Operations

By Adam Atlas Attorney at Law for The Green Sheet  March 28, 2011

As of Jan. 1, 2011, providers of credit and debit card settlement services must keep track of gross transaction totals, by individual merchant, for annual reports to the IRS. The first of these reports - detailing monthly and annual gross total credit and debit card payments by merchant during 2011 - are due to the IRS early in 2012.

Merchants must be identified by business name and address as well as tax identification number (TIN); those that fail to provide valid TINs will be subject to backup withholding.

Since acquirers already require TINs when opening merchant accounts, many payment professionals feel the new reporting requirement shouldn't be difficult to implement.

It's hard to ascertain how much it will cost acquirers to calculate the annual gross processing amount for each merchant and file the appropriate information with the IRS.

That said, the cost of delivering a service is not always directly related to the price charged for the service. Consider PCI compliance, for example. In many cases, PCI-compliance service for merchants consists of merely providing them a one-time questionnaire for which a processor charges a monthly fee for the term of the merchant agreement. Keeping that in mind, I will not hazard an opinion as to whether it is right or wise to charge merchants for filling out and filing the IRS forms.

As far as I know, the acquirer and merchant filing requirement is an annual obligation. That said, expenses related to plenty of annual requirements are commonly broken down into monthly fees. I think ISOs should expect acquirers to want to charge monthly fees related to the new IRS forms. It may, however, be challenging to reconcile merchants to the notion of paying a monthly fee for an annual tax form.

That said, anything more than a fee of a few dollars per month would probably be difficult to sell to merchants. Also, the price should not be greater than similar fees charged for other services that provide more perceived value to merchants.

For example, a merchant's monthly processing statement fee, which really is a monthly deliverable to the merchant, obviously takes more effort to compile than an annual statement of gross processing. Therefore, the monthly fee, if any, for the IRS form should not be more than that charged for the merchant's monthly statement.

While I cannot predict the future, I am inclined to believe that the popularity of charging an IRS reporting fee is likely to decline over time. At first, the temptation will be to charge a few dollars a month. Then, through ordinary competition, some ISOs might elect to absorb the fee.

In the very long run, some merchants might question why they are being asked to pay for a tax filing that is imposed on processors by law. Rather than speculate, it's probably best to simply recommend that all participants in our industry discuss with their business partners whether IRS fees will be charged, and if so, how they will be sold to merchants and how they will be shared.

Healthy communication now among all parties concerned will help smooth the implementation of additional merchant fees should they be deemed necessary.