Credit card surcharges and taxes: What your business needs to know

In recent years, a growing trend has emerged in the business world: the addition of credit card surcharges to customer bills. This practice has gained traction as companies seek to offset the often substantial costs associated with credit card processing fees, which can significantly impact profit margins.

As these credit card surcharges become more common, it’s important for businesses to understand their implications, specifically how to handle these charges for sales tax purposes.

Are credit card surcharges taxable?

In most states, credit card surcharges are added to the price of a product or service, making them subject to sales tax.

Credit card surcharges also create tax liabilities for businesses. They are payments made by customers to a business that are counted towards its gross income, making them subject to federal, state and local taxes.

The rise of credit card surcharges

Credit card processing fees can affect a business’s profitability. For instance, a business processing $100,000 monthly in credit card transactions might face fees ranging from $2,000 to $3,500, depending on the specific terms of their merchant agreement. To mitigate these costs, many businesses have turned to credit card surcharges.

However, the implementation of these surcharges isn’t as straightforward as it might seem. State regulations vary widely, and businesses must navigate a complex landscape of rules and restrictions.

Do states impose sales tax on credit card surcharges?

Certain states may not allow the pass-through of credit card surcharge to an end customer or may require specific tests to be met in order to include them on an invoice. Most states that do allow the surcharge require that these surcharges be included in the sales tax calculation if the underlying product or service being sold is taxable. This means the total amount a customer pays, including the surcharge, is used to determine the sales tax owed.

For example, Wisconsin’s Tax Bulletin 224 addresses credit card surcharges, stating that if the product or service is taxable, the sales tax applies to the total amount, including the surcharge. If both taxable and nontaxable items are purchased, the swipe fee is allocated accordingly.

Here’s an example to illustrate this: Imagine a $100 grocery bill that includes $75 in nontaxable items and $25 in taxable items, along with an additional 3% credit card surcharge. The taxable receipts for this transaction are calculated as follows:

• Selling price of taxable items: $25
• Credit card surcharge on taxable items ($25 * 0.03): $0.75
• Total taxable receipts: $25.75

However, it’s important to note that these credit card surcharges are not subject to sales tax in all states. For instance, Colorado has ruled that credit card surcharges are not subject to sales tax if they are separately stated on the customer’s invoice.

Given the variability in state regulations, it’s best to consult with a tax professional to fully understand the sales tax implications of credit card surcharges in your specific location.

Credit card surcharges versus convenience fees

While the terms are often used interchangeably, credit card surcharges and convenience fees are not the same, and that distinction matters for sales tax purposes.

A credit card surcharge is a fee added specifically when a customer pays with a credit card to offset the merchant’s card processing costs. These fees are typically a percentage of the transaction (often 2%–4%). The surcharge is passed directly from the merchant to the customer and is generally prohibited in some states or subject to card network caps and disclosure rules.

A convenience fee is charged when a customer uses a payment method that is not the business’s standard channel. For example, a utility company that normally accepts in-person payments may charge a convenience fee when a customer pays online or by phone. Unlike a surcharge, a convenience fee is tied to the payment channel rather than the payment method and can often be charged regardless of whether the customer pays with a credit card, debit card or another digital method.

From a sales tax perspective, these two fee types may be treated differently across states. Some states that exempt separately stated surcharges from sales tax may still subject convenience fees to tax or vice versa. Additionally, card network rules (Visa, Mastercard) distinguish between the two and impose different compliance requirements on each. Understanding which fee structure your business uses is a critical first step in determining your tax obligations.

Surcharges vs. convenience fees: Key differences

Feature	Credit card surcharge	Convenience fee
Trigger	Customer pays with a credit card	Customer uses a non-standard payment channel
Applies to debit cards	No (prohibited by card network rules)	May apply, depending on structure
Purpose	Offset merchant processing costs	Offset operational cost of alternative payment channel
Typical form	Percentage of transaction	Flat fee or percentage
State restrictions	Banned or restricted in some states	Generally more permissible
Card network rules	Subject to Visa/Mastercard surcharge caps and disclosures	Separate convenience fee rules apply
Sales tax treatment	Often included in taxable base; some states exclude if separately stated	Varies by state; may or may not be taxable
Common industries	Retail, restaurants, professional services	Utilities, government agencies, healthcare

Additional considerations for businesses

If your business is considering implementing credit card surcharges, some key points to keep in mind include:

• Legal compliance: Ensure that surcharges are legal in your state and that you’re following all disclosure requirements.
• Customer communication: Clearly inform customers about surcharges before they make a purchase to maintain transparency and trust.
• POS system updates: Your point-of-sale system may need updates to accurately calculate and display surcharges.
• Staff training: Ensure that your staff understands the surcharge policy and can explain it to customers if questions arise.

As credit card surcharges become more prevalent, understanding their impact on sales tax calculations is crucial for businesses of all sizes. The complex and varying nature of state regulations makes it essential to stay informed about the specific rules in your operating locations.

Read more

• Year-end planning for state and local taxes
• Major updates in unclaimed property compliance
• Does your business need to pay taxes in a given state? The answer depends on nexus.