Colorado lawmakers say they want to lower prices for consumers. Their latest idea would more likely pad the margins of big-box retailers, while sticking small merchants and cardholders with the bill.
The state Senate recently passed Senate Bill 134, which now sits on Gov. Jared Polis’ desk. The bill would bar some banks and card networks from charging interchange fees on the sales-tax portion of card transactions. Supporters say merchants would save millions and pass those savings along to consumers. That sounds appealing. But the evidence points the other way.
The bill targets card-issuing banks and affiliates with more than $60 billion in assets. In that respect, it resembles an Illinois law scheduled to take effect July 1, despite ongoing legal challenges. But there are important differences. Illinois’ law applies to taxes and tips. Colorado’s bill applies only to taxes. Illinois’ law applies to all issuers. Colorado’s exemption for smaller banks and affiliates would effectively exclude more than a third of debit cards and perhaps a quarter of credit cards issued nationwide.
Supporters make two basic claims: Merchants should not have to bear the cost of collecting taxes for the state, and any savings from removing interchange on taxes would flow to consumers. Neither claim holds up.
There was once a stronger case that collecting and remitting sales taxes imposed a meaningful burden on merchants. For that reason, Colorado long allowed merchants with up to $1 million in sales to deduct a vendor fee of up to $1,000 per filing period. But modern point-of-sale systems and integrated accounting software now calculate tax obligations automatically. That old argument has grown weaker — and Colorado has eliminated the deduction.
The difference matters. The old deduction mainly helped small merchants, reflecting that tax compliance is largely a fixed cost. Senate Bill 134 would work the other way. It would impose new fixed costs that larger retailers can absorb far more easily than small businesses.
Today, interchange fees are calculated on the full transaction amount. Point-of-sale machines generally do not need to transmit separate sales-tax information to payment networks, and most do not. To take advantage of Senate Bill 134, merchants would need to upgrade equipment or build new systems to identify and record the tax portion of each card transaction. That may be manageable for national chains with in-house compliance teams. It is a much heavier lift for a neighborhood restaurant, independent retailer or family-owned shop.
No wonder big-box merchants like the idea.
The bill’s bank-size cutoff would make the problem worse. By excluding banks with less than $60 billion in assets, Senate Bill 134 would leave out roughly a third of nationally issued cards, along with cards issued by Colorado-domiciled banks and credit unions. The bill may apply to only about half of all transactions.
That creates a practical headache: Merchants would need to know whether the cardholder’s issuing bank is large enough for the tax deduction to apply. Large retailers can build systems to manage that complexity. Smaller businesses may find the savings too uncertain, too small, or too costly to capture.
That also undercuts the promise of lower prices. If small merchants save little or nothing, and large merchants face little competitive pressure to pass along their savings, consumers should not expect much relief at the register. Colorado’s own fiscal analysis appears to assume the same thing. It estimates the bill would have no budgetary effect, meaning it expects no change in total taxable sales.
The bill could do more than fail to help consumers. It could hurt them.
Interchange fees help fund many card benefits that consumers now take for granted: fraud protection, zero liability for unauthorized charges, rewards programs and the convenience of electronic payments. Those features helped make cards nearly universal. Merchants benefit, too. Card transactions move faster than cash, especially with contactless tap to pay, and consumers often spend more when they are not limited to the cash in their wallets.
When lawmakers cap or carve up interchange revenue, issuers respond. They reduce cardholder benefits, raise other fees or both. That has happened in other places where interchange fees have been capped, including in the United States. Consumers may lose rewards or face higher banking costs, while seeing little — or nothing — in lower prices for goods and services.
Senate Bill 134 is sold as relief for merchants and consumers. In practice, it would likely deliver a narrow benefit to the largest retailers, impose new burdens on small businesses and chip away at the card benefits consumers value.
Colorado should not confuse a windfall for big-box stores with a win for consumers.
Julian Morris, of George Town, Cayman Islands, is a senior scholar with the International Center for Law & Economics and author of the ICLE white paper “State Regulation of Interchange Fees.”
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