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Visa Comments on Proposed Regs on Credit Card Transaction Reporting Rules

FEB. 25, 2010

Visa Comments on Proposed Regs on Credit Card Transaction Reporting Rules

DATED FEB. 25, 2010
DOCUMENT ATTRIBUTES

 

January 25, 2010

 

 

Hon Douglas Shulman

 

Commissioner of Internal Revenue

 

Internal Revenue Service

 

CC:PA:LPD:PR (Notice 2009-19)

 

Room 5203

 

PO Box 7604

 

Ben Franklin Station

 

Washington DC 20044

 

 

RE: REG-139255-08

 

 

Dear Commissioner Shulman:

Visa, Inc., is pleased to submit for your consideration the following comments on REG-139-255-08, proposed regulations issued under IRC section 6050W which was added to the Code by section 3091 of the Housing Assistance Tax Act of 20081. Our comments address duplication; modifications to the definition of gross amounts, including related backup withholding issues and the time frame for both; and concerns about rules for electronic payee statements.

Visa Inc. operates the world's largest retail electronic payments network and is one of the most recognized global financial services brands. Visa facilitates global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.

Duplication

Visa applauds the adoption by IRS of a rule which eliminates the duplication between IRC section 6050W and IRC sections 6041 and 6041 A. We believe that the same analysis underlying that decision supports extending the anti-duplication provision to transactions covered by IRC section 3402(t). By defining a "reportable transaction" under section 3402(t) as one that is not covered by reporting under another section, all electronic transactions reportable under IRC section 6050W would be removed from the scope of IRC section 3402(t). This is consistent with the approach in the statute itself, which removes from the scope of that section payments reportable under other sections of the Code. Since 6050W was enacted more than three years after section 3402(t), the latter section does not address interaction with the former. But the legislative history of section 6050W shows that Congress wanted IRS to protect taxpayers from the confusion that duplicate reporting causes. Visa urges IRS to extend the duplication relief to transactions otherwise reportable under both 6050W and 3402(t).

Gross Amount

Proposed Regulation Section 1.6050W-1 (a)(5) defines "gross amount" as "the total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts."

Taken literally, this definition would result in the reporting of only gross positive transactions without regard to any returns or other adjustments made prior to paying the merchant. While some in the PSE community believe they can provide this number, Visa questions whether this was the intended result for this definition, which could result in a gross overstatement of sales (much less payments or income) for the merchant, potentially confusing the merchant and complicating any compliance initiatives on the part of the IRS.

The following example illustrates a simple daily scenario and the issues that would need to be addressed if the reportable amount is gross positive sales:

 

Merchant M has five transactions on day one:

 

      T-1    $200 sale

 

      T-2    $300 sale

 

      T-3    $400 sale

 

      T-4     $50 sale

 

      T-5   -$100 return of merchandise

 

The system provides funds to the Acquirer on day two; the same day the acquirer initiates an electronic funds transfer to the merchant's bank account which is received on day three.

 

1. Under the definition in the proposed regulations, the number to be reported appears to be $950, the sum of all positive sales transactions not adjusted for the $100 return. This amount will never be paid to the merchant as payments will recognize not only positive sales but also returns. Is $950 the correct number to be reported?

2. If $950 is the correct number to be reported, then, if backup withholding is required, it would be 28 percent of $950 or $266. However, net sales, the basis for the payment to the merchant, would be $850 and 28 percent of that would be $238. Withholding 28 percent of the gross positive sales would actually result in an effective withholding rate in the above example of 31 percent. Should backup withholding be imposed on the gross positive sales transactions or the amount available to be paid to the merchant?

3. Assume the $200 transaction is rejected by the system as improperly formatted. Under the current definition of gross amounts the correct number to be reported is $950 since no adjustments are permitted. The merchant, however, will be eligible to receive only $650 less system fees. If backup withholding is required on $950, the effective backup withholding rate on $650 will be 40.9 percent. Is this correct?

4. Assume the rejected transaction is resubmitted on day three. Should this transaction be counted as a transaction for day three even though it was counted for day one?

5. If the reportable amount is $950 on day one, but no funds are available until day two, when should backup withholding occur? The date of the transaction or the date funds are sent to the merchant?

