The merchant-acquiring industry is turning an Internal Revenue Service reporting requirement into a profit center, some analysts suggest.
To accomplish that feat, however, companies are sidestepping a ban on levying fees for reporting merchants’ transactions to the IRS, Adil Moussa, an analyst for the Boston-based Aite Group LLC, tells PaymentsSource.
“Merchant acquirers plan to give the fee a generic name so they can circumvent the IRS forbiddance of charging for this service,” Moussa says.
That sleight of hand does not appear likely to have significant repercussions because the legal departments for the acquiring industry’s biggest players have assured top management they can safely evade the rule, he says.
In a common scenario, payments processors calculate the cost of complying with the new reporting requirement, marking up that figure and then passing it along to independent sales organizations, says Adam Atlas, a Montreal-based lawyer who specializes in payments. ISOs, in turn, will mark up the fees charged by processors and pass them along to merchants, Atlas says.
A few processors began assessing the fees late last year or early this year, but most have not imposed them yet, Moussa says.
Although some processors or ISOs may waive the fees to gain competitive advantage, Moussa projects the fees merchants ultimately pay will range from $24 to $119 or more annually. Most will fall within the span of $39 to $69, he says.
The cost of meeting reporting requirements appears likely to average $17.80 per merchant for larger players but could come to as much as $48 per merchant for smaller companies, Moussa says.
Costs include reprogramming computer systems and making sure databases match, observers say.
Some ISOs have complained bitterly about the fees while others have accepted them with little complaint, says Atlas. He used the word “heartache” to describe the rift in relations that has occurred between some ISOs and processors over the fees.
Virtually no contracts between ISOs and processors cover the fees, which almost no one foresaw when they were drawing up the agreements, Atlas notes. Imposing fees that are not included in the contract does not make sense, he asserts.
“For me, it is a matter of principle,” Atlas says. “I really don’t like imposition of a fee that is not clearly spelled out” in the contract.
Processors should wait until the contract runs out, typically three to five years, before imposing fees not covered in the document, he contends.
“I have seen instances where ISOs refused to pay this fee and were successful in convincing the processor that it had to be an optional program,” Atlas says. The ISOs accomplished that without legal action, he notes.
Besides imposing fees, processors have in some cases “punted” the work of reporting merchants’ transactions, placing the burden on ISOs, Atlas says.
The labor involved in reporting merchants’ transactions has irritated some ISOs, observers say.
ISOs have spent “an inordinate amount of time” validating tax identification numbers, or TINs, and the company names of merchants to ensure their databases match those of the IRS, Moussa says.
Every letter and number of each name and TIN must match exactly in both databases for the reporting to work. If an ISO records a company name as “ACME and Sons Inc.,” for example, and the IRS records show it as “ACME & Sons Inc.,” the ISO has to correct the situation, Moussa wrote in a report.
ISOs are using phone calls and direct mail in their attempts to clean up the records but will resort to charging fees or withholding of receipts as the end of 2011 approaches, the first year transaction-reporting is required, Moussa says.
If an ISO fails to reconcile the names and numbers, the IRS requires acquirers to withhold 28% of the value of the merchant’s transactions through the end of the year, Moussa says. That would result in merchants “lashing out” at acquirers, he contends.
The reporting requirements arose from the Housing and Economic Recovery Act, which was signed into law in 2008 (
The measure required the reporting on form 1099-K as part of an effort to end fraudulent or erroneous under-reporting of income by merchants.
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