Visa Comments on Credit Card Transaction Reporting Rules

Visa Inc. is please to submit for your consideration the following comments on regulations to be developed under Internal Revenue Code (IRC) section 6050W which was added to the Code by section 3091 of the Housing Assistance Tax Act of 2008¹. On February 20, 2009, IRS released Announcement 2009-19 in which the Service requested comments, particularly with regard to 10 stated questions. This letter addresses those issues.²

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

1. Whether the Form 1099 series is appropriate for Section 6050W reporting and whether the time and manner of reporting to the Service should conform to existing practices for information reporting to the Service under other provisions of the Code?

Visa urges IRS to develop a new form to be used solely for reporting under IRC section 6050W. This will minimize confusion between this section and other reporting which may apply to electronic transactions, such as reporting of income by cardholders on Form 1099-MISC under IRC section 6041. (But see also our comments under item 8 regarding avoiding duplication.) Because most businesses are familiar with the Form 1099 series, we recommend this new form be entitled "Form 1099-EP, Gross Proceeds from Electronic Payments." However, we note that the use of a separate form is more important than the name/title of that form.

The time and manner of reporting generally should conform to the existing practices for most other information returns. Substitute payee statements should be permitted. Generous transition rules and penalty waivers for the first year or two of filing also should be considered as they have been in the past. In addition, IRS should embark on a comprehensive outreach campaign to educate the Payment Settlement Entity or Electronic Payment Facilitator (PSE/EPF) community. While some PSE/EPFs are affiliated with banks which have extensive experience with information reporting, others are stand-alone third party processors which have no experience with any of the Code's other reporting requirements. Even those affiliated with banks tend to be separate departments or subsidiaries which have never before done information reporting, much less TIN Matching, backup withholding, depositing, B Notices, and Penalty Notices. IRS must bear some of the responsibility for educating these novices and for working with them as they implement systems, establish practices, and assemble a trained work force.

2. Whether procedures for electronic reporting to payees, under section 6050W(f), should conform to existing procedures for electronic reporting to payees under other provisions of the Code?

In T.D. 9114³, IRS set forth standards for providing Forms 1099 to consumers. There IRS sought to encourage electronic payee statements in light of the then-recent anthrax attacks and policy of encouraging electronic documents, but also sought to protect individuals from being forced to receive their annual payee statements electronically if they were unable to do so, or merely preferred to receive paper. The guidance sets up rules for consenting to electronic receipt of payee statements including a written communication from the institution explaining the option, and a written acceptance by the customer along with a demonstration that the individual was capable of receiving the documents electronically. These protections may have seemed appropriated at the time to ensure that the individual taxpayer would receive his/her payee statement without delay so that preparation and filing of individual tax returns would not be compromised in time or accuracy.

But the reporting under IRC section 6050W is strictly a business-to-business relationship. Not only is it "B-2-B", but it is the business of electronic commerce. The recipients of the reports include Fortune 1000 businesses, government agencies, and tax-exempt organizations including most of the largest, technically advanced institutions of higher learning in this country. While it also includes some sole proprietors, they, too, are part of this sophisticated electronic communications system.

The procedures for electronic provision of payee statements which apply to other forms are inappropriate in a business-to-business world of electronic commerce. The extraordinary protective procedures for reporting electronically to individuals adopted after the 2001 anthrax attacks are inappropriate here. Section 6050W applies to a market segment that is founded on use of electronic mechanisms to conduct business. IRS should adopt rules which provide that PSE/EPFs are able to supply any reports required under this section electronically in a manner consistent with that used to communicate business information.

Admission to the card system is a contractual business relationship and the terms of that relationship should be left to the parties involved. If a merchant wants to receive reports under this section in hard copy, it can contract with an acquirer who is willing to provide that service. If an Acquirer wants to keep a paper-demanding merchant within its portfolio, it can decide to meet those terms. Merchants can and do change acquirers for any number of reasons including the list of services provided and the costs associated with those services; the provision of reports electronically or by hard copy should be left to such free market forces to determine.

The concerns about forcing merchants to receive payee statements electronically are negligble. Concerns about delayed tax returns do not exist. Electronic commerce is a different universe. It is an inherently flawed approach to impose standards devised years ago for individuals who might not be techo-savvy upon an industry and its participants that are at the cutting edge of electronic innovation.

We recommend: (1) if the merchant is already receiving business communications electronically, he will be deemed to have consented to receiving the payee statement under section 6050W electronically without further mailings or demonstrations of consent, subject to the right to request a paper statement if one if desired (an "opt out" rather than "opt in" approach). (2) For merchants not currently receiving any business communications electronically, no specific or separate mailing be required to inform the merchants of their option to receive payee statements electronically. A message included with another business mailing, such as a monthly billing statement should be sufficient, with the specific content and format left to the the PSE/EPF. (3) If a merchant currently receiving paper communications wants to receive the payee statement electronically affirmative consent would be demonstrated by logging onto the PSE/EPF web site and opting for electronic communications. No specific written consent should be required beyond this clear demonstration of both intent and capability.

