Democrats in the PA House of Representatives are proposing a bill that would prohibit card processing fees from applying to sales tax when consumers pay with a credit or debit card. They are not the first to state to do so.

In June of 2024, Illinois became the first state to pass legislation prohibiting the application of card ‘swipe’ fees to excise taxes. The Democratic Gov. J.B. Pritzker signing the bill into law. It will go in effect next year. About a dozen other states are considering this as well.

The Pennsylvania legislation, House Bill 2394, seeks to require card networks to deduct the amount of tax from calculation of the interchange fees, also known as “swipe” fees, that businesses pay when consumers use their cards.

A second option allows the amount to be be rebated. The bill would require the payment card networks, which is typically either Visa or Mastercard, to implement this or face a civil penalty of $1,000 per violation.

I asked ChatGPT to explain this as simply as possible. Here’s what it came up with:

Imagine you have a lemonade stand and you sell a glass of lemonade for $1. Let’s say the government charges an extra 6 cents as a tax on each glass you sell, so your customer pays $1.06 in total.

When people pay with a credit card, the bank charges a small fee for using the card. This fee is called a “swipe fee.”

House Bill 2394 is a proposal that says you shouldn’t have to pay this swipe fee on the 6 cents of tax. Right now, you have to pay the swipe fee on the whole $1.06, but the bill wants you to only pay it on the $1.

This way, you save a little bit of money because you’re not paying extra fees on the tax part. Some people think this is fair because you’re just helping the government collect the tax, and you shouldn’t have to pay extra for that. However, banks and credit card companies are worried it might make things more complicated and expensive for them​

I think that sounds pretty accurate.  While it may save businesses money, it would disrupt a system that operates very efficiently. The cost of changing the technology required for this would far outweigh the benefits according to Scott Talbott, a spokesperson for Electronic Transactions Group.

The ETA, which represents Visa, Mastercard and bank card issuers like JPMorgan Chase, is trying to reverse the effects of the new law in Illinois by working with legislators there.

Most small business owners are already overburdened by regulations & reporting requirements. Having to adjust payment processing equipment and bookkeeping systems to exclude sales tax from processing fees seems like a major disruption.

We will update this story as it develops.