5. If reporting is required as of the date of the transaction (day one) but withholding is not required until funds are received (day two), and if day one and day two are in different years, what are the rules for reconciling the amounts reported for year one and the withholding which occurred in year two?

6. If a merchant has gross positive sales transactions for a day, but has an unusually large number of returns that more than offset the positive sales, there will be no payment on which backup withholding can be applied. In the above example, assume the return is not $100 but $1000 so the merchant owes the system $50. How should any required backup withholding be handled? No withholding required? Defer withholding until funds are available? Permit the merchant to provide funds from an alternative source?

7. If an EPF is responsible solely for making the payments and does not know the amount of the underlying transactions, what is the correct number for the EPF to report?

All of these issues can be resolved by defining gross amounts as we believe it was intended to be, that is, the gross proceeds paid to the merchant. "Gross" refers to the amount of the payment to the merchant not adjusted for items such as cashback to achieve a net income number. Such adjustments will be made by the recipient in the process of preparing the applicable tax return.

This approach helps ensure that the amount to be reported will be clearly identifiable, even by EPFs who are mere paying agents. The date is also clear. Amounts subject to backup withholding and the date (payment date) on which backup withholding would apply also would be obvious. Adjustments for rejected transactions, differences between transaction date and payment date, and amount refunded (whether or not backup withholding applied to the original transaction, the return transaction or both or neither) would not be necessary.

The definition provided in the proposed regulations likely has its roots in the use of the word "gross" in the statute. That usage must be seen in light of the legislative history of the provision. Earliest drafts provided that the number to be reported included adjustments for cashback2 and other items so that the net number reported more closely reflected taxable income. Ensuing discussions with industry representatives brought to light the inability of the industry to make all of those adjustments all of the time.3 The use of the word "gross", therefore, was understood to mean a number not adjusted for items like cashback which take apart the transaction into its component parts, but rather a number reflecting the amount made available to the merchant. In other words, gross amount does not mean gross positive transactions but rather the gross payment to the merchant.

This approach mirrors the approach used under IRC section 6045, "broker reporting", when reporting sales of stocks and other investments. Under broker reporting, the amount reported on Form 1099-B is the amount realized on the sales and paid to the seller. (Alternatively, that amount can be adjusted for commissions and fees which is then indicated on the form by checking a box). Gross proceeds reporting does not reflect taxable income as the amount realized on the sale may in fact represent a loss to the seller if the seller's basis were more than the proceeds.

Similarly, under section 6050W, the goal is to identify how much was disbursed to the merchant, with the determination of taxable income coming on the merchant's tax return. Visa recommends that the definition of "gross amount" be modified to make clear that the amount to be reported is the amount paid to the merchant without regard to how much of the payment might be actual income to the payee.

Visa recommends the following definition of gross amount:

 

". . . the total dollar amount of reportable payments to each participating payee as of the date an electronic deposit is initiated by the PSE/EPS."

 

By adopting this approach, IRS would also solve related issues as to when the payment is made and when backup withholding should be applied.

This definition can be illustrated by the following example:

Example -- Gross Amounts:

 

Merchant A has six transactions on day 1:

 

      D1-1   $100 sale

 

      D1-2   $125 sale

 

      D1-3   $150 sale

 

      D1-4   $175 sale

 

      D1-5   $200 sale

 

      D1-6  -$300 return of merchandise

 

 

On day 1, PSE/EPF Y submits these six transactions for processing through card organization J. On day two, J sends Y $450, the net of the six transactions that A conducted on day one. The same day, Y initiates an electronic funds transfer to A's checking account at Bank B in the amount of $441 reflecting the two percent fee charged to the merchant for processing the transaction. The deposit is recorded in A's checking account on day three.

For purposes of IRC section 6050W, the amount to be reported is the amount paid to A, $441. The date of the payment is day two. If any withholding is required, it is required on $441 on day two.

Electronic Payee Statements

In 2002, after anthrax attacks through the mail caused great concern throughout the populace, Congress authorized4 electronically-delivered payee statements for Forms 1099 series provided certain requirements were met. The fundamental approach was that of "opting in", that is, a recipient must affirmatively elect to receive electronic payee statements. IRS set forth a series of steps to be followed, including a mailing a letter to the payee to inform him/her about the electronic statement service, and to provide instructions how those desiring to avail themselves of this service were to go about enrolling in it. The recipient was required to mail back a written election, and then required to go online to demonstrate the ability to receive the statements electronically.