3. What foreign entities, if any, should be included in the definition of "payment settlement entity"?

We recommend that IRS adopt a rule that provides that electronic payments to US merchants within the scope of the statute should be reported regardless of the identity of the reporting party. To exclude any class of PSE/EPFs would provide an unfair business advantage to that group at the expense of those who are subject to the provision. For example, with regard to some foreign entities with US subsidiaries, both the foreign entity and its US sub might be "acquired" by a bank in the foreign entity's home country. Since the US subsidiary is subject to US tax laws, an information return should be required for payments to it just as they would be if the US subsidiary were acquired by a US bank. To have any other rule would put the US acquiring banks at a disadvantage vis-a-vis their foreign competition. Indeed, if foreign acquirers were not subject to the reporting rules, all US merchants could avoid reporting just by switching acquirers from their US bank to a foreign institution. The rules should apply equally regardless of the identity of the PSE/EPF.

In addition to defining the scope of this provision with regard to foreign PSE/EPFs, we suggest that IRS provide some examples of coverage in the domestic arena. For example, one fact pattern could show that a processor which initiates the payment to the merchant at the direction and control of the acquirer, and who has no authority to initiate on its own or to change the timing, amount or payee is a "paying agent" and not a PSE/EPF.⁴ On the other hand, other processors which have the authority to make the payments under their contracts with the acquiring institution would be asserting authority beyond mere ministerial functions and would be the reporting party.

4. What persons with foreign addresses, if any, should be included in the definition of "participating payee"?

Merchants applying to be a part of the electronic payment card system are routinely investigated for creditworthiness and the accuracy of their application. As a result, as of the time of acceptance into the card system, the location of a merchant is well established. Therefore, we recommend that IRS adopt a rule that any merchant that has no US address on record with the PSE/EPF should be exempt as having a foreign address, without more, and not included in the definition of "participating payee." Implementation of this exemption would be at the option of the PSE/EPF but only if the PSE/EPF lacked actual knowledge of a US address. For these purposes we suggest the "US address" be defined as the fifty states and the District of Columbia, but excluding Puerto Rico, Guam, the Virgin Islands, and other US territories since they generally are subject to different federal tax rules. In addition, merchants should be required to inform the PSE/EPF of any change in foreign/US address status.

5. How to interpret the statutory definition and scope of "payment card"?

We recommend that IRS regulations under section 6050W use the definition of "payment card" previously adopted by the IRS in regulations issued under IRC section 3406. This would include all credit and debit cards, both consumer and commercial, as well as any similar account or relationship which is not evidenced by an actual card. Those regulations provide:

We recommend that the amount to be reported is the amount "paid or credited" to the merchant. That is, at some point, the PSE/EPF initiates an electronic payment for the merchant's benefit under standing instructions. Usually the funds are sent to a checking account at the PSE/EPF or other institution. Occasionally, the merchant may request that funds, which would otherwise be sent to his bank account, be retained in a security reserve required under the terms of his contract with the acquirer. These funds, diverted at the request of the merchant, would also be considered paid to the merchant.

The amount of any such transfer to, or at the direction of, the merchant, is the "gross proceeds" to be reported. It is important to note that the legislative history is clear that the amount to be reported need not be adjusted for such things as cashback; this provision was not intended to be reflective of actual income, just of what was transferred to the control of the merchant.

8. How to administer the reporting requirements so as to prevent reporting of the same transaction more than once?

Congressional concern that duplication be avoided is evident in the legislative history and the directive to the Treasury to address this matter. Every payment card transaction reported under IRC sections 6041, 6041A, and 3402(t) will be reported a second time under IRC section 6050W. This will create obvious confusion for taxpayers who receive two returns for one transaction. This will be further compounded by the fact that the duplication is limited to transactions done by payment cards, and will not include payments done by check. Merchants generally do not keep track of who pays them by what method. It is important that the confusion potential be addressed by eliminating any duplication between and among the mentioned sections of the Code.

This confusion, of course, will also increase the burden on IRS as it tries to sort out what has been duplicated, and what has not. IRS will also have to deal with increased taxpayer calls with questions about this duplication, and with an increase in inaccurate tax returns and amended return processing. This unnecessary confusion and increase in burden on all parties can be simply solved with a regulation which eliminates the duplication.

In addition to confusion over duplicative reporting, the existence of section 6050W on one side, and sections 6041, 6041A, and 3402(t) on the other raises the possibility of double withholding. If the duplication is not removed, a single transaction would result in up to 56 percent being withheld.⁶ Removing the overlap between the provisions is necessary to avoid this unjust result.

