Articles
March 10, 2023
State bills to exempt sales tax from swipe fees would be a huge savings
If passed, would save restaurants several thousand dollars a year
The interchange fee restaurants pay is based on the full bill, including sales tax. Legislation to exempt sales tax would save restaurants thousands of dollars every year.
Since the pandemic, the use of credit cards and debit cards has dramatically increased. This matters for restaurants, because each time a card is used at the point of sale, they pay the card-issuing bank a transaction fee of between 2%—4% of the total tab. These fees are set by the card networks and are non-negotiable. In fact, merchants in the U.S. pay the highest interchange fees in the world. In 2021 alone, retailers paid $137.8 billion in credit and debit card processing fees.
Currently, the interchange fee restaurants pay is based on the full bill, including any sales tax collected. Sales taxes are passed on to the state or locality and are not part of the restaurant’s revenue. However, credit card companies are charging processing fees on the entire transaction, meaning that restaurants are losing money to the bank.
In 2023, restaurants are projected to contribute $1 trillion to the national economy, meaning they are among the largest collectors of state and local taxes. Understandably, restaurant operators support fair and reasonable legislation that removes the sales tax from the equation.
Currently, there are nine states with legislation to remove the sales tax from being included in the swipe fee computation—Florida, Georgia, Idaho, Maine, Mississippi, North Dakota, Tennessee, Texas, and Washington. The Association and the restaurant associations in these states plan to support these bills, and other states may introduce similar legislation this year.
The calculation to remove sales tax from the total check is a simple equation: total sales amount minus sales tax equals net sales. The net sales amount becomes the basis for the interchange fee.
In certain transactions, merchants are already required to pass the sales tax information to the networks in the transaction message. The card networks created this process for business cards so they could provide this information back to the business that uses these cards. In other words, many retailers and restaurants already separate sales tax from the base price of their product. They would be able to implement this change into their day-to-day operations seamlessly, meaning this legislation would not require additional investment to yield results. It is simply a process change that most merchants and their payment processing partners could easily make now.
Most importantly, not including sales tax in swipe fees would result in several thousands of dollars in savings for restaurants of all sizes. For the average restaurant that operates on razor-thin pre-tax margins of 3% to 5%, that savings is critical.
Swipe fee regulations at the state and federal level are a priority for the Association. Learn more about its advocacy on credit card transaction fees here.
Currently, the interchange fee restaurants pay is based on the full bill, including any sales tax collected. Sales taxes are passed on to the state or locality and are not part of the restaurant’s revenue. However, credit card companies are charging processing fees on the entire transaction, meaning that restaurants are losing money to the bank.
In 2023, restaurants are projected to contribute $1 trillion to the national economy, meaning they are among the largest collectors of state and local taxes. Understandably, restaurant operators support fair and reasonable legislation that removes the sales tax from the equation.
Currently, there are nine states with legislation to remove the sales tax from being included in the swipe fee computation—Florida, Georgia, Idaho, Maine, Mississippi, North Dakota, Tennessee, Texas, and Washington. The Association and the restaurant associations in these states plan to support these bills, and other states may introduce similar legislation this year.
The calculation to remove sales tax from the total check is a simple equation: total sales amount minus sales tax equals net sales. The net sales amount becomes the basis for the interchange fee.
In certain transactions, merchants are already required to pass the sales tax information to the networks in the transaction message. The card networks created this process for business cards so they could provide this information back to the business that uses these cards. In other words, many retailers and restaurants already separate sales tax from the base price of their product. They would be able to implement this change into their day-to-day operations seamlessly, meaning this legislation would not require additional investment to yield results. It is simply a process change that most merchants and their payment processing partners could easily make now.
Most importantly, not including sales tax in swipe fees would result in several thousands of dollars in savings for restaurants of all sizes. For the average restaurant that operates on razor-thin pre-tax margins of 3% to 5%, that savings is critical.
Swipe fee regulations at the state and federal level are a priority for the Association. Learn more about its advocacy on credit card transaction fees here.