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Who Pays Sales Tax with Cash Discounting? - CCSalesPro

Written by James Shepherd | Oct 31, 2019 1:25:59 PM

Who Pays Sales Tax with Cash Discounting?

Who should pay the sales tax on service fees? Here are some tips to keep your merchants compliant with state sales tax.  Whose income IS the cash discounting service fee?  Continue reading to explore this interesting concept.

 

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A very interesting concept has been brought to my attention recently by an email I received from a sales agent in NY.  A unique situation arose when the agent’s client was approached by a competitor.  The competitor stated that if the merchant switched to his company, they would arrange for the processor rather than the merchant to pay sales tax on cash discounting service fees.
Thus, the question comes, “Who SHOULD pay sales tax on the fees?” 
For those who may not be familiar with the topic of cash discounting and surcharging, let me briefly explain.

*I am not an attorney and this is not legal or accounting advice.  These are my opinions based on my experience in the industry.

Surcharging is –
·       One action of charging a consumer more to pay with a credit card.
Suppose a merchant sells bicycles for $100 each.  As long as consumers pay with cash, pin debit, signature debit, or pre-paid card, the amount of the purchase would be $100.  However, consumers who opt to pay with a credit card will have an added fee of a certain percent.  Thus, purchasing the bicycle with a credit card means the consumer would pay perhaps $103.50 rather than $100 due to a 3.5% surcharge.
Cash discounting is –
·       Two actions.  (1) Price Increase  (2) Discount for cash payments

The price increase is on all merchandise.  Depending on rules and regulations of the state and other compliance considerations, the merchants might simply inform consumers of the price increase by signage at the door and at the cash register.  Or merchants may increase prices on the shelf or menu.

Whatever method is used, there is a price increase.  Then the merchant offers a discount to anyone paying with cash.  That’s the cash discounting program.

The main reason merchants would choose cash discounting rather than surcharging involves the card brand rule prohibiting merchants from surcharging debit transactions. 
Therefore, merchants may choose cash discounting to collect additional revenue on all non-cash transactions to offset the cost of payment acceptance.  With a cash discounting program, consumers in the bicycle shop previously mentioned would pay $103.50 rather than $100 if using any form of payment other than cash.
Let’s use the example of a merchant making $10,000 in cash revenue and $10,000 in card revenue.  The merchant decides to implement a 3.5% price increase and notifies customers by signs at the door and at the register.  Then the merchant offers a 3.38% discount for cash payments ($103.50 x 3.38% = $3.50).  Therefore, the card revenue figure becomes $10,350 ($10,000 + 3.5%).
So, who pays the sales tax on that extra $350 revenue?  The answer should be simple.  Cash discounting is TWO actions – price increase and cash discount.  Whose revenue IS it?  Obviously, the price increase means that extra revenue is the merchant’s income.
For someone other than the merchant to pay sales tax cannot be a compliant cash discount program.  The only way that could be compliant is if there had not been a price increase.
Rather, someone else paying the tax would indicate that another service provider (the processor, in this case) is providing a service directly to the consumers, allowing them to use their card.  The revenue would come directly to the processor, which means they would be responsible for any tax implications.

 

Would that situation be in reference to a surcharge then?  No, even with a surcharge, the merchants add something to the purchase amount.  So, the revenue is still collected by the merchant.

The only situation, in my opinion, where the processor could be collecting the revenue is with convenience fees.  The convenience fee model hasn’t made it into the retail space yet.   There are very specific rules about convenience fees.  Convenience fees are collected directly by the processor.  As a convenience to consumers, XYZ processor allows the use of a card for payment of services to merchants who don’t accept card payments.  The processor then pays businesses their portion of the payment.

 

Although I’m not an attorney or accountant, this is my opinion.   There is no way to have a compliant cash discount program where the merchant is not paying the sales tax on that extra revenue.  Since the revenue comes from a price increase, it must be reported as income.  Thus, the merchant must pay sales tax on it.

 

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