We recommend that IRS provide in the regulations that any transaction reportable under section 6050W be exempt from reporting under the other sections. Sections 6041 and 6041A generally apply only to payments by those in a trade or business for services and not to merchandise transactions, and provide exceptions for most payments to corporations and government agencies. Section 3402(t) applies to payment for both goods and services but includes within its scope only payments made by Federal, State, and some larger local governments. Section 6050W includes payments for both goods and services, includes all payors (cardholders) including both those in a trade or business and the vast consumer sector, and contains no exceptions for payments to corporations or for governmental entities. Because the scope of the reporting under section 6050W is vastly broader than the other sections combined, it should be the primarily reporting requirement.

If section 6050W does not apply to a transaction, then the payor would be require to report as under current law. The payor would easily know which transactions were conducted electronically versus those paid by check as most, if not all, payors using cards for payments maintain separate systems for payments by check. A regulation excusing reporting under sections 6041, 6041A, and 3402(t), where the transaction is reportable under section 6050W will ensure the broadest coverage without any duplication, thereby both providing IRS with the most expansive pool of information without confusing taxpayers with multiple reports of some transactions.

9. How to address differences between section 6050W reporting and payee reporting on Forms 1040, 1065, or 1120, particularly when timing differences arise, for example, between calendar reporting years and fiscal taxable years, and the potential appropriateness of annual information returns from payment settlement entities that either segregate monthly "gross amounts" or reflect the taxable year of the participating payee?

Information reporting can be done only on a cash and calendar year basis. Reporting parties under section 6050W have no way to know the accounting method used (cash or accrual), or the tax year observed (fiscal or calendar) by their payees. As a result, it is inevitable that the amounts reported under section 6050W, as with many other items subject to reporting, will not correlate to any line item on any return. This is inherent in many reporting requirements, especially where the recipients are non-individuals. For example, Federal government agencies are required to report payments to corporations under IRC section 6041. Those corporation payees may use a fiscal year, and most likely use the accrual method of accounting. The Federal agencies use the standard cash/calendar method of reporting as the tax attributes of their payees are unknown and unknowable. The same is true for section 6050W.

It is important to note that during the legislative process, this provision was described as a way to develop comparative analytical tools for audit purposes, as a starting point to identify income of any taxpayer with the recognition that, like most other reports of proceeds⁷, it would be subject to adjustment. The decision to require a gross number rather than a net number was a further recognition that the proceeds reported would not reflect actual taxable income as they would include cashback paid to purchasers, and not be adjusted before reporting for other items.

Section 6050W was adopted with the knowledge that such specific line item correlation with existing tax returns would not be possible given the current tax returns. If IRS desires to have line item correlation, they should revise the specific tax returns to provide to a line that reflects the amount reported under this section. That number then can be adjusted by the taxpayer for cashback paid out to customers, chargebacks, returns, fees, as well as "normal" business expenses such as cost of goods sold, rent and other expenses, labor costs, etc. Congress intended that the reporting be of gross proceeds, and not taxable or other adjusted income. IRS should honor the Congressional intent in this regard.

10. What document retention and other verification requirements should apply to reporting entities and what information should be captured for purposes of substantiating the payments reported?

IRS should require of filers under section 6050W only the same things required of other filers of other information returns: (1) retention of the information or the ability to re-create it for 3 years from later of the due date of the filing or actual filing date (4 years if any backup withholding is done.); and (2) voluntary TIN matching. By adopting the suggested definition of gross proceeds, the PSE/EPF would "substantiate" any payments by showing records of the electronic funds transfers that occurred. No special recordkeeping should be required; PSE/EPFs should be held to a "normal business practice" standard of recordkeeping in computing and reporting the amount to the best of their ability. No other standard should apply here.

² The numbers refer to the questions as posed by the IRS in the Announcement. Since Visa is not submitting any comments on Question number 6, that number is omitted in the responses in the document.

³ Fed. Reg., Vol. 69 No. 32, February 18, 2004 pages 7567-74. This document, in conjunction with section 401 of the Job Creation and Worker Assistance Act of 2002 (P. L. 107-147, March 9, 2002), authorizes payors to provide payees with electronic Forms 1099, etc., provided certain requirements are met including payee consent to receive such documents electronically.

⁴ Cf. Payor and paying agent rules under Treas. Reg. 1.6041-1(e). The processor in this example would be performing mere ministerial functions and therefore not rise to the level of the one required to report.

⁵ Treas. Reg. 3406(g)-1(f)(2)

⁶ The maximum may be up to 62 percent as the rate for backup withholding will revert to its previous level of 31% as of 2011 unless Congress extends the current tax cuts. Since the current Administration has announced its intention to let those provision expire, it is highly likely that by the time 6050W goes into effect the backup withholding rate will be 31 percent once again. Because both 6041 and 650W could require the payor (6041) and the PSE/EPF to withhold, the merchant could receive a mere 38 percent of the transaction.

⁷ Cf. Broker reporting of gross proceeds from the sale of stocks and other securities under IRC section 6045. The amount reported on Form 1099-B, whether reported before or after fees and commissions, is not reflective of taxable income, but only the amount of the transaction. That amount may be a gain or loss after correlated with the basis of the item sold.