Could a retailer deduct the bank's 3%-6% credit-card processing charge from California taxable gross receipts?

Plain-English summary

A bank credited retailers for submitted credit-card invoices but retained 3% to 6% as compensation for its service.

Tax counsel concluded that the retailer could not deduct that amount from gross receipts. Tax was measured by the price the purchaser agreed to pay, while the bank fee was the seller's service cost or interest expense.

It was not a cash discount because the allowance went to the bank rather than to the purchaser.

Citations and references

• California Revenue and Taxation Code section 6012 (as cited)
• April 20, 1959 request asking about a bank charge-account service and taxable measure — letter not separately reproduced beyond the response's summary
• Bank-issued credit cards, merchant agreements, charge-sale invoices, immediate merchant credits, and three-to-six-percent service charges varying by volume and perhaps other factors — card terms, merchant agreements, invoices, statements, fee schedules, volumes, customer prices, and tax records not reproduced in the official PDF
• Official Annotation 295.0860's bank credit cards, retailer acceptance, three-to-six-percent service charge, nondeductible gross-receipts treatment, seller service cost, purchaser-benefit cash-discount distinction, and May 15, 1959 date — annotation omits the request provenance and redacted president, immediate-credit and periodic-invoice mechanics, fee-variation uncertainty, section 6012 quotation and interest classification, missing records, reliance status, and later outcome and supplies no additional transaction record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0860.pdf

Original ruling text

295.0860

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 15, 1959

Your letter April 20, 1959
Attention:
Gentlemen:

President

You inquire concerning the amount on which sales tax applies where a sale is made to a person who utilizes a charge account service offered by a bank. The bank has previously issued a credit card to the person, and the particular merchant has agreed with the bank to honor the credit card. Periodically, the merchant sends the charge-sale invoices to the bank, and the bank immediately credits the merchant's account with the total amount represented by the invoices. The bank, however, deducts an amount as compensation for its services. The amount deducted varies depending on the particular merchant's volume, and perhaps other factors. It ranges between 3% and 6%. It is our opinion that the bank's service charge is not deductible in determining the amount upon which sales tax applies. The sales tax applies upon a retailer's "gross receipts" as the total amount of the sale price of the retail sales of retailer. Thus, the gross receipts constitute the sum of the sale price in each individual retail sale. The sale price as to a particular retail sale is the amount to be, or agreed to be, paid by the purchaser. In most stores, this is the posted price. Section 6012 further provides no deduction may be taken on account of service costs or interest paid, but Section 6012 does allow a deduction for "cash discounts allowed and taken on sales." It is our opinion that the charge in question is a service cost or interest. We do not believe it to be a cash discount, because it is an amount allowed to someone other than the purchaser. We feel that a cash discount is an amount allowed to the purchaser.

Very truly yours,

Bill Holden
Associate Tax Counsel
BH:o'b
cc: San Francisco - Administrator