Credit card processing is one of the most common and necessary expenses for businesses in every industry. But a critical and often overlooked question persists: are credit card processing fees subject to sales tax? While these fees may seem like standard business costs, their taxability can vary dramatically depending on your location and how the processing fees are structured. Understanding how sales tax applies to these charges is vital for staying compliant, avoiding unexpected audits, and accurately reporting your expenses. Whether you’re working with flat-rate processors or interchange-plus pricing models, your tax obligations may differ, and this guide will help you understand the nuances—especially as more states reevaluate their stance on digital transactions.
What Are Credit Card Processing Fees?
Credit card processing fees are the charges a business incurs every time it accepts a credit or debit card payment. These fees typically include the interchange fee charged by the card network, the markup from the credit card processor, and additional service or platform fees. The average processing cost ranges from 1.5% to 3.5% per transaction[1]. Most merchants absorb these costs, but some pass them along to customers in the form of surcharges or higher list prices. Understanding how these fees are structured helps determine whether they are taxable in your specific jurisdiction.
Are Credit Card Processing Fees Subject to Sales Tax?
The answer is: it depends on your state. Some states consider credit card processing fees to be part of the transaction and thus subject to sales tax, while others classify them as service fees that are not taxable. States like Texas, California, and New York have different interpretations, and even within states, tax liability can vary by industry or how the fee is disclosed[2]. The key factor is often whether the fee is bundled into the price of the good or listed as a separate charge on the receipt. Businesses must carefully review their provider’s practices and state tax laws to ensure compliance.
Why States Are Reexamining Payment Taxation in 2025
With the rapid growth of ecommerce and digital payments, states are increasingly scrutinizing how transactions are taxed. Many are realizing that credit card processing fees—often in the billions of dollars—represent untapped revenue potential. As a result, states like Washington and Illinois have launched reviews into the taxability of merchant services fees[3]. This trend is likely to continue as government agencies attempt to modernize tax codes for the digital age. Businesses working with credit card processing providers must now pay close attention to these shifts to avoid costly mistakes.
How Credit Card Processing Providers Handle Taxation
Most credit card processing providers do not automatically assess sales tax on their own fees, but that doesn’t absolve merchants from responsibility. Providers like Square, Stripe, and PayPal each handle reporting differently, and some may offer itemized invoices that include taxability indicators. Others may remain silent on the issue, leaving merchants to determine the correct treatment for their specific state[4]. High-risk industries or ecommerce sellers dealing with complex cross-border transactions must be especially cautious, as multiple tax jurisdictions may apply.
The Risk of Misclassifying Fees in Your Sales Records
If you include processing fees in the total transaction value and do not clearly separate them, you may inadvertently make them subject to sales tax. For example, if a surcharge appears as part of the retail price instead of a line item, tax may be applied to the entire amount. Conversely, separating the fee clearly and labeling it as a non-taxable service in a compliant manner may exempt it[5]. Misclassifying these fees increases the risk of an audit and potential fines, especially in states tightening their rules around digital transactions.
States Most Likely to Tax Processing Fees in 2025
While no universal rule applies, certain states have already taken steps toward taxing merchant processing-related services. California has explored applying sales tax to third-party platform fees. New York considers some bundled transaction fees as taxable depending on the invoicing format. Texas may treat surcharges differently depending on whether they are disclosed pre-sale. As more states revise their interpretations, businesses working with national credit card processing providers need to localize their tax strategy accordingly. The only consistent answer is that each state must be reviewed individually.
How to Avoid Overpaying or Underreporting Sales Tax
The best way to stay compliant is to work with your accountant or tax advisor to categorize your fees appropriately and keep detailed records. If your credit card processing provider includes processing charges in the gross transaction amount, that portion could be taxed unless separated. Using a provider that offers detailed invoices or reporting tools makes this task easier. By understanding whether your processing fees are subject to sales tax, you can more accurately file returns and avoid underpayment penalties or overpaying on untaxable services.
Managing Taxable vs. Non-Taxable Fees
Surcharge Disclosure Matters
If you add a surcharge for credit card usage, it must be disclosed at the point of sale. In some states, failing to disclose it properly results in the entire transaction becoming taxable. A separate line item labeled correctly may be exempt.
Bundled Pricing Increases Risk
When you include the fee in the advertised price of goods or services, it becomes harder to separate the taxable portion. This often leads to the entire price being taxed, including the portion related to credit card processing.
Itemized Receipts Reduce Exposure
Receipts that break out processing fees as distinct service charges may offer tax advantages. This clarity helps both your customers and your accountant understand what portion—if any—is taxable under state law.
State-by-State Variability Is Real
One-size-fits-all doesn't apply when it comes to taxation. A fee that’s non-taxable in Florida may be considered part of a taxable sale in Illinois. Your processing provider should offer support for managing this complexity.
Provider Reporting Can Help or Hurt
Some credit card processing providers help you stay compliant by offering taxable indicators in reports. Others may leave these determinations up to you. Ask whether your provider gives detailed tax-ready documentation.
Local Business Types May Be Exempt
Certain services—like nonprofit event registrations or healthcare payments—may be exempt from sales tax, even if a fee is charged. Knowing the tax-exempt status of your business category is essential for accurate filings.
FAQ
Q: Are credit card processing fees always subject to sales tax?
A: No, credit card processing fees are not universally taxable. Whether they are depends on your state, how the fee is disclosed, and whether it’s bundled into the price of the good or service. You must check with your state’s tax authority and your provider.
Q: Can I pass sales tax from processing fees onto my customers?
A: In some states, yes—but you must disclose it clearly at the point of sale. If you’re passing on the cost of processing, the way it’s presented will determine whether it’s taxable. Transparency is key to avoiding penalties.
Q: Which states are most aggressive about taxing processing fees?
A: States like New York, California, and Texas are actively reviewing or taxing aspects of digital payment processing. These states often apply different rules based on industry and how fees are presented in transactions.
Q: Does using a third-party processor affect tax obligations?
A: Yes. If your third-party processor includes fees in your gross receipts without separation, you may owe tax on the entire amount. Providers that offer itemized invoices and reporting tools make compliance easier.
Q: Should I consult a tax professional about this?
A: Absolutely. A tax advisor can help you determine whether your fees are subject to sales tax and how to properly document them. They’ll also guide you in choosing the right credit card processing providers for your business model.
Q: Do any processors help manage this automatically?
A: Some processors, like Payment Nerds, provide tools that help flag taxable fees, offer itemized receipts, and assist with state-specific compliance. It’s essential to choose a provider that understands your industry and tax region.
Conclusion
So, are credit card processing fees subject to sales tax? The answer varies by state, provider practices, and how the fees are structured and disclosed. For business owners, the key is clarity: separate your fees, document your practices, and work with credit card processing providers that understand compliance at the state level. In an era where digital transactions are under increasing scrutiny, taking a proactive approach will protect your margins and your reputation. With the right systems—and partners like Payment Nerds—you can streamline your reporting and keep your sales tax obligations accurate.
Sources
- Avalara. “Are Credit Card Processing Fees Taxable?” Accessed July 2025.
- National Association of Tax Professionals. “Understanding Taxable Merchant Services.” Accessed July 2025.
- Forbes. “What to Know About Sales Tax and Online Payments.” Accessed July 2025.
- Visa. “Understanding Fees and Taxable Transactions.” Accessed July 2025.
- State of California Department of Tax and Fee Administration. “Sales and Use Tax Regulations.” Accessed July 2025.
