Key Takeaways: MSB Payment Processing
- States are moving to ban swipe fees on sales tax (and sometimes tips)—starting with Illinois—because merchants pay fees on money they don’t keep.
- If your state passes a law, savings won’t be automatic: your POS/gateway must cleanly separate and transmit subtotal, tax, and tip (especially tricky for restaurants where tips change after authorization).
- Know your exposure now: monthly card volume × tax rate × effective processing rate ≈ what you’re currently paying in fees on tax.
- Watch the fine print: credit vs debit coverage, issuer carveouts, enforcement penalties, and documentation requirements—plus potential fee “offsets” elsewhere.
You collect sales tax on behalf of the state, send it on its way, and yet you still pay card fees on that portion of the ticket. The processor doesn’t just take interchange on your revenue — it takes interchange on money that was never yours to keep.
That’s the core issue behind a growing wave of state legislation aimed at stopping interchange (“swipe fees”) from being assessed on sales tax (and in some proposals, tips). For merchants with meaningful volume — especially restaurants, retail, and service businesses — this isn’t a theoretical debate. It’s a real line-item cost that quietly compounds.
Below is what’s happening, what to watch, and what to do so you’re not caught flat-footed if your state flips the switch.
The Core Problem: Paying Fees on Non-Revenue
Interchange and network-related fees are typically calculated as a percentage of the transaction amount. On most receipts, that includes:
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the product or service price
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plus sales tax
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plus other add-ons (and sometimes tips, depending on how the transaction is structured)
Sales tax isn’t revenue. It’s pass-through money. But in a standard card transaction, interchange doesn’t care what portion is tax — it looks at the final total.
That’s why merchants are pushing for rules requiring networks to exclude tax from the fee calculation.
Illinois: The First State to Put It in Writing
If your business operates in Illinois — or you process Illinois transactions — this is the test case everyone is watching. Not because Illinois is the biggest market, but because it’s the first time a state has tried to force a change in how card economics get applied to tax and tips. If it holds up, other states will copy the structure. If it gets watered down, other states will rewrite the approach.
Either way, it’s the beginning of a fight merchants will see more of, not less.
The Copycat Wave: Which States Are Set to Adopt Next
Here are a few of the more active proposals referenced in early 2026 discussions:
Colorado
A bill introduced in early March 2026 would prohibit interchange fees on sales taxes for transactions involving large banks (based on asset thresholds). Colorado is worth watching because it’s a merchant-heavy state with strong small business advocacy — and because once a second state moves, this stops looking like an Illinois anomaly and starts looking like a trend.
New York
New York has entertained proposals to exclude state and local taxes from fee calculations, with language that borrows from the Illinois model. If a state like New York passes a version, it will accelerate similar pushes elsewhere.
Texas
A Texas proposal has been discussed that bans swipe fees on taxes and tips and includes enforcement language. Texas tends to be a bellwether for what might become politically viable across multiple regions, even if bills stall and reappear in different forms.
And those are not the only places where this has shown up. Once one state passes a law and survives initial legal attacks, legislation starts multiplying. That’s exactly what we’re seeing.
What This Could Mean for Your Bottom Line
Even “small” percentages become real money when they touch every transaction.
If your average ticket is $80 and your local tax is ~8%, you’re paying card fees on an extra $6.40 per sale that you don’t keep. Scale that across daily volume and it stops being a rounding error.
This matters most for:
- Restaurants (high ticket + tips + high transaction count)
- Retail (high transaction count + steady tax burden)
- Service businesses (big invoices with meaningful tax components)
- Any merchant with tight margins where fee leakage shows up quickly
If states begin requiring tax to be excluded, merchants could see measurable savings — but the actual benefit depends on how the rule is implemented and whether the compliance burden shifts onto merchants, processors, gateways, networks, or some combination.
The Catch: This Isn’t a Flip-the-Switch Change
Even if a state passes a law, the “how” matters:
- How does the tax amount get identified inside the transaction flow?
- Who is responsible for separating tax from the total?
- Does it require new fields, new reporting, or new clearing files?
- What happens with blended taxes (state + local + special district)?
