CHAMBER OF COMMERCE

OF THE

UNITED STATES OF AMERICA
R. BRUCE JOSTEN
EXECUTIVE VICE PRESIDENT GOVERNMENT AFFAIRS

1 6 1 5 H S T R E ET , N . W . WASHIN GTO N, D.C. 20062-2000 202/463-5310

April 30, 2008

The Honorable Max Baucus Chairman Committee on Finance United States Senate Washington, DC 20510

The Honorable Charles Grassley Ranking Member Committee on Finance United States Senate Washington, DC 20510

Dear Chairman Baucus and Ranking Member Grassley: The U.S. Chamber of Commerce, the world’s largest business federation representing more than three million businesses and organizations of every size, sector, and region submit the following comments for the record on the Finance Committee's draft proposals on Information Reporting on Electronic Payment Mechanism Reimbursements. Similar revenue raising proposals involving information reporting for electronic payments are contained in the Bush Administration’s federal budget submission for years FY 2007, FY 2008 and FY 2009. Simply put, this draft proposal requires each qualified payment facilitator to report yearly to the Internal Revenue Service (IRS) the name, address, and aggregate amounts of payments for the calendar year of each participating merchant. Additionally, the qualified payment facilitator or the electronic payment organization must validate the Taxpayer Identification Number (TIN) of the participating merchant. If the TIN does not match, then the qualified payment facilitator or the electronic payment organization must withhold 28 percent of all disbursements to the participating merchant. The Chamber strongly opposes the Committee’s proposal for the following reasons: The costs of implementing this proposal have not been fully vetted or identified. If this proposal were enacted into law and implemented, there could be substantial costs imposed on the federal government, the qualified payment facilitators, the electronic payment organization, and the participating merchants that may exceed any realizable benefits. Currently, there has not been adequate analysis provided on the implementation and the recurring costs of the proposal prior to enactment. Qualified payment facilitators will be subjected to extraordinary compliance costs in order to develop procedures, hire and train staff, and develop the infrastructure needed to provide the required information and reporting. Participating merchants, most of which are compliant

small business taxpayers, will incur these costs through increased fees and the direct cost of any administrative responsibilities the proposal may create. Many participating merchants will bear additional costs related to the burdens of converting a payment distribution system that was previously not taxpayer-specific into one that would be. Multiple merchant relationships with qualified payment facilitators will be needed under the proposed system, whereas one relationship between numerous taxpaying entities is currently sufficient. This change could impose significant costs to merchants who have very few payment card transactions yearly and utilize combined relationships with other merchants to reduce costs. All of these costs will more heavily impact the smallest of businesses, who may elect to eliminate the use of payment cards as a result. Multi-unit chains, franchise and businesses with multiple revenue operations such as hotels will also have to re-evaluate their payment card processing procedures. The ability to efficiently process payment cards due to innovation and centralization of services may be eliminated due to the need to report revenues as a qualified payment facilitator to a specific taxpaying entity. Although the IRS has openly expressed interest in obtaining this information and has provided an estimate of preliminary processing costs, a comprehensive independent cost analysis for adequate personnel and equipment to handle and process the information has not yet been performed. Given the cost and disruption to the business community that this proposal would cause, it would be prudent to institute an in-depth, independent cost benefits study prior to the proposal’s consideration. In 2005, Section 511 was passed as part of the Tax Reconciliation Act of 2005. This law was passed in order to capture $1.1 billion over five years of non-compliant taxes. Almost three years later the Department of Defense has determined that it would cost the taxpayers over $17 billion over five years to comply with this provision1. These costs do not include compliance costs by the rest of the federal government, nor the state and local agencies, which will most likely escalate the total estimate by a considerable amount. This report was requested by the House Committee on Armed Services as part of the National Defense Authorization Act for Fiscal Year 2008. Although the Government Accountability Office provided some general insights regarding this proposal in a report to the Committee in November of 20072, the Chamber believes there are many important unanswered questions. A well-funded, independent study should be required prior to this proposal’s consideration in order to circumvent possible costly, unintended consequences. This independent study should identify the costs to businesses, the total costs of implementing the new reporting regime within the IRS, and the ability of the IRS to use the information in a meaningful way to close the tax gap. IRS has failed to articulate the benefits they would derive from this information and the area of the tax gap they are targeting.
1

