North Dakota SB 2217, which passed the Republican-controlled state Senate and is currently pending in the House, seeks to prohibit the collection of interchange on the sales tax portion of electronic transactions. The bill would require payment card networks to:  “Deduct the amount of any tax or fee imposed from the calculation of interchange fees specific to each form or type of electronic payment transaction at the time of settlement;” or “Rebate an amount of interchange fee proportionate to the amount attributable to the tax or fee.”  The penalties for failure to comply include punitive damages not to exceed $1,000 per violation and court costs and attorney’s fees.

The North Dakota Bankers Association and the American Bar Association joined 12 other state and national trade associations in a comment letter opposing the bill.  The bill would require systems to deduct sales tax prior to determining interchange.  Interchange is the fees charged to merchants for processing electronic transactions to cover the issuing bank’s costs associated with accepting electronic payments.  To comply with this requirement, substantial operational changes would have to be made to merchant acquiring systems and card networks that are not currently programmed to process transactions in this manner.  Most merchants recently invested in new payment processing systems to comply with EMV chip requirements for fraud protection.  The industry letter points out some practical considerations for lawmakers:

When a retailer makes a sale using a customer’s electronic payment card, the system that processes the transaction recognizes only the final purchase amount on which the merchant discount fee is based.  The system transmits neither information regarding the product, nor services sold, nor the amount of sales tax collected.

The result of the implementation of this legislation would make North Dakota an island in a nationwide payment system.  Second, retailers would be required to create and implement new payments systems and operational mechanisms to ensure compliance, which would be both costly and burdensome.

Furthermore, newly required operational systems would lead to additional administrative costs and burdens for retailers, which would be passed along to consumers in the form of higher prices.

The letter further highlights that since 2006, over 40 similar proposals to prohibit interchange on the sales tax portion of electronic transactions never made it out of committee.  SB 2217, if signed into law, would require changes to the payment process solely to comply with one state’s law, causing significant compliance costs, disruption to the payment systems, and negative impacts to consumers.  We will continue to monitor this legislation to see whether the Republican controlled House and Governor will move forward on this bill.

Substantial changes were made to the payments system in 2011 to comply with Regulation II, the implementing regulation for the Durbin Amendment, which establishes standards for assessing whether a debit card interchange fee received by a debit card issuer for an electronic debit transaction is reasonable and proportional to the costs incurred by the issuer with respect to the transaction.  Consumers who lost the ability to earn rewards for debit card purchases, which rewards were funded by the unregulated interchange, are still waiting to realize the savings that federal lawmakers claimed merchants would  pass on to consumers after the reduction in interchange.  As we previously blogged, Federal Reserve finalized a rule expanding Regulation II, requiring online (card not present) debit card transactions to be enabled for processing on at least two unaffiliated payment card networks effective July 1, 2023.

On July 28, 2022, Senator Dick Durbin  introduced the S.4674 – Credit Card Competition Act of 2022 seeking to expand Regulation II to credit cards by prohibiting certain credit card issuers with assets of over $100 billion from restricting the number of networks on which credit card transactions may be processed to one network, two or more networks operated by affiliated networks or persons, or the two networks with the largest market share of credit cards issued.  This bill was referred to the Committee on Banking, Housing, and Urban Affairs.  A companion bill, H.R.8874 – Credit Card Competition Act of 2022, was introduced in the House on September 19, 2022 and referred to the House Committee on Financial Services.  With a divided legislature, we do not expect these bills will gain further traction.