Data-Tracking Provision Retained in Housing Bill

Congress last week passed a bill to tackle the housing crisis that also includes a controversial provision requiring e-commerce and credit card companies to report merchant transactions to the IRS, raising privacy and financial issues for small businesses.

President George W. Bush has indicated that he will sign the legislation, which is intended to help homeowners facing foreclosure, but it was not clear when the president would add his signature. The White House press office did not return a call for comment.

The provision calls for credit card firms and Internet companies, such as eBay Inc., its affiliate PayPal Inc., Google Inc. and Inc., to track, aggregate and report information to the IRS on the payments they make to merchants. The reporting provision would apply to merchants who earn more than $10,000 and those who make more than 200 transactions annually.

The provision, which would go into effect in 2011, is expected to bring in $9.8 billion over 10 years. It was included in the housing bill to raise money by collecting more taxes from merchants.

The bill was passed with the provision despite the warnings of privacy and small-business groups concerned that it could put small-business owners at greater risk of identity theft. Most small merchants use their Social Security numbers as tax identification numbers, so when the legislation goes into effect, small-business owners will have to turn over their Social Security numbers to credit card companies as well as to the companies that electronically process their payments. Those companies will then have to store those numbers, which they do not currently do.

Privacy advocates have said that the legislation will allow the government to maintain a federal database of all the transactions made by millions of small businesses via credit cards or through e-commerce companies, and that the database will be a lure for identity thieves.

“Our focus was the privacy implications of this provision,” said David Sohn, senior policy counsel for the Washington-based Center for Democracy and Technology. “The banks not keeping that information around is a good information-security practice.”

Although the provision will also affect large companies, those businesses will not be at the same risk of identity theft because they typically use government-issued tax identification numbers when they file taxes.

First Data Corp., which processes electronic payment transactions for 5.4 million merchant locations and more than 2,000 card issuers and their customers, opposed the provision, in part because it will be expensive and time-consuming to reprogram its systems to comply with the new mandates.

Adam Brandon, a spokesman for FreedomWorks, an organization that advocates lower taxes and less government, said his organization is concerned about the implications of the provision. “What is terrifying for us is that the federal government is going to be sitting on a huge database of information, and we want to know that they’re going to do with it,” he said.