These steps were created out of an abundance of caution to ensure that payor institutions did not require payees to receive statement electronically, and to ensure that the payee understood the methodology of how to access and download the statement.

IRC section 6050W presents an opportunity for IRS to advance beyond standards set eight years ago for a totally different set of payor/payee relationships. In the years since 2002, many more people have Internet access. Many more people pay bills electronically. Many more people text message and tweet, and utilize social interactive sites. It is a different world today. In addition, the differences between consumer transactions in 2002 and business transactions in 2010 are significant.

The concerns that may have been appropriate to address in 2002 are further removed from the current context in as much as the entire relationship between acquirers and merchants is based on an electronic payment system designed to eliminate paper wherever possible. Merchants are already receiving important business communications electronically. They have thereby demonstrated their desire for electronic communications and their acceptance of the system standards. For these merchants, it is plainly demonstrated every day that electronic delivery of Forms 1099-K is the preferred method. To require a standard mailing to them would be wasteful and potentially confusing to these taxpayers. If a business or business owner is used to receiving important business communications electronically, a paper mailing may just be discarded as an advertisement.

As a result, we urge IRS to seize this opportunity to progress and recognize the different situation faced here with Form 1099-K compared to that faced with consumer-related forms eight years ago. There is no benefit to doing a mass mailing to all merchants that already receive electronic communications. An electronic message informing them of the new information (Form 1099-K) that they will be receiving electronically should suffice.

For the ever-shrinking universe of merchants that continue to receive business communications on paper, a paper mailing informing them of the availability of electronic payee statement Forms 1099-K may be appropriate. However, a return mailing by the merchant is unnecessary. Acceptance of electronic delivery, as well as capacity to receive communications electronically can be accomplished in a single electronic step where the merchant logs onto the PSE/EPF web site and provides an email address for this purpose. While traditional mailing procedures continue to have a role in business and in consumer relationships, the IRS rules should further, not impede, transition to electronic communications, a process more in line with IRS's own efforts to do eliminate paper where possible.

Foreign Issues

When a merchant applies for enrollment into the card system, the information provided on the application must be substantiated. This vetting process is significant and includes documentation of the merchant's business form and location(s) as it will result in a credit relationship between the acquirer and the merchant; no acquirer will risk being held liable for the misdeeds of an unknown merchant. Any operation located in the US is known. As a result, to identify a merchant as non-US can be determined by relying solely on the documentation provided during enrollment without having to resort to additional paperwork. Requiring use of Forms W-8 series as is provided in the proposed regulations is unnecessary and will not add anything to the process of ensuring only foreign merchants are exempted from reporting.

In addition, requiring use of additional documentation above a foreign address on file would seem to turn the statute on its head. By its plain language, Congress showed its desire that use of a foreign address be the basic rule. By requiring US-based PSEs (by far the majority of industry participants affected) to obtain Forms W-8 from any merchant claiming non-US status, the address rule in the statute becomes the exception; indeed, reliance on a foreign address in and of itself would not be permitted in that the proposed regulations fail to permit reliance on the presumption rules of section 6049 to identify non-US persons.

Further, by extending the Form W-8 requirement to US-controlled foreign corporations operating abroad (by treating them as US PSEs), IRS has effectively burdened US-related entities around the world with documentation requirements not shared by their native competitors without any demonstrable increase in compliance. Unlike deposits earning interest where any customer is embraced, merchants operating within the card systems are vetted as a part of the application process; their country of affiliation is well documented. Requiring Forms W-8 will not provide any additional measure of proof of identity.

Visa recommends that the regulations be modified to provide that PSE/EPFs be permitted to exempt any merchants whose records with that PSE/EPF demonstrate no US operation.

