If reports of record spending are an indication of increased consumer debt, purchases made this holiday season have likely left creditors very happy. For those grappling with the aftermath or simply wishing to start the new year with a little more sales tax savvy, here’s a rundown of the sales tax implications of credit purchases.
Most people are aware that credit card companies charge retailers for the service of processing their transactions. It is less well known that customers can be held responsible for paying sales tax on this amount, even though retailers generally do not owe sales tax on the service. This occurs when the service fee is passed on to consumers by sellers, either in full or in part as a surcharge or “swipe fee.”
In many states, these charges, if passed on to the consumer, fall under the “seller’s cost of doing business,” an element of sales price. This common catch-all is often found in sales tax imposition statutes across the country and typically includes other costs, such as a seller’s labor, materials, and losses.
Some jurisdictions, such as Kansas and Maryland, do not include this fee in the consumer tax base if separately stated on an invoice or bill of sale. Others, like Illinois, consider the fee taxable whether or not it is separately stated. However, 11 states have passed laws forbidding retailers from passing this fee onto consumers at all; in which case, there is no accompanying sales tax.
While a tax on this fee may sound trivial, it is important to note that they are generally calculated as a percentage of the underlying purchase price, rather than a flat fee. Therefore, the size of the purchase dictates the impact. The Economist reports that these fees can range from 0.5 to 3 percent, depending on the type of credit card used. Rates can also vary by method of purchase, with higher fees associated with online purchases over physical storefronts.
Payment arrangements between consumers and their credit card issuers are generally not subject to sales tax, since tax is due at the point of sale. However, each payment presumably includes a portion of the original sales tax owed for every purchase made.
Interest, financing, and carrying charges on credit extended by retailers themselves are similarly not taxed by most states, as long as these charges are separately stated. Texas follows this rule, but also requires retailers who sell items on credit and charge interest on the amount credited to remit a portion of any interest collected that is attributable to the sales tax.
With the number of credit transactions on the rise, these fees are likely not enough to steer consumers away from using plastic on future purchases. However, it may be worth keeping in mind the next time you swipe.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does your state allow retailers to pass credit card transaction fees on to consumers?
Get a free trial to Bloomberg BNA Tax & Accounting's State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.
 Two of these states, California and New York, are facing legal challenges to this prohibition.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)