Most New York retailers don't realize they're paying card processing fees on taxes and tips—but a new state bill aims to change that.
Most New York retail owners don't know they're paying interchange fees on the full transaction amount—including the tax and tip portions. That means every time a customer pays with a card, the payment network charges a percentage-based fee on money that was never yours to begin with.
Senate Bill S05587, now under consideration in New York, contains a provision that would change this calculation. Here's what you need to understand about it.
Section 1121 of S05587 would prohibit payment card networks (Visa, Mastercard, American Express, Discover) from charging interchange fees on the tax and gratuity portions of a transaction. Instead, merchants would receive either a deduction at settlement or a rebate proportionate to those excluded amounts.
In practical terms: if a customer's total card transaction is $100—with $8 in sales tax and a $15 tip—the interchange fee would be calculated only on the remaining $77, not the full $100. The difference flows back to you, either as a lower fee charged upfront or as a credit after the transaction settles.
Interchange fees typically range from 1.5% to 3.5% of a transaction. On a $100 sale, that's $1.50 to $3.50. But because taxes and tips are included in that calculation, you're paying a percentage of money that goes directly to government or your employee—not your business.
For a small retail operation processing hundreds of card transactions weekly, this adds up. A coffee shop, boutique, or restaurant processing $5,000 in daily card sales could see meaningful savings once this provision takes effect.
The bill also includes a prohibition against payment card networks "altering or manipulating the computation and imposition of interchange fees," which prevents networks from offsetting the tax and tip exclusion by raising rates elsewhere.
If enacted, the provision becomes effective on July 1 of the first year following the bill's enactment. This gives payment processors and networks time to update their systems to exclude taxes and tips from the fee calculation.
Monitor the bill's progress through the New York legislature. If it passes, your payment processor will handle the technical changes—you won't need to take action. However, it's worth reviewing your current merchant services agreement to understand exactly what you're paying in interchange fees today, so you can measure the impact once the law takes effect.
Keep in mind that interchange fees are set by card networks, not your processor, so this change applies uniformly across all merchants, regardless of which payment company you use.
For a detailed breakdown of how interchange fees work and what S05587 means for your specific business model, free resources are available through New York retail trade associations.