2

See www.withholdingrelief.org GAO-08-266, Costs and Uses of Third-Party Information Returns, November 2007

No one can dispute the benefits of third-party reporting in driving tax compliance when there is a direct relationship between the information being reported and the tax entity’s willingness to divulge the information as part of their return to the IRS. An employer reports an employee’s income to the IRS and 99 percent of that income is voluntarily reported by the individual to the IRS. Financial institutions report dividend income and interest income to the IRS and nearly all of the income is voluntarily reported on the respective tax returns. The benefit of reporting payment card reimbursements, which are primarily sales and not income, is not clear. Is the IRS indicating that businesses are failing to report all or part of their credit card sales as revenue? Is the IRS looking to use this information to determine if Internet businesses are reporting sales or even acquiring a TIN? How much of the tax gap does the nonreporting of payment cards comprise? Are there other less intrusive and less costly strategies capable of achieving the same results? None of these questions have been answered prior to considering this proposal. Whereas current reporting measures require third parties to report income items that are exact, explicit and comparable to items contained on the reported tax entities return, reporting of payment card sales results at best in business profiling in order to determine non-compliance. At worst, it will lead to many unwarranted tax audits on compliant small businesses, needless expenses imposed on entrepreneurs, and precious funds diverted from the IRS in focusing on known avenues of non-compliance. As part of a comprehensive study, as suggested in the previous section, the IRS should be required to fully explain how they will use this information and the specific part of the tax gap they intend to close. The relationships between the qualified payment facilitator, the electronic payment organization and the participating merchant in many cases are not linear or mutually exclusive. In most cases there are complex relationships between the qualified payment facilitator, the electronic payment organization, and the participating merchant. Due to today’s complex financial relationships, it may be difficult to prescribe a simple method of reporting payment card sales for individual tax entities that conveniently fits the model of the draft proposal for all business relationships. As an example, a doctor’s or a lawyer’s office may have one payment card processing mechanism that is used for several taxpayers. Would they all be required to establish a different relationship with a qualified payment facilitator and purchase separate payment card processing systems under the draft proposal? If the doctor or the lawyer also had an Internet website that they used to tender payment that used a different qualified payment facilitator, would they now be required to establish their own relationship with the qualified payment facilitator assuming that they all were deemed to be individual participating merchants with distinct tax status?

The same questions would apply to single entrepreneurs with multiple businesses entities. Each business entity may not warrant the cost of establishing its own payment processing mechanism. An individual relationship with a payment facilitator is expensive and complicated. To require individual small business taxpayers to have separate relationships could be a costly and needless expense. The character of payment card transactions and the accounting methods used by the merchant to report those payment card transactions is not homogeneous. If the goal of the IRS is to compare reported payment card sales with reported merchant income then the comparison is fuzzy at best. Payment card sales can comprise a host of non-sale and delayed sale transactions. Many merchants allow cash-back features to the transaction which distort the total amount of the purchase. Tips, commissions, gift cards, coupons, and refunds add additional complexity to the transaction. Merchants themselves have differing restrictions and uses of the payment card. Some accept its use over the Internet. Some establishments do not allow the use of a payment card for big ticket items or sales which may be classified as a separate profit center. Some merchants may have only several big transactions a year, whereas others actively encourage the use of the payment cards resulting in a higher percentage of payment card sales. Some merchants accept primarily payment cards and some do not accept them at all. Further complicating the use of the reported information, many businesses employ the cash method of accounting rather than accrual accounting practices. All of these variances in the use and character of the transaction will undermine any meaningful strategy by the IRS to use the information to drive compliance. The amounts the qualified payment facilitator reports to the IRS will more than likely differ from the totals the merchant accrues based on many of the factors listed above. Merchants may therefore feel compelled to spend many hours in an attempt to reconcile the two for tax purposes so they are not subjected to an unwarranted audit. The qualified payment facilitator will have to provide additional customer support in order to field questions concerning this difference. In the end, the small businesses will end up paying for these services for an inexact and untested compliance effort by the IRS. The backup withholding and the TIN verification will impose substantial costs that will be incurred by small businesses. There are billions of credit card transactions that are processed monthly for millions of merchants. The global economy requires that these funds flow uninterrupted to the proper merchants and the liability is accrued accurately to the millions of payment card users. To impose on a payment card industry that operates internationally, the burden of a backup withholding structure that would apply to domestic businesses, that would divert some of the funds, under certain circumstances, to a suspense account to the IRS, could result in a myriad of unintended consequences and costs.

