Are Credit Card Fees Subject to Sales Tax?

Whether credit card fees are subject to sales tax is a complex issue, as there is no uniform approach across United States jurisdictions. State laws define and apply sales tax to services differently, requiring businesses to understand these varying regulations.

Understanding Credit Card Processing Fees

Credit card processing fees are charges businesses incur when accepting electronic payments, such as those made with credit or debit cards. These fees are distinct from consumer fees like annual card fees or late payment penalties. Various entities, including issuing banks, card networks, and payment processors, levy these fees on merchants.

The total processing fee comprises several components. Interchange fees, often the largest portion (70-90%), are paid by the merchant’s acquiring bank to the cardholder’s issuing bank. These fees compensate the issuing bank for costs like fraud prevention, approving payments, and maintaining cardholder accounts. Card networks, such as Visa and Mastercard, set these non-negotiable interchange rates, which vary based on factors like card type, transaction method, and business industry.

Assessment fees, also known as network fees, are charged by card networks to cover operational costs and maintain their infrastructure. These fees are a small percentage of the transaction value. Payment processors, who facilitate transactions, add their own markup, covering their services, technology, and customer support.

Sales Tax Fundamentals for Services

Sales tax in the United States is imposed at the state level, with no federal sales tax. Historically, sales tax applied primarily to tangible personal property. However, as the economy has shifted, many states now also apply sales tax to certain services. The taxability of services varies significantly, as states define taxable services differently.

Some states broadly tax services by default, with specific exemptions. Most states do not tax services unless explicitly enumerated as taxable within state statutes. Categories of services states may tax include business, personal, professional, and services related to tangible personal property.

States often define taxable services based on whether they involve information transfer, data processing, or are part of a larger taxable transaction. For example, “information services” might be taxed if they involve furnishing collected, compiled, or analyzed information. “Data processing services” can be taxable if they involve entering, storing, manipulating, or retrieving a customer’s data using a computer. The classification often depends on whether the transaction’s object is the information or data itself, rather than a professional opinion or personal service.

State-Specific Sales Tax Treatment of Payment Processing Fees

The sales tax treatment of credit card processing fees is not uniform across the United States. States interpret and apply their sales tax laws differently, often hinging on whether payment processing is considered a financial service, an information service, a data processing service, or an incidental cost of a sale.

Many jurisdictions consider these fees incidental to the sale of goods or services, making them exempt from sales tax. This perspective views the fees as a cost of facilitating the transaction rather than a separate, taxable service. In these cases, the fees are often seen as an operational expense for the business, similar to rent or utilities, and are not subject to sales tax when passed through or absorbed.

Other states may classify payment processing as a taxable service, especially with broader definitions for “information services” or “data processing services.” Some jurisdictions consider processing and transmitting transaction data a form of taxable data processing. These states may levy sales tax on the fees because the service involves manipulating and transmitting financial data through computer systems.

Some states may also require sales tax on credit card surcharges if passed directly to the customer and the underlying product or service is taxable. In these situations, the surcharge is considered part of the total sales price subject to tax. For instance, if a business sells a taxable item and adds a credit card processing fee as a surcharge, that surcharge may be included in the taxable sales price, even if separately stated on the invoice.

The specific language in state tax codes regarding financial, information, and data processing services determines taxability. Businesses should consult their state’s tax statutes and administrative guidance to determine the exact treatment of these fees.

Business Obligations and Compliance

Businesses must determine the sales taxability of credit card processing fees in each jurisdiction where they operate. This involves understanding how the state views these fees: as a taxable service, an exempt financial service, or part of the taxable sales price if passed on as a surcharge.

If credit card processing fees are taxable, businesses have specific compliance requirements. They must register with the state’s tax authority to obtain sales tax permits before collecting any tax. Businesses are responsible for collecting sales tax on these fees from customers, if applicable, or paying sales tax if they are the consumer of the service. The collected tax must be remitted to the state according to a defined filing schedule.

Accurate record-keeping is fundamental for sales tax compliance. Businesses should maintain detailed records of all transactions, distinguishing between taxable and non-taxable sales and documenting any sales tax collected on credit card processing fees. These records should include invoices, receipts, and documentation supporting taxability or exemption. Maintaining these records for a minimum of three to four years, or longer if an audit or legal proceeding is ongoing, is generally required. Businesses seeking clarity should consult a qualified tax professional or their state’s tax agency.