The hidden cost of passing on credit card fees

For many small businesses, the decision to pass credit card processing fees onto the customer seems like a straightforward way to protect profit margins. If a merchant processor takes 3%, adding a 3% convenience fee to the invoice feels like a wash. However, this simple math can lead to an unexpected tax liability if you aren't accounting for how states view the convenience fee.

Is a credit card fee considered income?

In most states that collect sales tax, the rule is generally consistent: if you charge a customer a fee to facilitate a sale, that fee is considered part of the total sales price. Because it is part of the "gross receipts" of the sale, it is subject to sales tax.

For example, if you sell a product for $100 in a state with a 6% sales tax and add a $3 credit card convenience fee, the state expects tax on the full $103. If you only collect $6 in tax (6% of $100), you are under-collecting. While $0.18 in missing tax may seem negligible, these small discrepancies across hundreds of transactions can create a significant headache (and tax liability) during an audit or a year-end cleanup.

The Hawaii GE Tax distinction

While the principle is similar, Hawaii’s General Excise Tax (GET) is even more encompassing than mainland sales tax. While sales tax is a tax on the consumer, GET is a tax on the business for the privilege of doing business in the state.

The Hawaii Department of Taxation calculates your liability based on gross income. In their view, every dollar that enters your business — including reimbursements, shipping charges, and convenience fees — is part of your taxable gross receipts.

When you add a $3 credit card fee to a $100 invoice in Hawaii, you owe GET on the full $103. Because the state recognizes that businesses will pass this tax on to the customer, they allow for a visible "pass-on" rate (currently 4.712% on most islands). This "grossing up" ensures that after you pay the tax on the total amount collected, you are left with the exact amount of your original invoice. If you are passing on credit card fees without also accounting for the GET on those fees, your books will show a persistent leak in revenue.

Strategy and simplicity

Handling these fees in QBO can become messy quickly if you are creating manual adjustments for every transaction. To maintain simplicity in your accounting, consider these approaches:

Adjust base pricing: Incorporate the cost of doing business into your standard rates. This eliminates the need for separate line items and simplifies your tax calculations at the end of the period. Plus, no one wants to see extra fees on their invoice.

The cash discount model: Frame your pricing around the credit card price and offer a discount for payments made via bank transfer or check. This is often more palatable for clients than a surcharge and is legally safer in many jurisdictions.

Proper mapping in QBO: Ensure that any fee you collect is mapped to an income account that is included in your sales tax or GET reports.

Keeping your books clean

Understanding how tax laws interact with your daily transactions is a crucial step toward having confidence in your numbers. Whether you’re dealing with mainland sales tax or the nuances of Hawaii GET, the goal is to ensure your "break-even" fee isn't actually costing you money.

If your QB records have become a tangle of fees, adjustments, and tax questions, don’t be afraid to reach out for help!