On Interchange, the NRF Turns to the States, Underscoring Sales Tax

If regulation can't be avoided, national trade groups often prefer federal regulation over regulation by states on the theory that one set of rules is less costly and easier to comply with than 50 different sets of rules. But when it comes to interchange, the National Retail Federation is challenging the conventional wisdom. Not only is the association seeking government intervention in interchange, which currently isn't regulated, but it also is encouraging states to get involved. According to the NRF, nine states have introduced at least 15 bills on interchange this year. “The activities you are doing in the states to shine a light on these fees and make consumers aware of them is an important step in the right direction,” NRF General Counsel Mallory Duncan said at the National Conference of State Legislatures' Spring Conference last week in Washington, D.C. Duncan was a member of a panel that discussed interchange, the amount of a bank card sale set by Visa and MasterCard that is assessed to the merchant acquirer and paid to the issuer of the card used in a transaction. Acquirers typically pass the expense on to their merchant clients. Duncan zeroed in on sales taxes. He said interchange is calculated after sales tax has been applied to purchases, resulting in a larger fee than if it applied only to merchandise. Retailers are required to remit the entire sales tax amount to state treasuries, so merchandise must be priced high enough to compensate for the interchange charged on the sales tax, he said. “When Visa and MasterCard take their cut, they don't take it on just the retail sale, they take it on the entire transaction including the sales tax,” he said. “That's not their money. The sales tax is the people's money, and they shouldn't be trying to take a piece of it. That drives up prices even higher, and everybody ends up paying a tax on a tax.” In an interview with Digital Transactions News, Duncan said that pricing model raises the expense of public services for which cards are accepted, such as college tuition. Measures to ban interchange fees on the sales-tax portion of transactions have been introduced this year in Florida, Kansas, Nevada, New York, and Washington, according to the NRF. Kentucky, Nebraska, and Texas have introduced bills requiring credit card companies to be more transparent in disclosing rules and fees. A bill in Tennessee would cap interchange rates at 0.75%. Some states have multiple bills pending, the NRF says. But many of the bills have already died, notes a spokesperson for MasterCard Worldwide. According to MasterCard, only the bills in New York, Tennessee, and Texas are still alive. Duncan seems unfazed. “That's not important; typically bills don't pass the first time they're introduced,” he tells Digital Transactions News. And on encouraging states to intervene in interchange before Congress acts, he says states often are the first to address problems. “Right now, the retail industry and their customers are under the thumb of monopolists,” he says. “What states do sometimes affects the federal government.” MasterCard would not comment further, and Visa USA did not respond to a Digital Transactions News e-mail for comment. The new Democrat-controlled Congress hasn't yet introduced an interchange bill, but the Senate Judiciary Committee last year held a hearing on whether interchange practices violate federal antitrust law. The Senate Banking, Housing and Urban Affairs Committee plans to hold a hearing on interchange this year, and the Senate Homeland Security and Government Affairs Committee may include the issue in its investigation of abusive credit card industry practices and fees, according to the NRF. Approximately 50 antitrust lawsuits challenging are pending in U.S. District Court in Brooklyn, N.Y., and are expected to be consolidated into a class action. Several individual retailers also are pursuing their own interchange lawsuits against the card networks.