If a Kansas business adds a credit or debit card processing fee to a taxable service, is that fee subject to sales tax?

Plain-English summary

A saw-sharpening business planned to add a processing fee when customers pay by credit or debit card, and asked whether that fee is taxable. The Department said yes — the line-item processing fee is part of the tax base and is taxed whenever the business's underlying services are taxed (K.A.R. 92-19-3a(e)(1)). If the underlying service is instead exempt — for example, work for a school shop or vocational school that provides an exempt-entity exemption certificate — then the processing fee is not taxed either, because it follows the tax treatment of the underlying charge.

The Department also addressed the other side of card transactions: the interchange fees the card company deducts from the retailer's account are charges for the card company's financial services, and the retailer cannot subtract them from its gross receipts to reduce the sales tax it reports (K.A.R. 92-19-3a(e)(2)).

What this means for you

Retailers and service providers adding a card surcharge

A credit/debit card processing fee you add to a customer's bill is taxed the same way as the sale it is attached to: taxable if the sale is taxable, exempt if the sale is exempt. Collect sales tax on the processing fee whenever you collect it on the underlying charge.

Bookkeeping

Do not reduce your reported gross receipts by the interchange or merchant fees the card company takes from your deposits — those are the card company's charges to you and do not lower your taxable sales.

Tax professionals

K.A.R. 92-19-3a(e)(1) treats a customer-facing card price increase as part of the selling price; (e)(2) bars netting the card company's interchange charges against gross receipts. The processing fee inherits the taxability of the underlying transaction.

Common questions

Q: Is a credit card processing fee taxable in Kansas?
A: Yes, when it is added to a taxable sale — it is part of the taxable selling price. If the underlying sale is exempt, the fee is not taxed.

Q: Can I deduct the card company's fees from my sales tax?
A: No. Interchange fees the card company deducts from your account cannot reduce your gross receipts or the sales tax you report.

Q: What if I serve an exempt customer?
A: If the customer gives you a valid exempt-entity exemption certificate, your service charge is not taxed, so the processing fee is not taxed either.

Q: Does this opinion bind the Department?
A: An Opinion Letter is general guidance without the force of law; another taxpayer with different facts should not assume the same result.

Citations and references

• K.A.R. 92-19-3a(e)(1) — a card-related increase in the selling price is part of the taxable selling price
• K.A.R. 92-19-3a(e)(2) — interchange and other card-company charges deducted from a retailer's account cannot be deducted from gross receipts

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2013-002

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

July 10, 2013

XXXX
XXXX
XXXX

RE: Your letter received March 21, 2013

Dear XXXX:

Thank you for your recent letter. You sharpen saws. You intend to begin charging customers a processing fee when they use a credit or debit card to pay for your services. You ask if a processing charge is taxable. The answer is yes. The line-item processing charge is part of the tax base and is taxed when your services are taxed. If you provide services to a high school shop, vocational school, or other entity that provides you with an exempt entity exemption certificate, the processing fee isn't taxed because your line-item services charges aren't taxed because of the exemption.

K.A.R. 92-19-3a(e)(1) specifically addresses your question about the taxability of the credit/debit card processing fees that you bill to customers. K.A.R. 92-19-3a(e)(2) addresses the treatment of charges that a credit/debit card company bills to you or deducts from your account for the use of their services. Subsection (e) of the administrative regulation provides:

(e)(1) If a retailer increases the selling price of goods or services for a buyer who uses a credit card to compensate for interchange fees or other charges that the credit-card company will later deduct from the payment it forwards to the retailer's account, these increases shall be considered to be part of the selling price of the goods or services and shall be subject to tax.
(2) Interchange fees and other charges that a credit-card company deducts from a participating retailer's account shall be deemed charges for the financial services that the credit-card company has rendered for the retailer and shall not be deducted from the retailer's report of gross receipts or otherwise used to reduce the amount of sales tax being reported.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 07/16/2013 Date Modified: 07/16/2013

Table 1

| Letter Number: | O-2013-002 |

Table 2

| Tax Type: | Kansas Retailers' Sales Tax |
| Brief Description: | Processing charges subject to sales tax. |
| Keywords: | |