Sales tax usually applies to credit card processing fees and surcharges. Here’s what you need to know.
In This Post
- Credit card processing fees: Fees charged to the merchant by credit card companies or payment processors. Usually not seen by the customer.
- Credit card surcharge: An additional fee added to the selling price that the customer pays.
- Convenience fees: Like a surcharge but subject to different credit card processing rules.
- When sales tax and income tax applies
- Can you reduce the sales tax and processing charges paid?
- Can you pass on the costs to your customers?
Are credit card processing fees subject to sales tax?
The credit card fees you pay on credit card transactions usually don’t affect sales tax. Sales tax is typically based on the sales price.
Unlike income taxes, you usually don’t get any deductions from sales taxes.
For example, you sell an item with a $100 sales price. Your local tax is 7%, and your credit card processor charges you 3%.
You’ll ring the customer up for $107 and later send $7 in tax to your state department of revenue. Your credit card processor will keep $107 x 3% = $3.21.
When does sales tax apply to credit card surcharges?
Many states consider a credit card surcharge to be part of the total purchase price. You may also see this worded as credit card surcharges being included in gross receipts subject to sales tax.
Otherwise, more businesses would switch from including processing fees in the price to using surcharges. Taxing the surcharge makes sure the states collect the same tax revenue no matter how businesses structure their transactions.
States that follow this rule include New York, Florida, California, Minnesota, New Jersey, Texas, and Wisconsin. This is not a complete list, so you should check with your state’s sales tax department.
The good news is that the credit card surcharge is only taxable if the purchase is taxable. Surcharges on nontaxable purchases don’t get taxed.
If you sell both taxable and nontaxable products, only the portion of the credit card surcharge that’s for the taxable items will be subject to sales tax.
Example: $100 purchase subject to sales tax with a 3% credit card surcharge. Sales tax applies on $100 + $3 = $103.
Example: $100 purchase not subject to sales tax with a 3% surcharge. No sales tax. The 3% isn’t taxable because the purchase isn’t.
Example: $100 purchase, only $50 is subject to sales tax, 3% surcharge. Sales tax applies on $50 + $1.50. Only half of the 3% surcharge is subject to sales tax because only half of the purchase is taxable.
The key here is that states aren’t saying the surcharge itself is a taxable service. They’re saying it’s part of the price of the taxable item. The usual rules for taxable and nontaxable purchases then apply.
Are convenience fees subject to sales tax?
The payment processing industry treats convenience fees differently than surcharges, but sales tax departments generally do not. Convenience fees will usually be subject to sales tax in the same manner as surcharges.
The idea is that no matter how you treat fees and surcharges or if they’re imposed by a third party, it’s still part of the price a customer has to pay for an item or service. If the item or service is taxable, any additional fees will generally be taxable.
How do I track sales tax on credit card surcharges and convenience fees?
The best thing to do is to use a payment processing service that
- Calculates sales tax,
- Has rules that can apply sales tax to surcharges or fees,
- Has rules to not apply sales tax to surcharges or fees when not applicable, and
- Can apply the specific rules for each state you need to collect sales tax for.
If you use more basic payment processing services, they may only have an option to add a fixed rate for sales tax. For example, they might add 5% to every sale. You need to make sure the software can and is including the surcharge as part of the taxable total.
If your payment processing/sales tax software doesn’t have a surcharge feature, a potential hack is to add the surcharge in the system as an item for sale so it gets included in the taxable total. This will probably get too messy if you have multiple items or tax rates.
One thing you can’t do is just add the surcharge to the sales tax rate. For example, you can’t set your system to set 8% sales tax when you need 5% sales tax and 3% surcharge.
Even if you tell your customers what you’re doing, the tax collected isn’t the same. 5% tax on $103 is $5.15. Collecting 8% on $100 only gets $5 in tax and $3 for the surcharge.
Some states may not allow you to cover the difference.
Another option is to just not have a surcharge and raise your prices to cover your payment processing costs. This avoids having to calculate taxes on surcharges.
A final option is offering a cash discount. You might find this easier to implement in your payment processing software than a surcharge you have to collect tax on. Check your merchant agreements and local laws to make sure you can do this.
Are credit card surcharges and convenience fees subject to income tax?
The answer is both yes and no. Technically, if you receive the fee or surcharge, you need to report it as income. However, the fees and surcharges you pay to your payment processors are also tax-deductible.
The usual accounting treatment for a surcharge is to report the customer’s total as income and add a deduction for any fees.
Example: $100 purchase with 3% surcharge.
- Gross receipts: $103
- Deduction for processing fees: $3 (assuming the entire 3% goes to the payment processor)
- So the net income on the sale before considering other expenses is still $100
For convenience fees, you may exclude the surcharge if it never hits your accounts.
Example: $100 purchase with $3 convenience fee.
- Customer selects $100 item on your site
- Customer transferred to third-party website to pay
- Customer charged $100 for the item
- Customer charged $3 convenience fee by the third-party
- You receive $100 from the third-party
- Report $100 as income
- Do not report the $3 since you never received it or paid it.
There are some technicalities that can come up in this, so talk to your accountant about how to handle your specific situation.
Can I change how I process transactions to avoid paying fees on sales tax?
There’s usually no way to avoid paying fees on sales tax. Most payment processors charge their fee on the total amount that you collect whether it’s for the purchase price or tax.
Similarly, if your state makes credit card surcharges subject to sales tax, there’s usually no way to avoid having to collect tax on credit card surcharges. As you saw above, taxes almost always apply on fees.
Can you pass credit card fees on to customers?
You can always pass your costs of doing business on to your customers, but how you do it depends on the law and your merchant agreements.
You’re not always allowed to add a separately stated charge for using a credit card to a customer’s bill. You can of course raise your prices to account for any charges you’re covering.
In addition to what you’re technically allowed to do, you should also think about what’s normal for businesses in your area. Extra charges that no one else has can scare away customers even if your prices are still fair.
Is it legal to have a credit card surcharge?
Many states make credit card surcharges illegal or place restrictions on them.
In some cases, business in your area may be charging illegal credit card surcharges on each sale. Businesses don’t usually get in trouble until customers complain to the state, so don’t rely on what other people are doing as proof that credit card surcharges are OK.
If you have legal questions, talk to a local business lawyer.
How much can credit card surcharges be?
Credit card surcharges may be limited by both the law and your agreements with each credit card company.
It’s fairly common for a rule to say that an additional fee paid by a buyer on a sale can’t exceed your payment processing expenses. You usually can’t just add a fee to pad your profits on the sale.
2 thoughts on “Sales Tax on Credit Card Surcharges and Processing Fees”
We are charged $7.95 processing fees monthly for each of our vending machines, our card processing company recently started charging us tax on those fees. Is this legal? The following is the explanation line on the amount deducted from our check each week.
*Sales Tax – Terminal Service Fee Network Service Fees -$X.xx
The fee may count as a monthly service charge similarly to if you pay a monthly fee for QuickBoooks or website hosting. Some states do tax business services.
Since the change is recent, you might want to see if your state changed its sales tax law. It’s also possible the company found out that they were supposed to be charging tax all along.
If you can’t find what sales tax law they’re using, you can ask them then look it up.
As to whether they can start charging you the fee now versus covering the tax, you’d need to check your contract and maybe ask a local lawyer.