Credit Card Processor Not Subject to Washington B&O Tax on Interchange Fees

The Washington Court of Appeals concluded that a credit card processor was not subject to the business and occupation (B&O) tax on interchange fees charged by issuing banks as part of various credit card transactions because the processor did not actually receive the fees.¹ In so ruling, the court invalidated the findings of an excise tax advisory² that such fees are consideration that accrues to, and is taxable to, the processor. An interchange fee is the amount a network, such as Visa or Mastercard, allows an issuing bank to charge for funding a transaction. Upon approval, the bank funds the transaction, less the interchange fee. The Washington Department of Revenue (“Department”) issued an excise tax advisory in 2017 (mistakenly said 2018 by the court) in which it stated that a merchant discount (of which an interchange fee in one component) is consideration that accrues to the processor and, therefore, represents gross income…notwithstanding that the fees may be netted out before the processor receives payment. It is undisputed that the issuing banks deducted the interchange fees before they sent payments through to the processor. Based on the advisory, the processor paid the B&O tax on the interchange fees. Subsequently, it claimed a refund for that portion of the tax attributable to the fees. The dispute escalated, and a trial court ruled that the fees were not taxable because they were not actually received by the processor.

The Court of Appeals (“Court”) explained that under the B&O tax law, gross income of a business is the value proceeding or accruing...without any deduction…and value proceeding or accruing means the consideration actually received or accrued. The law (Revised Code of Washington § 82.04.090) further directs that value proceeding or accruing refers to the method of accounting regularly employed by the taxpayer. The taxpayer (processor) and its parent did not report interchange fees as revenue on their financial statements, and the fees are not considered part of the processor’s gross income. The Department’s argument hinged on an administrative rule [WAC § 458-20-197(2)(a)(i)] that states value accrues to a taxpayer when the taxpayer becomes legally entitled to receive consideration.

However, the Court, cited the law that focuses on when a taxpayer is actually entitled to the interchange fees. It was undisputed that the processor did not receive the consideration for which the Department sought to impose the tax. Thus, the trial court’s decision was affirmed, and the fees should not be included in its gross revenue calculation.

Ryan’s Take and Action Steps

Credit card processors and other taxpayers that applied the findings of the excise tax advisory need to examine their records to see if they incorrectly paid tax on interchange fees—or another component of a merchant discount―for amounts not actually received.

The decision is notable that the trial court found that the rule, on which the Department’s argument was based, was secondary to the requirement in the law that amounts must be actually received. This should also prompt taxpayers with assessments based on similar arguments to determine whether application of the law may yield a more favorable result.

¹ First Data Merchant Services LLC v. Department of Revenue, Wash. Ct. App., Div. 3, No. 40584-2-III (January 29, 2026).

² ETA 3204.2017 (June 17, 2017).

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.