Credit card surcharges: What you need to know about the sales tax implications

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.

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.

State regulations: A patchwork of policies

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.

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.

How Wipfli can help

If your business is considering implementing a credit card surcharge or you’re concerned about the tax implications of a policy you’ve recently enacted, Wipfli can help. Our dedicated team of state and local tax professionals have hands-on experience with all the regulations surrounding sales tax across the country and can help you craft a policy that meets all state and local rules. Contact an advisor today to get started.