Compliance costs – Credit card fees add up

In what would seem like a minor example of compliance costs, the cumulative effect of these costs cuts against the profitability and survival of small retailers.  One more example of compliance costs: The retailer will have to pay credit card fees against these new sales tax receipts.

A couple of examples:

Retailer has $1,000,000 in sales per year.  Assume an overall 7% sales tax collection rate on these sales, now expanded to nationwide.  The newly collected sales/use tax will amount to $70,000 per year.  All $70,000 would then be remitted back somehow to all the states.  But the retailer is stuck with the credit card processing fees on this $70k.  Assuming 3% merchant fees or paypal fees, this retailer is now paying $2100 out of their own pocket every year.

And of course this example scales.  $3 million in sales?  $6300 a year, every year just in new credit card merchant fees!

Instead of the states enforcing their own use tax laws, they are forcing out of state retailers to be their unpaid tax collectors.

The Steamlined Tax Governing board has acknowledged this in their own small seller study task force:

“The issue of the credit card merchant fees imposed on the amount of tax collected on credit card sales is an important one.  It is a cost that is solely attributable to the seller’s role as a tax collector, it is not in the control of the seller, it will become more important as electronic payments become more prevalent, it increases as the amount of tax collected increases, and it can be a substantial amount for large sellers. There are also some costs associated with other electronic payments such as debit card payments. The Task Force believes further work is necessary to gain an understanding of the relative role of electronic payments among various types and sizes of retailers as well as the distribution of electronic payments across debit cards, credit cards and private or store label cards and the relative costs associated with such payments”


  1. Of course, with that volume of sales, the merchant would be given a better rate. For PayPal, that’s 2.1% For WalMart, it might be around 2%

    Why not have the Merchant Accounts collect the tax and remit directly to the State (Stat’s pay related fees)?
    ~ States get instant funds.
    ~ It’s paperless and no privacy issues
    ~ minimal coding and law to pass
    ~ system would work for B&Ms as well as online.

    Ask any business if they would ‘like’ to reduce tax collection costs by 2% or more? I rest my case.

  2. marketplacefairness says:

    Our credit card merchant rates are closer to the example numbers. There’s the “teaser” base merchant rate. But there’s a per-transaction charge as well. And more people are using premium cards with rewards that are non-qualified transactions.. which are also at a higher rate. And I know our American Express merchant rates are above 3%. I stand by that number.

    Sure, larger sites that do tens of millions per year probably have a little bit better rate, but they’re spending tens of thousands of dollars just for this compliance cost per year.

    I don’t see how it would be workable to somehow get back money doing it through the merchants and it would introduce an accounting nightmare.


  1. […] In what would seem like a minor example of compliance costs, the cumulative effect of these costs cuts against the profitability and survival of small retailers. One more example of compliance cos…  […]

  2. […] most) and even paying for the credit card fees on the newly collected sales tax.   As covered in a previous blog post, remote retailers will pay around $2,000 per year, per million in sales.  So we become unpaid […]

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