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Monday, July 14, 2008

Does Housing Bill Create New Burdens and Costs for Small Businesses?

So, the Senate passed Housing legislation on July 11 – the Housing and Economic Recovery Act of 2008. The House could consider the bill as soon as Tuesday (July 15).

Guess who gets to shoulder the burden of "paying for" the legislation?

The legislation includes an array of programs and taxpayer supported initiatives like $3.92 billion in block grants for communities disproportionately impacted by foreclosures; a tax credit for first-time homebuyers; a standard property tax deduction for non-itemizers; $11 billion in mortgage revenue bonds (“federal tax-exempt private bond authority”); and assorted other programs that will provide “long-overdue relief to millions of homeowners struggling to keep their homes and the communities affected by the crises,” said Chairman Chris Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs in a media statement.

“In addition, this legislation will work to stabilize the housing markets and reform and strengthen our housing sector,” he added.

Obviously, this bill is an expensive one and it has to be “paid for.” That’s where small business comes in. (Or, where Congress thinks it can get more money from.)

The bill includes a provision that would mandate information reporting to the Internal Revenue Service (IRS) on merchant payment card payments. “Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee,” according to a Senate Finance Committee document outlining the measures to “pay for” the bill’s tax provisions. (The government estimates this "tax gap" reporting mandate would raise $9.802 billion over 10 years.)

Essentially, the bill establishes a mammoth system for collecting almost all credit card, debit card and electronic payment transactions made in the United States – and these will be reported to the IRS. Many in Congress claim the mandate won’t cost small businesses anything – in real dollars or compliance costs – but who are they kidding. Credit card companies, banks and the electronic payment industry are not going to do this for free – the costs will be passed down to small businesses.

The small business merchant also gets a copy of the total transactions sent to the IRS.
And what if there are mistakes in reporting transactions (can you imagine reconciling hundreds, and even thousands of transactions)? I don’t have to go any further there….

In addition, the reporting companies would be required to verify the small business owner’s taxpayer identification number. And if they could not, the credit/debit or e-payments company would be obligated – by law – to withhold 28 percent of total sales and send it to the IRS. (Oh, and is anyone concerned about privacy issues here?)

The Senators must have overlooked the fact that most banks in the U.S. are small institutions. This new reporting burden will be quite costly and burdensome to implement and maintain. According to the Independent Community Bankers of America, 96.3 percent of all banks in the U.S. are small businesses. As of January 2008 -- 8,324 banks are community banks (out of a total of 8,643 banks).

Well, how can Senators say this is small-business friendly? In an act of kindness, the legislation exempts entities that have transactions of $10,000 or less, and 200 transactions or less.

This initiative is one of many that have been proposed to close the so-called “tax gap.” It has been supported by the Administration for some time, but small business groups have been very vocal in opposing its intrusive and burdensome nature.

Nothing like a crises, however, to get it into law.

Karen Kerrigan, President & CEO, SBE Council

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