Proposed Rule for Remittance Transfer Excise Tax
On April 13 th , the Internal Revenue Service (IRS) published a proposed rule on H.R. 1’s (FKA the One Big Beautiful Bill Act) excise tax on remittance transfer providers. To recap, HR. 1 imposes a 1% excise tax on certain remittance transfers. Remittance transfer providers are responsible for collecting the tax by withholding and remitting to the U.S. Treasury Department on a quarterly basis. Remittance transfer providers are secondarily liable for the tax and are required to remit the tax to the Treasury, even if they do not collect the tax at the time of transfer. Notably, the tax only applies to remittance transfers made by cash, money orders, cashier’s checks, or other similar physical instruments. H.R. 1 exempts transfers made from accounts at banks, credit unions, and other financial institutions or funded by a debit or credit card issued in the United States.
America’s Credit Unions’ Regulatory Advocacy team will be writing a in-depth summary of the proposed rule and soliciting comments from members. When it is published, you can find the regulatory comment here. In the meantime, here are some key points from the proposed rule.
Regulation E Exemptions
The proposed rule discusses several Regulation E remittance transfer exemptions. The first is the small value transaction exemption under Regulation E, section 1005.31(c)(1)(i). This section provides an exemption for small value transactions of $15.00 or less. The proposed rule adopts this exemption and excludes remittance transfers of $15 or less from the excise tax.
The second is Regulation E’s exemption of securities and commodities transfers. The proposed rule adopts this exemption and excludes from taxation any “transfer that is excluded from the definition of electronic fund transfer under 12 CFR 1005.3(c)(4).”
The last is Regulation E’s normal course of business safe harbor. Under section 1005.30(f)(2), if a person provides 500 or fewer remittance transfer in both the current and previous calendar year, they are not considered a remittance transfer provider for Regulation E purposes. Unfortunately, the proposed rule does not adopt this exemption and remittance transfer providers, who provide fewer than 500 remittance transfers and qualify for the Regulation E safe harbor, will be required to collect the excise tax.
Cashing Checks
H.R. 1 specifies that the excise tax only applies to cash, money orders, cashier’s checks or other similar physical instruments. The proposed rule also includes traveler’s checks.
Beyond traveler’s checks, the rule goes a step further and provides that:
“in a case in which a remittance transfer provider (or its agent) cashes a personal or business check payable to the sender and the funds are used to fund a remittance transfer, such transaction will be treated…as a remittance transfer for which the sender provides cash to the remittance transfer provider.”
Under the above, if a member walks into a credit union with a check payable to themselves and uses that check to pay for a remittance transfer, the transfer is taxable. However, if the member makes out a check payable to the credit union, as the transfer provider, that transfer is not taxable.
Transactions for Tax-avoidance Purposes
Under the proposed rule, “[i]f a sender and remittance transfer provider (or its agent) or third party engage in a transaction (or series of transactions) with a principal purpose of avoiding the remittance transfer tax, the Secretary may disregard or recharacterize the transaction (or series of transactions) in accordance with its substance.” Under this, if a remittance transfer provider or sender structures a transaction, in order to get around the excise tax, the IRS can come after them. When making a determination on whether a transaction was made to avoid the tax, the IRS will review the relevant facts and circumstances, such as the pattern of conduct for both parties, the timing of the transactions involved, and the amount of the transaction.
The proposed rule provides an example where a sender purchases a pre-paid debit card from a remittance transfer provider and immediately uses that pre-paid debit card to send a remittance transfer with the provider. Based on this, credit unions may want to be careful regarding the exemption for funding transfers via a credit union account. While the law does not provide for a specific length of time that funds need to be in an account for the exemption to apply, using the prepaid debit card example, it looks like the IRS will look unfavorably on deposits into an account followed immediately by a remittance transfer.
America’s credit unions will be submitting a comment letter to the IRS on this proposed rule, requesting clarification and advocating for credit unions. In the meantime, if you have any compliance questions, please do not hesitate to contact us at [email protected].
