Merchant Category Code To Assist In Determining Whether Payment Is Reportable.

Notice 2003-37

[1] This notice provides a proposed revenue procedure that, when finalized, would provide an optional procedure that payors and their authorized agents may use in determining whether payment card transactions are reportable under section 6041 or section 6041A of the Internal Revenue Code.

[2] The Internal Revenue Service requests comments on this proposed revenue procedure. Written comments must be received by September 29, 2003. Comments should be submitted to: CC:PA:RU (NOT129380-02), Room 5526, Internal Revenue Service, Ben Franklin Station, Washington, DC 20224. Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 5:00 p.m. to CC:PA:RU (NOT-129380-02), Courier's Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC. Comments may also be transmitted electronically via the following e-mail address: Notice.Comments@ irscounsel.treas.gov. Please include "Notice 2003-37" in the subject line of any electronic communications.

[3] For further information regarding this notice, contact Joseph P. Dewald of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. Mr. Dewald may be contacted at 202-622-4910 (not a toll- free call).

This revenue procedure provides an optional procedure that payors may use in determining whether payment card transactions are reportable under section 6041 or section 6041A of the Internal Revenue Code. In addition, payors, or their authorized agents, may use this optional procedure in determining whether payment card transactions are reportable payments for purposes of the Internal Revenue Service TIN Matching Program under section 3406.

In general, this revenue procedure classifies businesses, by Merchant Category Codes (MCCs), according to whether they predominantly furnish services (for which payments are reportable) or predominantly provide goods (for which payments are not reportable). A payment card organization or one of its members or affiliates may assign MCCs, or equivalent Industry Codes, to merchant/payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent Industry Code assigned to a merchant/payee. A cardholder/payor may then rely on the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with that merchant/payee is subject to reporting under section 6041 or section 6041A.

SECTION 2. BACKGROUND

.01 Reporting requirements under sections 6041 and 6041A. If a person is engaged in a trade or business and, in the course of that trade or business, pays any person $600 or more of rent, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable gains, profits, and income during a calendar year, section 6041 generally requires the payor to file an information return with the Internal Revenue Service and to furnish an information statement to the payee.

Section 1.6041-3(c) of the Income Tax Regulations provides an exception to reporting for payments for merchandise, telegrams, telephone, freight, storage and similar charges. Section 1.6041- 3(p)(1) provides an exception to reporting for payments made to a corporation, unless the corporation is engaged in providing medical and health care services or is engaged in the billing and collecting of payments in respect to providing medical and health care services. The same provision also provides that reporting is not required for payments made to a hospital or extended care facility that is a tax- exempt organization described in section 501(c)(3) or to a hospital or extended care facility owned and operated by the United States, a State, the District of Columbia, a possession of the United States, or a political subdivision, agency or instrumentality of any of the foregoing. Section 1.6041-3(p)(2) provides that reporting is not required for payments to an organization exempt from taxation under section 501(a) or an individual retirement plan. Section 1.6041- 3(p)(3) provides that reporting is not required for payments made to the United States. Section 1.6041-3(p)(4) provides that reporting is not required for payments made to a State, the District of Columbia, a possession of the United States, or any political subdivision of the foregoing.

If a person is engaged in a trade or business and, in the course of that trade or business, pays any person $600 or more for services during a calendar year, section 6041A(a) generally requires the payor to file an information return with the Service and to furnish an information statement to the service provider. In general, the exceptions to reporting under section 6041 apply to reporting under section 6041A. However, section 6041A(d)(3) provides that reporting is generally required for payments made by a federal executive agency to a corporation.

Revenue Ruling 81-232, 1981-2 C.B. 231, involved an insurance company making payments to an automobile repair shop for the repair of an insured automobile. The repair contract required payment of $300 for labor and $700 for parts. The ruling held that the entire payment was reportable under section 6041 because the portion of the payment attributable to parts was merely incidental to the obligation to repair the automobile. The ruling further held that no part of the payment was excepted from the reporting requirements of section 6041 as a payment of a bill for merchandise.

.02 Payment card transactions. A payment card transaction is a transaction in which a cardholder/payor uses a payment card (as defined in section 4.05 of this revenue procedure) to purchase goods or services and a merchant agrees to accept a payment card as a means of obtaining payment. A payment card organization (as defined in section 4.06 of this revenue procedure) sets the standards and provides the mechanism, either directly or indirectly through members and affiliates, for effecting the payment.

