New Law Taxing for PayPal & eBay Sellers

By Ina Steiner
EcommerceBytes.com


Online merchants face many challenges
running their business, and taxes and
cash flow are top concerns. A new law
will require payment card processors
and third-party settlement organizations
to report eBay sellers' and online
merchants' transactions to the IRS
beginning in 2011.

Sellers have had many questions about
the new law and have also wondered
about certain PayPal practices around
credit checks and holding payments.
We checked in with PayPal and with
an attorney in the payments field
to learn more about these issues.

Reporting Payment Transactions to the IRS
The United States Congress passed the Housing
and Economic Recovery Act of 2008 last summer.
Included was a provision that requires payment
processors and third-party settlement
organizations to report gross transactions
of payees to the IRS (Internal Revenue Service).

At the time, PayPal said the new law would
require it to report to the IRS the total
payment volume received by PayPal customers
in the U.S. who receive more than $20,000
in payment volume in a single year and receive
more than 200 payments in a single year.
The new reporting requirement takes effect
in 2011.

Michael Oldenburg said there was
nothing new to report on the new legislation.

Zahara Alarakhia, an attorney who works
with financial services firms said,
"who's going to enforce it, what kind of
compliance issues are payment processors
going to face - no one really knows."

Zahara confirmed that the law applies to
merchants who make over $20,000 in gross
transactions and more than 200 transactions.
So, for example, an online seller who makes
two transactions for a total of $30,000 in
the tax year would not be reported, since
the number of transactions did not exceed
200. She said the law is not retroactive
and takes effect for tax-year 2011.

Zahara said it's going to take a lot of
upgrading on the technology end for
settlement agencies to comply with the
reporting requirements, and it also raises
privacy and regulatory issues. The IRS
does not really understand the merchant
acquiring business, she said, and what
Congress has required under the law
raises substantial issues in the
marketplace, such as security issues
regarding keeping track of social
security and tax identification numbers
that might conflict with other laws.
"The process would have to tie all of
the transactions of the merchant to the
tax identification number and store
those on their systems, which would
increase potential hacking issues
and privacy issues."

PayPal Credit Checks and
eBay's 21-Day Hold Policy

PayPal may hold a seller's funds as
part of eBay's 21-day hold policy -
usually affecting fewer than 5% of
transactions, according to PayPal
Director Monroe Labouisse. In an
interview with eBay blogger Richard
Brewer-Hay last week, Monroe said,
"In a very small percentage of cases,
eBay asks PayPal to hold a payment in a
seller's PayPal account for up to
21 days.

eBay asks PayPal to do this for a
buyer's protection when eBay believes
the transaction is significantly
more likely than the average transaction
to be fraudulent or to wind up in a
dispute between the buyer and the seller.
For example, a relatively new eBay seller
who is selling an expensive electronics
item may be flagged for an eBay item hold."

Monroe said eBay item holds are part of
eBay's overall efforts to bring more
buyers back to eBay, which ultimately
will drive more sales for sellers.

PayPal also conducts credit checks on
sellers in certain cases to manage any
possible risk of loss from a seller's
transactions. The review might result in
PayPal imposing a rolling reserve. "If the
seller's credit score is not as high as
we'd like (and the score we look for depends
on the industry the seller operates in),
or if we determine there are other factors
that may increase the risk of claims or
chargebacks, we will ask for the seller to
deposit a reserve in their account," Monroe
said in the blog interview.
"The reserve will be a certain % of the
seller's past volume over a certain period
of time." These rolling reserves differ
from the 21-day holds.

PayPal spokesperson Michael Oldenburg said,
"In most instances, credit inquires are for
authentication purposes only and will not
impact customers' credit scores. In those
instances where there is an increased level
of risk (for example, high processing
volumes similar to a traditional merchant
or business account), then we may do more
in-depth credit inquiries that could
potentially impact the customer's
credit score."

Oldenburg also said that PayPal does not
restrict accounts as a result of credit
checks. "As you may know, accounts are
generally restricted when we suspect
fraudulent activity. We do this to protect
both buyers and sellers against fraud."

We asked attorney Zahara Alarakhia about
PayPal's practice of running credit checks
and its 21-day hold policy. "As long as
it's in PayPal's terms and conditions, can
they do it? Yes." It's not uncommon for a
payment processor to require a background
check on the merchant business and its
principals, she said. Banks typically put
holds on checks in certain circumstances -
though not as long as 21 days, Zahara said.

"Right now, PayPal has been fortunate
enough to escape all kinds of regulation.
They're not under the purview of a bank,
so they can escape banking regulations"
and KYC (Know Your Customer) standards.
She believes PayPal is trying to enforce
these laws to curb possible regulation
that might be coming down the line that
fight money-laundering and
anti-terrorism activities.

"This new legislation (Housing and Economic
Recovery Act of 2008) is the first time
that PayPal will actually be hit with
legislation - any sort of legislation."
She said that while nothing is on the radar
screen, she thinks eventually there will be
some regulation regarding third-party
settlement organizations.

The law does not differentiate between
online and offline merchants, according
to Zahara.