For the small business merchant who relies heavily on this cash flow, minor paperwork mistakes could result in anticipated funds not being deposited on a timely basis in the bank. This could substantially diminish the ability of the small business owner to make payroll and pay bills while the problem is rectified. After making the necessary correction that will reinstitute the full funding flow, locating and retrieving the diverted funds and identifying the actual amount of the funding diverted could be a monumental and costly challenge. For the qualified payment facilitator, the amount that is reimbursed to the small business has direct relationships to actual transactions. All of the transactions have different characteristics associated with the payment obligation and some of the transactions may even have a cash advance tendered to the customer. If a percentage of these funds are withheld from disbursement, is the amount transaction-specific? If a transaction is subsequently deemed a chargeback, is it charged back to the IRS suspense account or the small business? Will the withheld funds include a percentage of any cash advances made by the merchant? Regardless of how these complications are handled, the accounting needed by the IRS, the qualified payment facilitator, the electronic payment organization and the merchant in order to track and sort out the funding could be overwhelming considering the billions of transactions the funds represent. Additionally, the global payment card economy is in operation seven days a week, twenty-four hours a day. At what point in the transaction stream do you interject a complicated withholding regime? What will be the complications in doing this? The cost to collect and verify millions of existing TINs would be substantial. To require businesses to collect and verify millions of the TINs of their existing customers will be both lengthy and complicated. In an attempt to accomplish this on a timely basis, inadvertent verification errors will occur given the sheer numbers required to verify and the limitations of imposing this type of demand on the database. Thus the opportunity for errors to occur during this process will most likely be high. The result of these errors will be devastating to the small business merchant who depends on the cash flow from their payment card receipts. Another complication to the TIN verification and withholding proposal will be that entities will have to renegotiate existing contracts altering legal liabilities between all of the parties involved in the process. Using verified TINs as a key element for payment card reimbursements gives rise to privacy concerns. For millions of the self-employed, their Social Security number is their TIN. Given the severity and frequency of occasions of identity theft, many taxpayers are extremely reluctant to provide their TINs. Increased availability of this information in non-government databases also gives rise to privacy and security concerns for the large majority of tax compliant small business owners. International implications More information and analysis is needed to better understand the international impact of this proposal and how it may affect the global character of electronic payment processing.

Conclusion The Chamber strongly opposes the Committee’s draft proposal “Information Reporting on Electronic Payment Mechanism Reimbursements.” This proposal could impose substantial implementation costs that will be passed on to many compliant small business taxpayers. Currently, there is not a clear explanation of what benefits will be derived or the area of the tax gap this provision will seek to address. Prior to consideration of this proposal, the Chamber recommends a well-funded, independent study by a recognized non-government entity, fashioned with substantial industry input be commissioned to reveal possible unforeseen costs and unintended consequences of this type of proposal. The Chamber also recommends that the IRS provide a detailed, comprehensive public report on the complete costs of implementing the new reporting regime and the ability to use the information in a meaningful way to close the tax gap, including what areas of noncompliance they are looking to address through this reporting structure and whether there are less costly alternatives available. The Chamber appreciates the opportunity to comment on this proposal.

Sincerely,

R. Bruce Josten

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