operates those systems, and administers the rules that enable its financial institution customers to complete MasterCard payment card transactions. MasterCard neither issues payment cards to cardholders, nor does it contract with merchants to accept payment cards. Rather, MasterCard's financial institution customers issue payment cards to cardholders and/or contract with merchants to accept the cards. The card issuing financial institutions are known as "issuers." Those customers that contract with merchants for card acceptance are commonly called "acquirers." Cardholders and merchants generally have no direct relationship with MasterCard. Instead, each cardholder's account relationship is with the issuer that issued the card to the cardholder, and each merchant's acceptance relationship is with its acquirer.

A transaction that is processed on the MasterCard network is handled as follows. When a cardholder presents a MasterCard payment card to a merchant for payment, the information from the card is provided in some manner to the merchant (e.g., card swipe). The merchant then sends an authorization request to its acquirer, the acquirer routes the request to MasterCard, and MasterCard routes the request to the issuer. The issuer either approves or declines the authorization, and routes its message back to the merchant through the same channels. The clearing and settlement of the transaction (i.e., the actual movement of funds from the issuer to the acquirer) is based on a second message and occurs later, usually that same day or the next day.²

Overview of Section 6050W

Generally speaking, section 6050W is intended to require payment settlement entities (e.g., merchant acquirers and companies such as PayPal) to make a return to the IRS each calendar year providing certain information about each merchant with whom they contract and the gross amount of reportable transactions for each merchant. The reporting requirements pertain to any "payment card transaction" and any "third party network transaction," the latter involving the types of transactions provided by companies such as PayPal. Section 6050W also requires payment settlement organizations to provide certain information to each of their respective merchants. In some circumstances, the payment settlement entity may need to engage in backup withholding on a merchant.

Definition of "Payment Card"

The definition of a "payment card" is central to the requirements of 6050W, but the statutory definition of the term is in need of clarification. A plain language reading of section 6050W(d)(2) suggests that the definition is relatively narrow. To the extent the IRS intends to include MasterCard-branded payment cards as "payment cards" for purposes of section 6050W, we believe the IRS's definition of payment cards should be relatively broad. In this regard, the definition should cover all other general purpose payment cards (e.g., Visa, American Express, Discover, Tempo Payments, Revolution Money) as well as any other payment card involving an issuer that is "unrelated to" the merchants accepting the payment card. For purposes of 6050W, an issuer should be considered "unrelated to" a merchant if the issuer is not a corporate affiliate of the merchant. We believe that is the congressional intent and most appropriate reading of the statute.

When interpreting the definition of "payment card" it is important to provide clarity with respect to the scope of the term so that merchants, merchant acquirers, and others can be reasonably certain whether the requirements of section 6050W apply to a payment. We expect that this will be an issue of increasing importance to merchants, the payments industry, and the IRS as technologies and products continue to evolve. For example, the statutory definition appears to suggest that there must be an actual "card" associated with the mode of payment in order for the requirements of section 6050W to apply. The IRS should clarify whether the requirements of section 6050W apply in connection with payments that access an account where such payment is not associated at all with a "card." For example, a payment could be initiated through use of a mobile device (e.g., a cell phone), a biometric reader (e.g., fingerprint reader), or use of a specific number, none of which may be associated with any "card."

Definition of "Third Party Payment Network"

The statute refers to, and defines, a "third party payment network." MasterCard believes any guidance, interpretation, or regulation pertaining to the definition of a third party payment network must recognize that a third party payment network, by statute, is of the type that: (i) has direct account relationships with merchants; and (ii) does not involve payment cards. These points are clear in the statute, and we respectfully request the IRS to recognize them explicitly. For example, the statute states that a third party payment network is an arrangement where merchants have "accounts with [the] central organization." Furthermore, the statute specifically clarifies that a third party payment network "does not include any agreement or arrangement which provides for the issuance of payment cards." MasterCard, for example, would not be a "third party payment network" because: (i) MasterCard does not have account relationships with merchants (acquirers do); and (ii) the network arrangement involves the issuance of payment cards.