Payment card organizations and the Information Reporting Program Advisory Committee have recommended that cardholder/payors be allowed to rely on MCCs or equivalent Industry Codes provided by the payment card organization in determining, for purposes of sections 6041 and 6041A(a), whether a payment card transaction is a payment for services or a payment for goods.

SECTION 3. SCOPE.

This revenue procedure applies to payment card organizations and their members and affiliates and to cardholder/payors that purchase goods or services in payment card transactions. In addition, cardholder/payors, or their authorized agents, will be allowed to rely on MCCs or equivalent Industry Codes for purposes of TIN matching with respect to reportable payments.

SECTION 4. DEFINITIONS

For purposes of this revenue procedure, the terms listed below are defined as follows:

.01 Cardholder. A cardholder is the payor for payments made to a merchant/payee through a payment card.

.02 Merchant. A merchant is a payee that has entered into an agreement with a payment card organization, or a member or affiliate, to accept the organization's payment card as payment for goods and services.

.03 Merchant Category Code. A Merchant Category Code (MCC) is a classification code that is assigned by a payment card organization or one of its members or affiliates to a merchant that has been accepted to participate in the payment card system as a card-accepting merchant. The payment card organization or one of its members or affiliates assigns the merchant a particular code based on the predominant business activity of the merchant.

.04 Industry Code. An Industry Code is the number that corresponds to, and identifies, a merchant in the same business as a merchant assigned a particular MCC.

.05 Payment Card. A payment card is a card (or an account) issued by a payment card organization, or one of its members or affiliates, to a cardholder/payor, which upon presentation to a merchant/payee, represents an agreement of the cardholder to pay the merchant through the payment card organization.

.06 Payment Card Organization. A payment card organization is an entity that sets the standards and provides the mechanism, either directly or indirectly through members and affiliates, for effectuating payment between a purchaser and a merchant in a payment card transaction. A payment card organization generally provides such a payment mechanism by issuing payment cards, enrolling merchants as authorized acceptors of payment cards for payment for goods or services, and ensuring the system conducts the transactions in accordance with prescribed standards.

.07 Payment Card Transactions. A payment card transaction is a transaction in which a cardholder/payor uses a payment card (as defined in section 4.05 of this revenue procedure) to purchase goods or services, and a merchant agrees to accept a payment card as a means of obtaining payment.

SECTION 5. APPLICATION

.01 Payment Card Organizations. A payment card organization or one of its members or affiliates may assign MCCs, or equivalent Industry Codes, to merchant/payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent Industry Code assigned to a merchant/payee. The MCCs assigned to merchant/payees must be determined under the table in section 5.03 of this revenue procedure. If the Internal Revenue Service notifies the payment card organization that the MCC or equivalent Industry Code assigned to a merchant/payee is incorrect, this revenue procedure does not apply to a payment card transaction with the merchant/payee occurring after the date of the notification unless the payment card organization or one of its members or affiliates has assigned the merchant/payee a MCC or equivalent Industry Code that is satisfactory to the Internal Revenue Service and has notified the cardholder/payor of the correction.

02. Cardholder/payors. A cardholder/payor may rely on the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with that merchant/payee is subject to information reporting under section 6041 or section 6041A. Thus, if a merchant/payee is assigned a MCC and the table in section 5.03 indicates that payments to merchants in that category are not reportable under section 6041 or section 6041A, a cardholder/payor is not required to report payment card transactions with the merchant/payee. Similarly, an indication in the table that payments to a category of merchants are reportable under section 6041 or section 6041A reflects a determination by the Internal Revenue Service that those merchants predominantly furnish services, and cardholder/payors may treat payment card transactions with those merchants as payments for services. Although the transactions do not qualify for the merchandise exception to information reporting under this revenue procedure, they may qualify for the exception under the generally applicable rules of sections 6041 and 6041A if, in fact, only merchandise is provided. In addition, other exceptions to information reporting (such as the exception for payments to corporations) may apply.

.03 Table. The following table is used in applying the optional procedure permitted under this revenue procedure.

                                                          Reportable under

The procedures are proposed to be effective on the date they are published as a final revenue procedure.