Iowa businesses say they’re paying something akin to a “tax on a tax” and they’re asking Iowa legislators to help. 

Let’s say you buy a coat for $100 and use your credit card or debit card to pay for it. The state sales tax on that is six percent, or $6. The store pays a 2.5 percent transaction fee on the total bill of $106. Iowa Retail Federation president Jim Henter testified before a small panel of legislators this morning and suggested that’s a tax on a tax.

“We’re paying $41 million-plus a year in fees to collect and remit taxes,” Henter said. “We don’t think that’s fair.”

Iowa retailers are asking legislators to pass a bill that would prohibit financial institutions from charging that processing fee on the part of the transaction that covers state taxes. Banks, credit unions and companies that process credit card and debit card transactions oppose the bill. Mike Hollinger of the Shazam Network suggests every time you buy something that’s subject to the state sales tax in Iowa, you’d have to pay for the good or service in one transaction and then pay the sales tax with another swipe of your card.

“We do not believe that it’s a simple, you know, couple of programming changes,” he said. “This is a massive change.”

The Retail Federation’s Henter suggested that’s an exaggeration. “We can figure that out,” Henter said, “and we can do it quite easily.”

Justin Hupfer of the Iowa Credit Union League said congress wrestled with this issue and resolved it at the federal level in 2010.

“The retailers are trying to take this state-by-state now,” Hupfer said. “But there’s a reason why states have considered this and not taken action because the nature of these transaction are cross-state, cross-borders and if every state did their own law like this, it becomes extremely complex.”

Senator Randy Feenstra, a Republican from Hull, said the proposal would be a “nightmare” to try to enforce.

“I don’t think it’s a government issue. I think it’s a contractual issue,” Feenstra said. “Your contract should say we’ll pay on the cost of the goods only and not on the tax and, to me, that’s your argument between you and the processor.” Retailers say they’re unable to negotiate that kind of a deal, and that’s why they want state legislators to step in.

Small groups of legislators in both the House and Senate are reviewing the proposal, but it appears the bill is unlikely to become law this year.

AUDIO of hour-long subcommittee meeting in Iowa Senate on the issue.