A buried provision in S05587 requires payment card networks to exclude sales tax and tips from the amount used to calculate interchange fees—potentially lowering your per-transaction costs.
Most retail owners don't realize they're paying interchange fees on sales tax and customer tips. When a customer buys a $100 item, pays 8.875% tax, and adds a $15 tip, Visa or Mastercard calculates their interchange fee on the full $123.88—not just the $100 merchandise sale. New York bill S05587 changes that.
Section 1121 of S05587 requires payment card networks to exclude state and local taxes and fees from the transaction amount used to calculate interchange charges. In plain terms: Visa, Mastercard, and other networks must strip out sales tax and gratuities before computing what they charge you per transaction.
Using the example above, instead of charging interchange on $123.88, the network would calculate it only on the $100 base sale. For a business processing thousands of transactions monthly, this compounds into measurable savings.
The bill also prohibits card networks from "altering or manipulating" how they compute these fees—a safeguard against workarounds that might offset the reduction.
Any New York retail business accepting credit or debit cards is affected: restaurants, grocery stores, boutiques, gas stations, salons, and e-commerce operations serving New York customers. The provision applies to all payment card networks operating in the state.
Businesses in high-tax jurisdictions or those with high average tips (restaurants, bars, salons) will see the largest proportional benefit, since tax and tip amounts are larger portions of the total transaction.
The provision becomes effective on July 1 of the year following enactment of S05587. Retailers should confirm the exact enactment date with their payment processor or acquiring bank, as implementation timelines may vary slightly across networks.
Review your current interchange rate structure with your payment processor. Ask them explicitly: (1) when they will implement the tax and tip exclusion, and (2) what the estimated impact will be on your monthly processing costs. Some processors may need to update their systems, so early communication helps ensure smooth transition.
If you're renegotiating processing agreements before the effective date, you may want to reference this upcoming change in discussions with your provider.
Keep documentation of your current interchange costs so you can verify the reduction takes effect as required by law.
For a detailed breakdown of how interchange fees work and how S05587 affects your specific business model, contact your local retail trade association or payment processor.