- How do tips work in restaurant flows (authorized vs captured totals)?
This is why banks and networks push back hard. They argue it complicates processing and settlement. Merchants argue the current system is simpler for processors, not fair for merchants.
Both things can be true.
What Merchants Should Do Now (Even Before Your State Acts)
1) Know your effective rate and your “tax exposure”
Most merchants can tell you their effective rate, but very few can tell you what portion of their total processing volume is sales tax. That number matters if tax becomes excludable.
Action: Pull one month of sales data and estimate:
- Total card volume
- Average tax rate applied
- Total tax collected on card sales
That’s your “fees paid on tax” exposure.
2) Make sure your reporting is clean enough to prove tax amounts
If laws require documentation — and many will — you want receipts and reporting that consistently separate:
- Subtotal
- Tax
- Tip (when applicable)
If your POS mixes these inconsistently, you’ll have a bad time.
3) Don’t assume your provider will proactively optimize this for you
Some will. Many won’t. And some will “comply” in a way that preserves their margin elsewhere. You want a provider that can talk plainly about:
- Interchange vs network vs processor markup
- How the tax portion is recognized (or not)
- What’s required operationally on your side
Does This Apply to Debit, Credit, or Both?
This is where bills start to diverge.
- Debit has additional routing rules and a different regulatory history, so lawmakers sometimes treat it separately.
- Bills may target transactions tied to large issuers first (asset thresholds are common) because it’s easier to frame and enforce.
Why Tips Are Tricky (Especially for Restaurants)
Tax is usually known at checkout. Tips often aren’t and a lot of restaurants run a card as:
Authorization
for an estimated total (often without the final tip), then
Capture/settlement
for the final amount after tip is added
That creates a few complications:
- If the law bans fees on tips, the system needs a way to identify the final tip amount reliably.
- Some POS setups store tips cleanly. Others don’t. Some batch tips differently. Some pass the “tip” as a separate field; others just change the total.
- Refunds, tip adjustments, and partial voids create edge cases that processors will handle differently.
Refunds, tip adjustments, and partial voids create edge cases that processors will handle differently.
Merchant Calculator: Estimate What You’re Paying in Fees on Sales Tax
Here’s a simple way to approximate your exposure.
Step 1: Estimate monthly tax collected on card volume
Monthly card volume × average tax rate = tax collected on card sales
Step 2: Estimate fees paid on that tax portion
Tax collected × your effective processing rate = fees paid on tax
Example:
- Monthly card volume: $150,000
- Average tax rate: 8%
- Effective processing rate: 2.9%
Tax collected = $150,000 × 0.08 = $12,000
Fees paid on tax = $12,000 × 0.029 = $348/month
Annualized = $4,176/year
That’s not a promise of savings—because laws may be partial and implementations may vary—but it gives you a clean “this is the size of the issue” number you can track.
What to Watch in Your State
If you want to track whether your state is moving in this direction, focus on the parts of a bill that actually determine impact:
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Scope:
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sales tax only, or sales tax + tips
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credit only vs credit + debit
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issuer carveouts (large vs small banks)
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Enforcement:
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penalties (who gets fined—networks, banks, acquirers, processors?)
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complaint process (is it merchant-driven or agency-driven?)
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Data mechanics:
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how tax/tip must be transmitted
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recordkeeping requirements
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audit language
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Cross-border / ecommerce language
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whether it applies only to in-state merchants, or transactions involving that state’s tax
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Effective date (and whether implementation depends on court outcomes)
Where to look: your state legislature site, committee calendars, and bill text search for “interchange,” “sales tax,” “card network,” and “transaction fee.”
Where Durango Merchant Services Fits In
We work with merchants that don’t have time for payment politics — they just need stable approvals, predictable funding, and pricing that doesn’t drift upward because nobody is watching.
If your state moves in this direction, the practical questions aren’t philosophical. They’re operational:
- Will the way you accept payments allow tax to be separated cleanly?
- Will your reporting support audits or documentation requirements?
- Will your processing setup adapt without breaking your checkout flow?
- Will the “savings” get clawed back elsewhere?
That’s what we help merchants answer before a deadline forces rushed decisions.
