A Notice from NCRLA RE: NC Sales Tax on Credit Card Surcharges

Please note that while this is intended to help you be in compliance, it is in no way intended to serve as legal advice (by AIR or NCRLA). Please consult a licensed attorney to address more specific questions that may arise concerning this issue.

It has come to our attention that the NC Department of Revenue (NC DOR) is auditing for the collection of sales tax on credit card surcharges. If you currently impose a surcharge for credit card purchases, we encourage you to check your Point-of-Sale Systems to confirm that this is your current practice.

As reference, linked below is a 2024 Sales Tax Bulletin from the NCDOR regarding this interpretation.

NC Department of Revenue Sales Tax Bulletin (Pages 36-37)

“Surcharges made by a retailer for a retail sale, whether separately stated or not, are part of the sales price of an item subject to sales and use tax. (Examples: Fees for using a credit card, fuel surcharges, trip surcharges, service fees unless exempt under SUTB 32-18, etc.”

Audit Example:

A CPA shared an experience where a restaurant was audited by the NC Department of Revenue for Sales Tax Compliance for the three years beginning June 2021. The establishment was found to have fully reported all sales and paid tax correctly.

However, in June 2022 this establishment began to charge their customers a 3% fee to reimburse them for the fees on Credit Card purchases – a practice that has become common in the hospitality and retail industries.

This was set up in their Point-of-Sale (POS) system by the firm hired to provide those support services. That charge was set in the POS system to be free of sales tax. Commonly called in the POS system, “Non-Cash Adjustment” or sometimes simply “Service Charge.”

The auditor states this charge is to be taxed at the State rate of 7%, yet the POS system has not done so. In fact, we now find that the POS System used here cannot be programmed to charge Sales Tax on that item.

North Carolina Law:

In general, sales taxes apply to the gross proceeds of the sale without deduction for expenses. Some states make exceptions for things like shipping.

The way the North Carolina statute is written, the seller is not able to deduct any of their costs from the sales tax base. NCGS §105-164.3.(237) provides the following of sales price:

Sales price: The total amount or consideration for which an item is sold, leased, or rented. The consideration may be in the form of cash, credit, property, or services. The sales price must be valued in money, regardless of whether it is received in money.

The term includes all of the following:

  1. The retailer’s cost of the item sold.
  2. The cost of materials used, labor or service costs, interest, losses, all costs of transportation to the retailer, all taxes imposed on the retailer, and any other expense of the retailer.
  3. Charges by the retailer for any services necessary to complete the sale.
  4. Delivery charges.
  5. Installation charges.
  6. Repealed by Session Laws 2007-244, s. 1, effective October 1, 2007.
  7. Credit for trade-in. The amount of any credit for trade-in is not a reduction of the sales price.
  8. The amount of any discounts that are reimbursable by a third party and can be determined at the time of sale through any of the following: I. Presentation by the consumer of a coupon or other documentation. II. Identification of the consumer as a member of a group eligible for a discount. III. The invoice the retailer gives the consumer.

The term does not include any of the following:

  1. Discounts that are not reimbursable by a third party, are allowed by the retailer, and are taken by a consumer on a sale.
  2. Interest, financing, and carrying charges from credit extended on the sale, if the amount is separately stated on the invoice, bill of sale, or a similar document given to the consumer.
  3. Any taxes imposed directly on the consumer that are separately stated on the invoice, bill of sale, or similar document given to the consumer.

NC Department of Revenue Interpretation:

The interpretation from NC DOR is essentially saying that while the credit card expense is a direct result of how the customer chose to pay, it is still an expense of the business. As such, it is considered part of the selling price even if it is itemized. Further, it would be considered part of the selling price whether it is passed through at cost or marked up. As part of the selling price, it will be taxed in the same manner as the underlying transaction. If the product being sold is taxable, the fee is taxable, if the product being sold is nontaxable, the fee is nontaxable.

Looking Ahead:

NCRLA is meeting with our colleagues at the NC Association of CPAs as well as the NC Retail Merchants Association and other industry stakeholders on this interpretation and discussing the potential desire for a legislative clarification with the argument that this charge is simply a reimbursement by the consumer for charges incurred on their behalf by the merchant rather than a payment for goods or services.

In the meantime, our guidance is to follow the interpretation from the NC Department of Revenue to avoid the potential of having to pay the tax out-of-pocket through an audit.