Form 1099-K

Visa applauds the IRS decision to create a new form for this new reporting requirement. This will help minimize confusion on the part of taxpayers (and IRS) and improve understanding of what is being reported and how to use it in preparation of one's tax return. However, the issuance of the draft form provided only the face of the form and not the instructions for the recipients nor the separate instructions for filers of the form. Visa believes that the information contained in both of those missing parts is critical to maximizing understanding of the filing requirements and an understanding of just what has been reported. In particular, the instructions for the receiving merchant must inform those recipients that the number reported may not correspond to numbers provided on the monthly statements provided by the PSE/EPF, and that any questions about how to use the information on the form should be directed to the merchant's tax advisor. The instructions for the filers will need to provide basic information about all aspects of the reporting regime, from what constitutes a valid TIN to when to backup withhold to dealing with corrections. Mere cross references to other IRS publications generally will not suffice to educate these new filers.

Education of Affected Parties

Visa strongly urges IRS to undertake an extensive outreach campaign to educate PSEs, EPFs, 3PNs5, and other affected parties about the requirements under IRC section 6050W. While some PSEs or EPFs are affiliated with institutions that are subject to various other reporting requirements, the divisions that are responsible for card processing have no such experience. Most third party networks have no IRS reporting experience at all. TINs and TIN matching, backup withholding and depositing, B Notices and Penalty Notices, year-end rules and filing specifications are all foreign concepts to them. Extensive, plain-English guidance will be necessary beyond the form and proposed regulations provided so far. Unlike, for example, payers of interest under IRC section 6049 that learned first how to file (mid-1960's), then how to get TINs (mid 1980's), then how to deal with B Notices (late 1980's), then how to deal with penalty notices (early 1990's), and then how to do TIN matching (early 2000's), these new filers will need to become experts on all phases of the filing regime all at once. They will need the assistance and understanding of the IRS in that endeavor. Visa will be happy to work with IRS on development and delivery of such educational materials.

Early Finalization of Regulations And Penalty Relief For 2011

Visa appreciates the effort IRS has made to provide workable regulations expeditiously, but the reality is that over sixty percent of the implementation period provided by Congress will have expired by the time of the hearing on February 10, 2010. The final regulations may not be issued before the second half of 2010, maybe just days or weeks before the effective date of the statute, January 1, 2011, maybe even afterwards. All effective parties will need at least one year from the promulgation of final regulations to implement workable requirements. Building the systems, coding the software, testing it, developing internal processes, and training personnel cannot be done instantaneously, particularly during a time when resources are scarce due to a national recession.

While some work can begin now that proposed regulations are out, even if these proposed regulations were final regulations (and assuming the necessary changes, modifications, and clarifications had already been made), it would still be a challenge to have the implementation successfully completed in the eleven months remaining before the effective date.

As a result, Visa respectfully requests that IRS release final regulations by July 1, 2010, and provide for a penalty waiver for at least 2011 for all affected parties that make a good faith effort to implement the requirements within twelve months of the publication of final regulations. Visa pledges to continue to work with IRS in doing whatever it can to contribute to the goal of workable regulations at the earliest possible time.

 

* * *

 

 

Thank you for this opportunity to comment on the IRC section 6050W proposed regulations. If you have any questions, please contact Paula D. Porpilia at 304-947-7417.
Sincerely,

 

 

Michael Orman

 

Senior Business Leader

 

Commercial Solutions

 

Visa, Inc.

 

FOOTNOTES

 

 

1 P. L 110-289, 122 Stat. 2653.

2 "Cashback" refers to the service provided by some merchants whereby the cardholder is permitted to obtain cash back from the transaction. For example, if the cardholder purchased $100 of merchandise, it could obtain $20 in cash from the merchant by agreeing to charge/debit of $120.

3 Ability to make such adjustments depends on a variety of factors including not only the PSE/EPF system capabilities (which vary widely) but also on the type of equipment used by the merchant (which also varies widely.) Only the merchants with the most advanced systems can provide detailed point of sale information that can break out things like cashback. Not wanting to burden merchants, especially "mom-and-pop" operations, with a requirement to install more advanced card equipment, the draft of the statute dropped those requirements.

4 Section 401 of the Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21, 40 (2002), provides that filers of Forms 1099, etc., may electronically furnish such statements to any recipient who has consented in a manner similar to the one permitted under the regulations issued for Forms W-2 under § 6051 of the Internal Revenue Code or in such other manner as provided by the Secretary.

5 Third party networks.

 

END OF FOOTNOTES
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