Visa Criticizes Proposed Regs on Withholding Requirements

Visa Inc. is pleased to submit for your consideration the following comments on proposed regulations under Internal Revenue Code (IRC) section 3402(t) which requires Federal, State and some local governments to report all payments for both goods and services and to withhold 3% of such reportable payments. Our concerns outlined below address the issue of the duplication this provision will cause with other reporting provisions, especially IRC section 6050W and sections 6041 and 6041A.

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.

Discussion

Section 3402(t) provides that Federal, State and some larger local government agencies must report all¹ payments (both check and by card) for purchases of goods or services and withhold three percent of the amount paid. IRS proposed regulations would limit this obligation to contracts entered into after the effective date, now January 1, 2012, and for amounts of at least $10,000 per payment.²

Section 6050W provides for the reporting of all payment card transactions -- both goods and services, both consumer and those in a trade or business -- of any amount for any type of merchant including governments and corporations.

Section 6041 and 6041A generally require reporting of payments for services of at least $600 in the aggregate for a calendar year with exceptions for governments and most corporations (unless the payor is a federal agency which must report such payments to all corporations.)

Whether the merchant gets one or two returns or none at all will depend on who is making the purchase -- government agency, a consumer or a business -- how much is spent -- $600 annually, $10,000 per transaction or any amount -- how it is paid for -- check or payment card -- whether the merchant is a corporation or other exempt recipient -- and what is purchased -- goods or services.³

In addition, 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.⁴ Removing the overlap between the provisions is necessary to avoid this unjust result.

Example

A purchase of services by a federal government agency from a corporation in the amount of $10,000 paid by payment card in connection with a contract entered into after 2011, will be reportable under 6041, 3402(t) and 6050W. If no TIN is provided, backup withholding would be required under both 6041 and 6050W. On the other end of the spectrum, a purchase of goods or services by a consumer of any amount by cash or check will be not be reported at all. In between you have two information returns when a federal agency pays for goods with a card, two when a private sector entity pays for services by a sole proprietorship with a card (double backup withholding if no TIN in both cases), and just one when a consumer pays for anything by card. Other combinations are also possible. Merchants will get Forms 1099-MISC with amounts in box 7 (section 6041/6041A) or in box 11 (section 3402(t); payments under section 6050W may be on Form 1099-MISC, or perhaps another form. This will be very confusing for merchants who already do not understand the tax code but have been trained to include amounts reported on information returns on their tax returns. 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 that eliminates the duplication.

Recommendation

Since every card transaction reported under IRC sections 6041, 6041A, and 3402(t) will be reported a second time under IRC section 6050W. The best -- really the only workable -- way to eliminate this duplication and minimize taxpayer confusion and the additional IRS processing costs is to provide that any transaction reportable under section 6050W is not reportable under the other sections. The reason for this approach is clear. Sections 6041 and 6041A generally apply only to payments by those in a trade or business for services and not 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 required 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 or by card. 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.

We understand and support the need for a paper trail of transactions to assist IRS in their audit and other enforcement activities. But it must be pointed out that every card transaction already has a paper trail. By layering multiple reporting requirements on top of each other compliance is reduced, not enhanced, as taxpayers become confused and overwhelmed. Elimination of the over-lapping elements of the multiple reporting requirements, will improve the utility of the information and increase taxpayer understanding and compliance.

² This threshold is in the proposed regulations, not the statute.

³ See attached chart for a brief look at the relative coverage of the various provisions.

⁴ 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 6050W could require the payor (6041) and the PSE/EPF (6050W) to withhold, the merchant could receive a mere 38 percent of the transaction.