Minnesota says credit card surcharges are subject to sales tax

Merchants sometimes add a surcharge to credit card transactions to help offset the cost of processing credit card payments. Though credit card surcharges are currently prohibited or limited in several states, they’re allowed in Minnesota. They’re also subject to Minnesota sales tax.

States that currently limit or prohibit credit card surcharges include Colorado (through June 30, 2022), Connecticut, Maine, Massachusetts, and Oklahoma.

Visa encourages merchants to consider the following before instituting a credit card surcharge:

• Whether surcharges are permitted in your state
• The potential impact on your customers’ experience
• What your competitors might be doing
• What information must be disclosed to your customers, and how

These are all important considerations. Here’s another: Are credit card surcharges subject to sales tax? Are you sure?

This issue landed at the Minnesota Tax Court after the Minnesota commissioner of revenue learned a vacation rental owner (the taxpayer) hadn’t collected sales tax on a 4% credit card surcharge. The commissioner assessed the owner for the uncollected tax, and the owner contended the surcharge should be exempt from sales tax. As noted by the Tax Court, “the parties dispute the legal effect of undisputed facts.”

The taxpayer markets vacation rentals directly and through third parties (e.g., Airbnb and Vrbo). When people rent through a third party, the third party processes payments and collects the appropriate sales tax. When people rent directly from the taxpayer, the taxpayer processes payments and collects sales tax. If a customer pays with a credit card, the taxpayer charges the customer a 4% credit card surcharge, which is stated separately on the invoice.

In the case in question, the taxpayer collected and remitted sales tax on charges for lodging but not on the separately stated credit card surcharge. He later issued a refund after the customer canceled due to COVID-19, and then sought a refund of the tax remitted. It’s at this point that the commissioner discovered the taxpayer had not collected sales tax on the credit card surcharge.

Upon inquiry, the taxpayer maintained the surcharge is exempt under Minn. Stat. § 297A.61, subd. 7(b)(2) (2021). The commissioner disagreed, and the issue ended up in the Minnesota Tax Court, which found in favor of the commissioner.

As the ruling explains, all gross receipts are presumed subject to sales tax in Minnesota:

• “Gross receipts” means the total amount received in money “for all sales at retail as measured by the sales price.”
• “Sales price” means “the total amount of consideration, including cash, credit, personal property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise.”

The statute specifies that “sales price” does not include “interest, financing, and carrying charges from credit extended on the sale of personal property or services, if the amount is separately stated on the invoice, bill of sale, or similar document given to the purchaser.” So, it’s not hard to see why a person might assume a separately stated credit card surcharge would be exempt.

However, that’s only part of the story. The court noted that Minnesota does not provide a deduction for the seller’s cost of the property sold, or the cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expenses of the seller.

The court found the credit card surcharge to be an expense of the seller, and seller expenses are “generally not deductible from the sales price.” To be exempt from sales and use tax, the charge must be “from credit extended on the sale of personal property or services.” And as the owner admits, the charges at issue are not. The case is Kurt W. Martin v. Commissioner of Revenue, Docket No. 9499-S.

A number of other states also tax credit card surcharges (also known as swipe fees), including the following.

California considers a credit card surcharge to be part of the consideration for the sale of the tangible personal property in California “and is therefore part of gross receipts subject to sales tax” (annotation dated November 1991).

The Illinois Department of Revenue says credit card surcharges must be included in a company’s taxable gross receipts. Although legislation to prohibit credit card surcharges in Illinois was introduced in 2013, it didn’t pass (April 2014 General Information Letter).

Kentucky explains that “a credit card surcharge passed on to the customer as a separate charge is only subject to sales tax if the item being sold is subject to sales tax” (Kentucky Department of Revenue December 2020 sales tax newsletter).

Wisconsin has a similar policy: “If the credit card is being used to pay for both taxable and nontaxable products or services, the retailer may allocate the ‘swipe’ fee between the taxable and nontaxable purchases.”

In Texas, a “surcharge added to the selling price of an item paid for with a credit card is taxable. For sales tax purposes, the taxable selling price of an item includes services or expenses connected with the sale of the item” (1989 letter ruling from the Texas comptroller).

To me, one of the most interesting aspects of the Minnesota case is how it came to be. The taxpayer wasn’t under audit. He was seeking a refund of sales tax because he had provided a refund to a customer. Through that process, the state determined he had been handling sales tax incorrectly. It demonstrates just how complicated sales tax compliance can be: Even when you’re working hard to get it right, you can get it wrong.

Automating sales tax collection and remittance can help reduce the complexity and improve overall compliance.