Preventing the Reporting of Multiple Payments

As noted above, section 6050W requires merchant acquirers to report payment card transaction information to the IRS and engage in backup withholding under certain circumstances. Section 6041 of the Code, however, already imposes 1099 reporting requirements on a subset of the transactions that will be covered by reports under section 6050W. To address this issue, section 6050W(g) authorizes the IRS to "prescribe such regulations . . . as may be necessary or appropriate to carry out this section, including rules to prevent the reporting of the same transaction more than once." MasterCard strongly urges the IRS to use this authority to issue regulations to prevent the reporting of payment card transactions multiple times. Specifically, the IRS should exempt from the 1099 reporting requirements of section 6041 any payment transactions that are of the type covered under section 6050 W.

Section 6041 of the Code requires that persons engaged in a trade or business that pay to an unincorporated merchant $600 or more for services in a year must file a form 1099 information return with the IRS and provide a copy to the merchant. The 1099 must include the merchant's correct name, address and taxpayer identification number ("TIN"). If the merchant fails to provide its TIN to the trade or business, or if the TIN furnished is incorrect, the trade or business is required to withhold taxes from payments made to the merchant.

As the IRS is aware, through its efforts to implement the Qualified Payment Card Agent ("QPCA") regulations, compliance with the 1099 reporting and backup withholding rules is particularly difficult in payment card transactions because of the lack of a direct relationship between the cardholder and the merchant who accepted the card.³ The obligation under section 6041 of the Code falls on the purchaser -- i.e., the payment cardholder in the context of a payment card transaction -- and results in an extremely unwieldy process that would almost certainly involve information flows from the merchant, to the acquirer, to the network, to the card issuer, to the cardholder. The cardholder must then file a form 1099 and provide a copy to the merchant. If, for whatever reason, the cardholder does not have sufficient information to file a form 1099, or if the information does not match the information on file with the IRS, the cardholder must engage in backup withholding on a merchant with which it has no real relationship and for which it has incomplete or inaccurate information.

There is no question that implementation of the QPCA initiative will impose significant burdens on a variety of parties, including acquirers who will ultimately be expected to provide necessary information to each QPCA for subsequent use by corporate cardholders. Fortunately, implementation of section 6050W renders the QPCA initiative unnecessary. In this regard, the full range of payment card transactions, including those covered under the QPCA initiative, will be reported under section 6050W. As a result, we strongly urge the IRS to use its authority under section 6050W(g) to eliminate the QPCA program and provide that the reporting of payment card transactions shall be administered solely under section 6050W. Without such a clarification, the 1099 reporting requirement applicable to corporate cardholders under section 6041 and the QPCA initiative will result in duplicative and costly reporting regimes with no tax compliance, or any other, benefit. There is simply no need for a corporate cardholder to report payment card transactions pursuant to section 6041 once section 6050W is implemented.⁴

To be clear, MasterCard is not requesting the IRS to eliminate the 1099 reporting requirement under section 6041 for all entities. Rather, the redundancies created by section 6050W relate only to payment card usage, not to other forms of payment such as cash or check. We believe, therefore, the IRS should prescribe regulations that would appropriately mitigate the compliance burdens of section 6050W, including on acquiring banks, by preventing the need to report business cardholder transactions under section 6041 (and thereby eliminating the need for the QPCA program).

² If the transaction involves a debit card and a PIN (as opposed to a signature), the authorization, clearing, and settlement generally occur in a single message.

³ The nature of many payment card transactions is such that the corporate cardholder is not transacting with the merchant through a bidding process or other arrangement through which the purchaser has more than a fleeting contact with the merchant.

⁴ We note that this conclusion is not affected by the limited exception for certain third party settlement organizations to avoid reporting de minimis transaction amounts in section 6050W(e). We believe this exception would generally not apply to any card transactions, and would likely only apply to certain merchants involved in third party network transactions such as PayPal.