NSBA Testifies on Electronic Payments to Increase Tax Compliance

June 17, 2008

Speaking on behalf of NSBA, President Todd McCracken testified June 12 before the House Small Business Committee on the administration’s budget proposal to require information tax reporting on all credit card receipts of small businesses.

The hearing entitled: "Electronic Payments Tax Reporting: Another Tax Burden for Small Businesses" focused primarily on the potential administrative and financial burdens this proposal may create for small retailers and financial institutions.

This proposal would require that the institution that makes the payment to the merchant (payment facilitator) for a payment card—both credit cards and debit cards—report annually to the Internal Revenue Service (IRS) the name, address, and aggregate amounts of payments for the calendar year of each participating merchant.

Additionally, the 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 payment facilitator or the electronic payment organization must withhold 28 percent of all disbursements to the participating merchant.

During his testimony, McCracken outlined why NSBA opposes this proposal, which includes:

• The administrative and compliance costs of implementing this proposal are burdensome and onerous. It would create a new level of regulatory burden on credit card issuers, likely leading to increased fees passed on to businesses which conduct credit card transactions. These increased fees will have a negative impact on business revenue and sales, and in turn tax revenue.
• The backup withholding and the TIN verification requirements will impose substantial costs that will be incurred by small businesses. Although the burden is intended to be placed on the processor to verify the TIN, it is likely if there are any mistakes the burden will fall back on the business, requiring them to deal with the IRS and certify that their TIN is correct.
• NSBA has significant concerns about the use of the data collected by the IRS, as it could be used by the IRS for the purpose of developing trends and reporting profiles, by taking the total credit card receipts reported for a particular business and then extrapolating total income based on industry averages.
• He questioned how the IRS will be able to match and use the information reported by the processor to identify merchants that are truly underreporting electronic payments or that reliable composites of gross receipts reporting including projected cash transactions can be developed. The diversity of merchant activity based on industry, geographic location and even an owner’s efforts to manage cash flow or acceptance of only certain credit cards are all factors that make the latter objective more difficult.

NSBA’s comments were well received by Chairwoman Nydia Velazquez (D-N.Y.) and Ranking Member Steve Chabot (R-Ohio) as they both agreed this proposal raises significant technical and financial challenges for banks and entrepreneurs. In her opening statement, the Chairwoman stated "…even in a pay-go environment, we cannot afford to focus blindly on revenue figures while creating unreasonable costs for the small firms that drive economic growth."

The proposal has been broached in various forums and, over the past year, it was even suggested as a means of helping to pay for the farm bill. Until now, Congress has avoided using any of the tax gap proposals as revenue raisers. However, faced with the difficult pay-as-you-go budgetary rules, on June 18, House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) plans to hold a mark-up of a bill to patch the Alternative Minimum Tax for 2008 and offset the potential cost by using this credit card reporting proposal.

NSBA has sent a letter to both Chairman Rangel and Ranking Member Jim McCrery (R-La.) encouraging them to find a different revenue-raiser to use to pay for the AMT patch. The letter outlines the comments McCracken made during his testimony before the House Small Business and emphases this proposal places excessive and intrusive burdens on honest small-business owners.

Please visit NSBA's Action Alert center to take action.