This article was first published by the Merchant Acquirers' Committee (MAC) Government Relations Newsletter on June 27, 2018.

As the payments industry develops and deploys new technology, policymakers are working to update outdated laws and write new ones. In addition to modernizing the regulatory environment, many states are looking to the payments industry to change how payments are conducted or help raise revenue and close their budget gaps. With the Electronic Transactions Association (ETA) leading the charge, the industry has fought back against these efforts and achieved some notable successes. But as recent developments show, many challenges for the industry remain. Moreover, as different states devise new ways to drum up revenue from payment processors, other states may look to follow suit.

What follows is a summary of developments on this front in Washington, Massachusetts, and Arizona—three states that have recently looked to payment processors for additional revenue. The MAC Government Relations Committee extends a special thanks to Scott Talbott, ETA's Senior Vice President of Government Relations, and Jonathan Genovese, head of Worldpay's Government & Regulatory Affairs for helping to compile this update and participating in MAC's Government Relations Committee.

This update is meant to keep MAC members apprised of ongoing issues in the payments space and to encourage MAC members to be active in the effort to shape good public policy with state-level initiatives that could affect the industry. Cooperation and coordination will be essential as battles continue. The more that members get involved in these issues and work together, the better the chances of setting public policy that strengthens the ability of our industry to help consumers make over $7 trillion in electronic purchases in the US during 2018.

Washington:In June 2017, the Washington Department of Revenue issued an Excise Tax Advisory concluding that, for purposes of the state's business and occupation (B&O) tax, a payment processor must be taxed on the entire merchant discount for every transaction it processes with merchants, not just the revenue the processor earns. Since then, the state's Department of Revenue has audited processors based on this interpretation and, at the end of the audit, sent invoices retroactively for huge sums due. Challenging the assessment with the Department of Revenue has not borne fruit, leaving companies with the option to challenge the interpretation in court—a time-consuming and costly option that requires the payment processor to deposit the estimated tax due with the court, prior to filing suit.

Washington's decision to apply the B&O tax to payment processors doing business in the state poses a very real threat with major implications nationwide, as other states may well look to follow this model to address revenue shortfalls. The risks are especially serious in states that enforce a gross receipts tax under which companies are taxed on total gross revenue without allowing for deductions. That the B&O tax results in double taxation for many payment processers only underscores the stakes and the need to continue the fight.

Separately, the Washington Department of Financial Institutions proposed in July 2017 to amend regulations implementing the Uniform Money Services Act and Regulation of Money Services Providers. The proposal would change the state's longstanding interpretation of the Uniform Money Services Act that exempted payment-processing businesses. ETA worked with the state legislature to change the law submitted comments on this proposal on March 30, 2018 and May 14, 2018. A hearing on the rulemaking was held on May 22, 2018.

Massachusetts: For the second year in a row, the Governor's budget contained a proposal to require third-party payment processors to collect sales tax amounts from merchant settlements and send them directly to the state as part of a 'real-time sales tax' remittance system (RTST). And for a second year, a broad coalition of businesses—including the ETA and merchant trade and taxpayer organizations—came together to help educate policy makers on the disruption and staggering costs of such proposal to retailers, payment processors, and the Commonwealth, without any real benefit.

In the 2017 session, an amendment was added to Senate budget that made the implementation of RTST contingent upon the outcome of a feasibility study by the Department of Finance—and which study concluded that implementing a RSTS scheme by the proposed implementation date (June 1, 2018) was not cost effective. This year, neither chamber passed budgets that included RTST; however, the House version includes a provision establishing a special commission, to study and report on the cost-effectiveness of implementing a monthly estimated sales tax prepayment structure. These bills are currently in conference.

Arizona: In the last hours of the Arizona legislative session a bill was amended in conference to include a RTST proposal and was ultimately sent to the Governor who vetoed the bill (S.B. 1091), citing concerns about the costs the bill could impose on private industry, without any real benefit to the state. This result would not have been possible without the immediate and overwhelming opposition demonstrated by the broad coalition of retail, payments industry and taxpayer associations that has formed around the issue.

Given the risk of other states following the lead of Massachusetts and Arizona, the payments industry should work to ensure that it is prepared to fight back against similar proposals that may arise in other states.