Proposals to require financial service providers to exclude payment processing fees from the sales tax portion of a card payment would bring higher costs for everyone but the largest merchants, according to CUNA-commissioned research from Cornerstone Advisors released Monday. Seven states and one territory currently have legislative proposals in place that seek to exclude state and local sales tax from the calculation of interchange fees when consumers pay with debit, credit, or prepaid cards.

Specifically, the proposals look to remove interchange fees for each card payment transaction within the daily settlement process or an after-the-fact rebate.

“While it might appear that these proposals would benefit retailers and other merchants, nothing is farther from the truth—the bills pose an enormous threat to the payment system and will result in higher (not lower) costs to all but the largest merchants,” the research reads.

“The conclusion is clear: Policymakers must consider alternative methods outside of interchange rebates to assist merchants. Large-scale changes to card payments require a full understanding of the risks the changes will bring and the costs that merchants, consumers, state governments and financial institutions will incur,” it adds.

Removing sales tax from interchange calculations will:

• Introduce complexity, cost and risk to a global, interoperable payment system.
• Create significant operational burden to merchants with small businesses seeing little to no benefit.
• Require a system of accountability to ensure that the sales tax charged on every card transaction is accurate.