You may have to collect sales tax on credit card surcharges depending on where you live.
When does sales tax apply to credit card surcharges?
Many states consider a credit card surcharge to be part of the total purchase price. States that have recently released guidance on this include New York, Florida, California, Minnesota, New Jersey, Texas, and Wisconsin. This is far from a complete list, so you should check with your state’s sales tax department.
Making the credit card surchage part of the purchase price makes the credit card surcharge subject to sales tax if the purchase is 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 have 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. This prevents businesses who split out the credit card surcharge from gaining a sales tax advantage over businesses who build credit card processing costs into their pricing.
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. (Contrast to tips that usually aren’t taxable.)
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.
- Sales: $103
- 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.