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January 27, 2025

CEOs Collide Over Maryland’s Sale Tax Interface Fee Tip Cut

EMS

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EMS

CEOs Collide Over Maryland’s Sale Tax Interface Fee Tip Cut

Maryland’s House Bill 29 sparked controversy among lawmakers and business owners regarding its proposal to exclude taxes and tips from interchange fees on debit and credit card transactions. Merchants often forfeit a large portion of their profits to sales taxes and gratuities; therefore, the Maryland legislature was introduced by delegates Brian Crosby and Todd Morgan, who aimed to address financial fairness concerns.

According to Merchants Payments Coalition (MPC) officials, merchants and customers alike cannot afford the sales tax in Maryland, as fees contribute an additional $1,100 to an average family’s annual expenses.  

“The credit card industry price-fixing swipe fees is bad enough, but taking a slice out of tax dollars before retailers can hand them over to the state of Maryland is unconscionable,” reports Doug Kantor, MPC Executive Committee member and General Counsel for the National Association of Convenience Stores. “Retailers have to make up the difference, and that ultimately drives up prices for consumers. It is time for this abuse to end.”

How Sales Tax in Maryland Affects Merchant Processing

Sales tax in Maryland may influence a business’s health through collection, remittance requirements, and pricing strategies. The Maryland sales tax is 2-6%, and according to representatives, many companies struggle to profit from taxed tips and gratuities. House Bill 29, however, proposes a sales tax excluding interchange or swipe fees.

In recent years, interchange, also known as swipe fees, has escalated significantly in the U.S., costing businesses a record $172 billion in 2023. The impact has been considerable in Maryland, with merchants and consumers collectively incurring nearly $2 billion in swipe fees last year. 

House Bill 29 aims to mitigate this issue by allowing merchants to request the exclusion of sales tax and gratuity amounts from the total transaction value subject to interchange fees. Under Maryland legislation, entities such as issuers, payment card networks, acquirer banks, or processors must exclude these amounts from the fee calculation. Details House Bill 29 will include: 

  • Taxes and tips must not be included in interchange fees during transactions. 
  • Credit and debit card issuers would reimburse merchants for interchange fees applied to taxes and tips, contingent upon the merchant providing appropriate supporting documentation.

Maryland Sales Tax Rate Reduction Benefits

The bill would exclude sales tax amounts from the total transaction value used to calculate interchange fees. Since sales tax does not contribute to a merchant’s revenue, this exclusion would reduce the financial burden on businesses. Merchants often pass the costs of interchange fees to consumers through higher prices. By reducing the fees associated with sales tax, the bill could alleviate some of the upward pressure on consumer prices, potentially saving Maryland families money over time. House Bill 29 may also enact the following:

Fixed Fee Structure

House Bill 29 introduces a more equitable approach to transaction processing by excluding sales tax from fee calculations. This change ensures that interchange fees are based solely on merchants' revenue, offering significant advantages to small businesses that often operate with smaller profit margins.

Additional Fee Limits

Excluding sales tax from interchange fee calculations, safeguards state-collected funds from being subjected to additional fees. This adjustment reinforces the integrity of Maryland’s tax system by addressing concerns over potential "double dipping" by card issuers.

House Bill 29 Opposition and Disadvantages for Small Businesses 

Opposition to Maryland's House Bill 29 stems from concerns raised by financial institutions, credit card networks, and specific business groups. Interchange fees fund services like fraud prevention, cybersecurity, and system improvements. Critics claim that reducing these fees by excluding sales tax and tips could strain these resources and impact service quality.

Fraud

Financial institutions and payment networks assert that interchange fees fund essential services like fraud prevention, cybersecurity, and payment system innovation. Reducing these fees might compromise the quality of these services, leading to potential risks for merchants and consumers.

The exclusion of interchange fees on sales tax and gratuities creates opportunities for dishonest businesses to exploit the system for financial gain. Without penalties for fraud or unethical behavior, the Act allows entities to unfairly bypass interchange fees or submit false claims for fee refunds.

Restaurants, spas, salons, or other tip-based service businesses could manipulate the system by inflating the gratuity amount in the transaction. By shifting a significant portion of the total sale into the gratuity field, exempt from interchange fees, the owner effectively reduces the business’s payment processing costs.

While the Act includes provisions for detecting such discrepancies, dishonest businesses could still take advantage of this loophole, lowering their fees by manipulating the system in ways it was not intended to allow. This misuse undermines the legislation's goals and highlights the risk of exploitation when enforcement mechanisms are insufficient to prevent fraud or dishonest practices.

Small Business Disadvantage

Small businesses often lack the resources of larger enterprises, making compliance with new refund processes more complicated. These processes require meticulous record-keeping, modern equipment, up-to-date systems, and timely submissions to claim reduced fees, which could disproportionately benefit larger businesses with established accounting services. This could mean the bill's intended cost-saving benefits are not evenly distributed, undermining its goal.

Some companies require substantial technological updates to adapt their payment ecosystem to exclude interchange fees on the sales tax portion of transactions. These updates include reprogramming payment processors, upgrading point-of-sale systems, and modifying accounting software to accurately separate sales tax from the total transaction amount. 

Savings from the Maryland legislature might not be significant enough to offset the administrative effort required for small businesses to comply. Larger companies with high transaction volumes may realize substantial savings, but smaller merchants may struggle to effectively justify the operational overhead needed to claim refunds.​

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Final Words

Eliminating interchange fees on the sales tax portion of transactions presents both opportunities and challenges for the payment ecosystem. However, policymakers, industry leaders, merchants, and other stakeholders must thoroughly evaluate the potential benefits against the associated costs and challenges. A balanced and collaborative approach will be critical to ensure any reforms are practical, equitable, and beneficial for all parties involved.

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