House committee reviews bill to exempt taxes and gratuities from merchant interchange fees

The Dumont House Committee on Commerce & Economic Development on April 4 received testimony on H.3.17, a bill that would exempt the tax and voluntary gratuity portion of a card payment from interchange fees charged to merchants.

Legislative counsel Rick Siegel walked the committee through the bill's structure and definitions, saying the measure would let a merchant flag the tax or gratuity portion of a transaction so banks, card networks or processors would not charge interchange on that portion. "If you had a bill of $100…and $20 of those dollars were taxes and gratuity, only $80 would be subject to the interchange fee and the $20 would be not," Siegel said. He described the bill's key mechanics: merchants could transmit tax/gratuity amounts at authorization or submit tax documentation up to 180 days after the transaction; an acquirer, issuer or processor that receives documentation must credit the merchant within 30 days; and violating entities could face a civil penalty of $1,000 per transaction. The bill places the measure in Title 9 (consumer protection) and sets an effective date of July 1, 2025.

Why it matters: supporters said the measure would return money to small merchants and tipped workers; opponents warned of system costs, national preemption and practical barriers. Doug Kanter, general counsel for the National Association of Convenience Stores, told the committee the change would particularly help small, single-store operators: "The banks take that money before the merchant gets it, and the merchant has to reach into their own pocket to make up the difference," Kanter said, noting that an estimated $14,000,000 in interchange on sales tax is collected annually in Vermont. He argued networks such as Visa and Mastercard can implement the change and that litigation in Illinois should not block state action.

Industry witnesses and bankers urged caution. Steve Rauschenberger of the Electronic Payment Coalition said the current payment system is global, open to thousands of banks and millions of merchants, and that converting the single dollar amount now routed through the payment rails into separate, auditable tax and tip fields would be complex and costly. "If you start from that, you have to decide, do you really want to, on a state-by-state basis, begin to try to reengineer a global payment system?" Rauschenberger said. Chris Stelier, president of the Pennant Bankers Association, described the Illinois litigation as unsettled and urged the committee to weigh impacts on Vermont-chartered banks and credit unions before acting: "The Illinois case is very much up in the air," Stelier said.

Committee members pressed several practical questions: whether the bill would force processors to create new point-of-sale capabilities; whether merchants would shoulder reconciliation burdens if their systems are not integrated; whether the statutory penalty is strict liability or requires a negligence standard; and how the bill would interact with federal law. Siegel said the draft uses "shall" for the merchant duty to transmit information so a merchant has a clear path to enforce rights, but acknowledged language could be adjusted. Witnesses described three pragmatic outcomes if enacted statewide: processors could build segregation systems (at cost), issuers might decline to accept transactions in the jurisdiction, or merchants could resort to off‑rail settlement for tips and taxes.

No formal vote or committee decision was recorded. Committee members signaled continued study: the chair set a reconvening of the committee at 1:00 p.m. to delve further into costs, implementation options and the Illinois litigation that currently constrains similar laws.