By Adam Atlas
Attorney at Law
Get ready for another line item in your merchant pricing: online sales tax processing. On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act of 2013 (MFA). Political observers predict passage in the House could occur within weeks or months. The White House claims the tax would "level the playing field for local small-business retailers." What does this mean for ISOs and merchant level salespeople (MLSs)? A lot.
If passed into law, the MFA would require online retailers to collect state sales tax. Most online retailers lack the willingness or the sophistication to determine what state sales tax applies to each sale. If the MFA becomes law, willingness will not matter; retailers will be required to collect and remit state sales tax.
The MFA will create a market for intermediaries providing real-time tax look-up services enabling merchants to charge the right tax on each sale. Whether or not ISOs, MLSs and merchants have heard of this law, processors are now laying the infrastructure for new fees related to the processing of online sales tax.
If the MFA becomes law, each online sale will have to provide the following in order to query an MFA intermediary and fetch the applicable sales tax:
For example, a fruit basket sold from California to Utah will have a different tax rate than the same basket sold from Florida to New York. The intermediary servicing the merchant will keep records regarding all taxes levied by the merchant.
At the end of the month, the total of taxes collected will be processed by the intermediary from the merchant's bank account via automated clearing house (ACH) and remitted to the various states that are entitled to the taxes. Yes, cash advance providers: be warned of a possible new monthly ACH of taxes from merchants' bank accounts.
The states have put a kind of bounty on online sales taxes, agreeing to pay a small percentage of the taxes collected to the intermediaries that collect them. As ISOs know, small percentages - even basis points - on overall merchant volume are enormous. Only six intermediaries are licensed to assist merchants in the United States with online sales tax collections. If the MFA becomes law, they stand to make a killing.
Acquiring banks, processors, ISOs and shopping carts are ready to race for a share of the revenue of intermediaries providing MFA tax look-up, collection and remittance services. They are in a position to integrate the piece into their systems and earn a part of merchants' tax collections from the intermediary for which they become a reseller.
For the first time in years, there is competition for a new slice of merchant processing basis points - on overall volume. Savvy entities are already integrated and providing opt-in MFA processing prior to the law's enactment. Others will be playing catch-up, or worse, be shut out from revenue on sales tax.
Ask your processors and acquiring banks whether they are ready for the MFA, to what extent they will earn revenue from it and how much of that revenue will be shared with you. We are talking about billions of dollars in which percentages are up for grabs. If your acquiring bank does not yet have an MFA integration plan, you, as an ISO or MLS, may be shut out of this new revenue stream.
Despite the fact that the MFA could create a source of new revenue, some acquirers may do a repeat of the Payment Card Industry (PCI) Data Security Standard (DSS) and other new regulatory items and impose a compliance cost on ISOs and merchants for the program. No single formula works for everyone.
However, those who do not plan for this new item are planting the seeds of new conflicts under ISO agreements. Contact your acquirer and get a written agreement regarding its MFA integration program and how much revenue will be shared with you. Also begin educating larger online merchants about the MFA. We have learned from PCI, the Fixed Acquirer Network Fee, TIN matching, etc., that we should plan for changes in structural items when we know of them in advance.
The MFA is a perfect opportunity to get a new item right; there is money to be made here. If acquirers plan now for technical integration and commercial integration with ISOs, this could be a win-win for the whole industry. If acquirers fail to plan ahead, I'll be getting a new round of calls from ISOs with gripes about unforeseen pricing changes and the related disputes.
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