wo important changes in card Association policies described below will affect you as ISOs and merchant level salespeople. I hope the following information is helpful for your businesses.

Be Wary of Internet Tobacco Merchants

Both Visa U.S.A. and MasterCard International recently asked acquirers to review their portfolios for merchants selling cigarettes and other tobacco products over the Internet. The Associations advised acquirers to carefully review federal and state laws that might restrict or prohibit the sale of cigarettes to consumers.

These actions are in response to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) notification to the Associations and other payment system providers that a number of Internet merchants violate federal and state laws governing cigarette sales.

According to the ATF, many Internet cigarette merchants try to circumvent federal and state tax laws by selling cigarettes from "low" or "no" tax jurisdictions to consumers in "high" tax jurisdictions without paying applicable taxes. The ATF calls this "cigarette diversion."

Even though customers pay shipping costs to purchase cigarettes online, by avoiding paying these taxes they still save money. As a result, it's unlikely that any Internet cigarette merchant businesses would pass ATF scrutiny. According to the ATF, merchants engaged in cigarette diversion are also usually in violation of various labeling, registration and tax stamp requirements.

Because Visa and MasterCard regulations require that members submit only legal transactions to their payment systems, this announcement affects not only acquirers but also cardholders and merchants, too.

To prevent illegal transactions from entering the Visa payment system, members should implement controls to monitor merchant and cardholder activity. Members that sign merchants selling age-restricted or regulated goods (including tobacco products sold over the Internet) should take extra precautions to ensure that these merchants comply with state and federal laws.

The ATF's position is that Internet cigarette vendors are in violation of numerous federal provisions including Internal Revenue Code 5762(c), which makes it unlawful for any person to refuse to pay any federal cigarette excise tax, or to attempt to evade or defeat paying a federal cigarette excise tax. Other violations include the Cigarette Labeling and Advertising Act, The Tariff Act, various smuggling laws, the Cigarette Trafficking Act, the Jenkins Act, and various wire fraud and money laundering provisions.

In addition, the ATF:

... received several inquiries about cigarette sales and purchases that involve Native American reservations. Sales or shipments of cigarettes from Native American Reservations are not exempt from the requirements of the Contraband Cigarette Trafficking Act and the Jenkins Act. Additionally, the application of state taxes and regulatory requirements to sales made on Native American reservations varies depending on the transaction. Accordingly, anytime you engage in transactions involving a Native American reservation, ATF recommends that you contact your state tobacco tax administrator to determine the extent of your liability for State tobacco tax.

(For more information, visit www.atf.treas.gov/alcohol/info/faq/subpages/99-2ic.htm .)

Both Visa and MasterCard rules prohibit the processing of any "illegal" transactions. The Associations have fined members for processing illegal payments, including those for gambling, prescription drugs and pornography, and now they've added online cigarette transactions to the list.

An Update on Debit Card Chargebacks

In December 2004, Visa implemented a chargeback policy for purchases made using PIN-based debit cards on its Interlink network. Consumers using Visa PIN-debit cards now have the same protection as users of credit or signature-based debit cards. In addition, other U.S. PIN-debit networks will now probably follow suit.

Before Visa's announcement, consumers who used a PIN-debit card to pay and were unhappy with the product or service purchased could only bargain with the merchant, and the outcome was often unsatisfactory.

Interlink PIN-debit cardholders can initiate chargebacks if merchants do not provide the requested product or service, non-receipt of shipped merchandise, or if merchandise is in a damaged condition. After consumers contact merchants to resolve the situation, they can also contact their issuing banks to initiate chargebacks.

David H. Press is Principal and President of Integrity Bankcard Consultants. Phone him at 630-637-4010, e-mail dhp@integritybankcard.net or visit www.integritybankcard.net .