Earlier this year, lawmakers rejected a measure that would have changed how credit card interchange fees are collected. Now, evidence is stacking up from elsewhere showing why the issue should stay dead.
Such fees are sometimes seen as a tax on a tax because they charge between 1% and 3% of the total transaction amount, including sales tax.
Sen. Travis Hutson and Rep. Mike Caruso carried bills in the 2023 Legislative Session that would have exempted the fees from state sales tax, ostensibly saving sellers a few pennies a sale.
But the measures failed, with credit unions and small-business leaders opposed due to its adverse effects on small businesses.
A new Council on State Taxation study offers insight into such legislation’s unintended consequences.
It looks at a similar measure currently being considered in Massachusetts and found that implementing the proposed daily sales tax collection system would cost businesses about $1.2 billion in one-time, nonrecurring costs and an additional $28 million annually in recurring costs.
Given Florida’s size and population compared to Massachusetts, such legislation could cost three times that in the Sunshine State, or $3.6 billion in one-time costs and $84 million in recurring costs.
The study notably did not include a cost estimate for integrating systems at financial institutions because data doesn’t exist to create one.
As has been previously reported by Florida Politics on the Florida legislation, the COST study found that “new systems would need to be developed and implemented to accommodate the increased information flow between retailers, payment processors, and banks to implement this unprecedented change to sales tax collection.”
The study also similarly noted that the legislation would benefit a rare few at the detriment of many others.
In previous reporting on the legislation, Florida Politics found that Walmart would benefit about $400,000 a month. Still, smaller retailers who use payment processing services such as Square would lose money. Walmart can update its software in-house, while small businesses must outsource such changes.
Last month, the Florida Credit Union Association and the Credit Union National Association highlighted a new Cornerstone Advisors study outlining the drawbacks of implementing such legislation in Florida and nationwide.
The research within the study found that “to ensure that the sales tax information is accurate, payment providers would require validation from merchants and possibly state revenue departments for accuracy,” adding that “to achieve this level of validation, merchants would be required to transmit sales data at the line-item level to support certain solutions.”
Simply put, that means transaction fees would be based on looking at every individual purchase rather than the current “batch system,” which expedites payments and keeps purchases confidential for the consumer. It would require new software that is an out-of-reach expense for some small businesses.
The study found that while “large retailers could afford these specialized systems at a minimal cost … mom-and-pop shops on Main Street” would face “costs that could lead stores to stop accepting card payments or worse, close their doors permanently.”
That study also raised privacy concerns, noting that “calculating interchange fees based on the purchases for an individual item will make it possible for others to see where people are spending their money.”
Small businesses deal with “independent sales organizations,” or ISOs. That industry designation describes most public-facing payment processors, such as banks, credit unions, or techier brands that market plug-and-play card readers, such as Square.
ISOs partner with interchange providers and repackage their services at a premium. Likewise, ISOs differentiate themselves with value adds, such as providing customer service, assuming fraud risk, and developing point-of-sale software suites that allow small businesses to accept cards without worrying about the minutiae of how many basis points are owed to each stakeholder.
If the legislation is revived and passed, that would all be upended.
Big boxes, such as Walmart and Target, and companies like Disney, can create new software to avoid potential $1,000-a-violation fees if a processing company were to collect interchange fees on the sales tax portion of a sale. But for retailers who use ISOs, there would be a need for new software rolled out across millions of point-of-sale devices.
The time, labor and hardware costs involved in developing software and replacing deprecated POS systems would inevitably be passed on to businesses, which would be forced to either eat the cost or shift the burden onto consumers through higher prices.