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TACIR draft recommends tiered vendor compensation if Tennessee reinstates sales‑tax collection payments to retailers
Summary
TACIR staff presented a draft report on vendor compensation for sales‑tax collection and card transaction (‘swipe’) fees, recommending tiered rates and a cap if the state reinstates vendor compensation and advising caution on requiring exclusion of sales tax from card fees until an Illinois test case is resolved.
TACIR staff presented a draft report on Dec. 19 that assessed the costs businesses incur collecting and remitting state and local sales taxes and compared Tennessee’s approach with other states. The study was prepared under Public Chapter 1013 (Acts of 2024).
Why it matters: The question before commissioners was whether Tennessee should reinstate vendor compensation for retailers who collect sales taxes and, separately, whether the state could require payment processors to exclude sales tax from transaction processing (card) fees.
Key findings and staff advice: Doctor Michael Strickland, presenting the draft, told commissioners that 27 states currently allow some vendor compensation and 16 do not; Tennessee has historically changed its approach. The evidence does not clearly mandate one interpretation — that businesses are entitled to compensation as agents for the state versus that tax collection is a cost of doing business — but staff recommended equity safeguards should the state reinstate compensation. Specifically, the report recommends a tiered rate schedule and a cap on total compensation to avoid large businesses receiving windfalls and to protect state revenue.
On card‑processing (interchange) fees, Strickland summarized recent legislative experiments elsewhere and legal uncertainty. Illinois enacted a law to require exclusion of sales tax from card transaction fee calculations effective July 1, 2025, but that law has been met with industry opposition and litigation. Because the effects and legality of such an exclusion remain in dispute, TACIR’s draft recommends Tennessee defer action on changing card transaction fees until outcomes from the Illinois test case are clearer.
Other observations: Staff noted that improvements in technology have lowered collection costs over time and that vendor compensation, if used, should be structured so smaller businesses—where the cost of compliance is a larger share of revenue—are not disadvantaged. Strickland also emphasized that a single flat compensation rate without a cap could overcompensate large firms.
Process note: The draft report is for review and comment; staff will return to TACIR with a final report at a future meeting.
Ending: Commissioners asked clarifying questions and thanked staff; no vote was taken on the draft at the Dec. 19 meeting.
