For many Michigan businesses, it can be almost impossible to run a business without accepting credit or debit cards. However, the fees from these transactions, the charge merchants pay to their customer’s credit card issuer and credit card network when they accept credit card payments like from Visa, Mastercard and other issuers, can eat into profits. The average credit card processing fee ranges between 1.5% to 3.5%. As a result, a number of Michigan businesses pass this cost back to the purchaser as “surcharge” for the convenience of using a credit card as a means of payment.
Recently, the Michigan Department of Treasury provided guidance on the application of a Michigan sales tax on credit card “surcharges” for businesses. The Michigan Department of Treasury considers the surcharge added to a customer’s bill a “service cost” or “other expense of the seller” under the General Sales Tax Act, making it part of the taxable “sales price” of a transaction.
For example, if a business sells $50 in goods, accepts the customer’s credit card as payment and passes on the $2.99 processing fee as a credit card surcharge to the customer, the business must collect and remit the 6% sales tax on $52.99, not just the original $50 retail price.
According to the Michigan Department of Treasury:
“A payment processor provides a financial service for the seller for which it imposes a fee on the seller. Since that fee represents a cost or expense for which the seller is responsible, the fee is fairly characterized as a ‘service cost’ or an ‘expense of the seller.’ Thus, the fee is part of the sales price and thus part of the tax base. For these reasons, Treasury concludes that the credit-card surcharge is part of the sales price as a ‘service cost’ or ‘any other expense of the seller.’”
Action Steps for Business Owners:
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- Review current pricing and surcharge practices.
- Adjust point-of-sale systems to correctly calculate tax on the total amount, including surcharge add-ons.
- Ensure that point-of-sale system accurately marks surcharge on the customer’s bill or receipt as a taxable item.
- Update accounting procedures to ensure proper tax remittance.
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Compliance with this guidance is important. Failure to do so may result in underpayment of taxes due to the State of Michigan, potentially subjecting your business to penalties and interest. If you have any questions about how this guidance applies to your specific situation, please contact Paul McCord or your Fraser Trebilcock attorney.
This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.
