December 2, 2011
Credit card processors pass costs of IRS rule to merchants
Negotiate to have fees waived, expert advises
By: Bill Enfield
For The VIN News Service
Some credit card processors are charging customers a new fee because of an Internal Revenue Service (IRS) reporting requirement, according to a credit card industry watchdog.
Phil Hinke, president and founder of MerchantFeeSavers LLC, said in an email interview that credit card processors are trying various methods to assess merchants a fee to offset costs tied to a federal directive that forces processors to report income passing through credit cards to the Internal Revenue Service (IRS).
The reporting requirement — outlined in section 6050W of the Internal Revenue Code — was passed in 2008, as a section of the Housing and Economic Recovery Act. The mandate kicked in this year.
“I know salespeople are quoting IRS fees to merchants,” he said. “In fact, I saw a quote that had a $2.95 monthly IRS fee just today. However, it appears the merchant account providers are using other terms on the merchant statement to describe a fee with the IRS component in it. Some of those terms appear to be ‘reporting fee,’ ‘regulatory fee,’ and ‘reg comp fee.’ ”
There may be other terms as well, he said.
To the best of his knowledge, Hinke said it's legal for processors to impose fees on merchants to compensate for having to deal with additional IRS paperwork.
“Keep in mind that all merchant applications or merchant agreements will have some clause giving the provider the right to increase fees or add new fees,” Hinke said.
"Just like with monthly PCI (payment card industry) fees, I have seen monthly reporting fees vary dramatically,” Hinke said. “This may suggest that some processors are using these fees as an additional revenue source. As a rule of thumb, all annual and monthly fees should not add up to more than $200 per year.”
One veterinarian reported on the Veterinary Information Network, an online professional community, that she'd been charged a one-time fee of $29 by Elavon, a major credit card processor, which cited the IRS mandate as justification. The veterinarian protested the fee and received a refund from a third party that had engaged Elavon to handle its credit card services.
A spokeswoman for Elavon, which processes payments for more than 1 million merchants worldwide and conducts more than 2 billion transactions annually, did not respond to several calls and emails for comment.
Sean Harper, chief executive officer of FeeFighters, recommended fighting any such fee.
“Before the new law, there was no requirement for credit card processors or services like PayPal to report the income they sent to customers,” said Harper, whose company is a web-based service free to merchants seeking competitive bids from processing companies.
The lack of such a requirement “created gaps” in the IRS’s knowledge, Harper said in an email interview.
Harper suspects that credit card processors are using the law to try “to pass along the cost of the law and then some.”
It is impossible to determine how much it truly costs to meet the new law's requirements, he said, and that uncertainty works in Elavon's favor.
“One, they hope a lot of customers won’t notice. Two, no customer really has the data to dispute it,” Harper said of the new fees that Elavon has passed on to merchants
Harper recommends that veterinarians and others try to negotiate a fee waiver. If the processor still balks at waiving the fee, Harper said the customer should tell them that they will shop around and may take their business elsewhere.
“Tell them that you are angry and that you did not agree to the fee,” he said.
The new fee is reminiscent of the PCI compliance fees that Visa and MasterCard charge merchants to offset security expenses tied to storing credit card numbers, Harper said. “It was sort of a joke in the industry that the fee was so profitable that the PCI stood for Processors’ Cashflow Infusion."
Another recent dust-up concerning credit card processors relates to a government-mandated limit on debit card fees. Although Congress intended to save consumers money, credit card processors are not required by law to pass those savings on to their clients.
Heartland Payment Systems, one of the largest credit card processors in the United States, recently raised its monthly merchant fees by $10. But company spokeswoman Ela Voluck said the increase was not imposed in response to the new IRS reporting requirements.
Rather, it "is a reflection of an overall increase in regulatory requirements surrounding security practices and reporting," she said, adding that the $10 increase will permit Heartland to provide additional services related to security, data protection and regulatory compliance.
“This is the first fee increase in the company’s 14-year history,” Voluck said.
A PayPal spokeswoman declined to say whether or not PayPal is charging extra to cover the IRS requirement. A statement on the company’s website reflects what’s outlined in the law: After Jan. 1, PayPal will
report to the IRS the sales information of users receiving more than
$20,000 in gross payments and those receiving more than 200 payments a
“We do not comment on speculation regarding increased costs due to Form 1099-K,” said Jennifer Hakes, senior manager for PayPal corporate communications.
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