In a Technical Memorandum, TSB-M-12(2)C, (2)I, (2)S (N.Y.S. Dep’t of Taxation & Fin., Feb. 8, 2012), the New York State Department of Taxation and Finance has issued guidance for those required to file duplicates of federal information returns relating to payments made in settlement of payment card and third-party network transactions pursuant to Internal Revenue Code § 6050W.
IRC § 6050W requires that payment settlement entities (such as payment processors and third-party settlement organizations) report merchant payment card (e.g., VISA, MasterCard, or American Express) and third-party network transactions (e.g., PayPal or Google Wallet) to the Internal Revenue Service. This reporting requirement began in early 2012 for payment card and third-party network transactions that occurred in 2011.
Under IRC § 6050W, reporting entities must file Form 1099-K in order to report the gross amount of each merchant’s transactions for the year and must also provide a copy of the Form 1099-K to the merchant. Only those merchants that accept merchant payment cards or third party network transactions in payment for goods or services will be the subject of Form 1099-K reporting. For example, if a business sells items on eBay and accepts merchant payment cards for payment, the business will receive a Form 1099-K for the gross amount of proceeds for the goods purchased through use of a merchant payment card in a calendar year. With respect to third-party network transactions only, reporting is only required if the total number of transactions exceeds 200 and the aggregate value exceeds $20,000 in a calendar year.
In response to the new federal reporting requirements, New York enacted Tax Law § 1703, which requires reporting entities that are subject to IRC § 6050W to file with the Department either a duplicate of all information returns or a duplicate of such information returns relating to New York State payees. The duplicates of Form 1099-K must be filed within 30 days of the filing of the information returns required by the IRS. Under the IRS rules, information returns are due by February 28 of the following year if the return is not filed electronically, or by March 31 of the following year if filed electronically. The Technical Memorandum advises that the first duplicate information returns must be filed with the Department by either March 29, 2012, or April 30, 2012, depending on whether the information returns are filed with the IRS in a paper format or electronically. This represents a change from guidance that had been provided in Technical Memorandum, TSB-M-10-(7) C and (13)I (N.Y.S. Dep’t of Taxation & Fin., Dec. 10, 2010) and TSB-M-10-(18)S (Dec. 6, 2010), which indicated that the first information returns were due March 1, 2012.
While reporting entities have the option of filing either duplicates of all information returns filed with the IRS or duplicates of any information returns for New York State payees, the Department “suggests” that, for ease of compliance for the reporting entity, all information returns required to be filed with the IRS be filed with the Department. For reporting entities that choose to file information returns relating only to New York State payees, the Department will make available a database of New York State taxpayers and persons registered for sales tax purposes. Tax Law § 1703(c) prohibits the Department from using any information received on an information return concerning a person who is not subject to tax in New York.
Tax Law § 1703 mirrors IRC § 6050W only as to the requirement to file an information return. New York has not adopted the federal requirement that reporting entities perform backup withholding with respect to merchants that fail to furnish a correct taxpayer identification number.
The Department may impose a $50 penalty for each failure to file a duplicate information return, with an annual maximum penalty of $250,000. The Department has the authority to waive all or a portion of the penalty if it is shown that the failure was due to reasonable cause and not due to willful neglect, or if rescinding the penalty would promote compliance with the requirements of the Tax Law and effective tax administration.
Additional Insights. According to the legislative history of Tax Law § 1703, the New York State Legislature intended that the gross payment information provided to the Department on Forms 1099-K would be used to analyze sales and other tax returns to determine if there may be underreporting of sales and income tax liabilities. While the Department had sources of information for reporting and withholding requirements on entities making payments to individuals, until the passage of IRC § 6050W and Tax Law § 1703, the Department did not have a similar source of information to validate sales reported by New York State businesses. The enactment of Tax Law § 1703 was estimated to increase revenue by $35 million in the State's fiscal year 2012–13 and $83 million per year thereafter.
As a practical matter, reporting entities may follow the Department’s advice and file copies of all information returns required to be filed with the IRS, even if some of the merchants reported thereon have no New York sales or no New York tax obligations, rather than taking the time and trouble to segregate New York State payees. Faced with the risk of substantial penalties for failure to file the required information returns for New York State payees, reporting entities may err on the side of overreporting. Non-New York merchants may, therefore, have concerns about the Department’s use of the information reported on Forms 1099-K to identify merchants that the Department believes should be collecting New York State tax. However, the legislative history is clear that the information reported on the Forms 1099-K was intended to be used to analyze sales and other tax returns to determine if there may be underreporting. Accordingly, the additional revenue projected to result from Tax Law § 1703 should arise solely from the detection of underreporting by New York vendors and not the identification of non-filers.