Texas Denies Claim that Interchange Fees Are Flow-through Funds Excludable from Revenue

DALLAS, Jan. 11, 2017 /PRNewswire/ -- In a recently published hearing (Hearing Number 110,908), a Texas administrative law judge held that a credit card processing company ("Taxpayer") incorrectly excluded from revenue interchange fees collected from merchants and forwarded to credit-card issuing banks. Interchange fees, assessment fees, and processing fees comprise the "merchant fee" paid by sellers for the privilege of using credit card networks. The interchange fees are amounts paid to the banks that issue branded credit cards (called issuer banks) and are intended to cover the bank's costs of authorizing, clearing, and settling credit card transactions.

Texas allows a company to exclude from its reported revenue flow-through funds that, by law, fiduciary duty, or contract, must be distributed to other entities. Examples of flow-through funds include taxes collected from customers and commissions paid to nonemployees. 

The Taxpayer argued that the interchange fees received from merchants were flow-through funds for issuer banks. In finding that the Taxpayer had failed to prove that the interchange fees qualified as flow-through funds, the judge stated that he was not persuaded that the Taxpayer had a fiduciary duty to distribute the interchange fees to the issuer banks. In addition, because the Taxpayer did not have contracts with the issuer banks, the Taxpayer could not prove that it was obligated by contract to distribute the interchange fees to issuer banks. Further, the judge noted that the Taxpayer recognized the interchange fees as revenue on its federal income tax returns.

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