Alabama exempts credit card transaction fees starting September 2026

• Alabama is excluding credit card transaction fees from the sales tax base. Credit card transaction fees associated with taxable sales are currently subject to Alabama sales tax. They’ll be exempt effective September 1, 2026.

• Credit card transaction fees are not the same as interchange fees. Alabama’s new law applies only to merchant-charged credit card transaction fees. It doesn’t affect interchange (swipe) fees charged by payment processors.

• Businesses may need to update tax calculation systems. Businesses need to make sure their systems and processes are properly handling credit card transaction fees.

Alabama sales and use tax currently applies to credit card transaction fees on taxable transactions. Credit card transaction fees on nontaxable transactions are exempt in Alabama. States generally presume that every charge associated with a sale is part of the sales price unless specifically exempt.

Effective September 1, 2026, Alabama Senate Bill 221 excludes credit card transaction fees from Alabama’s sales and use tax base. It reads: “The amount of any credit card transaction fee charged for an electronic payment transaction shall be excluded from the amount on which basis sales and use tax is assessed for that electronic payment transaction.”

SB 221 defines “credit card transaction fee” as “a fee assessed on purchases made by debit or credit card to offset interchange fees charged to a merchant or seller.” To avoid confusion, it’s important to underscore the difference between a credit card transaction fee, as defined in the bill, and an interchange fee.

An interchange fee, sometimes called a swipe fee, is a fee that banks, payment card processors, and other institutions charge merchants to process payments made by credit card, debit card, or other payment cards.

Swipe fees typically range from 1% to 4% of the transaction amount. Merchants that accept such forms of payment cannot avoid paying applicable interchange fees, though they may be able to negotiate lower rates.

A credit card transaction fee is an amount merchants sometimes charge customers to recoup the cost of interchange fees. Credit card transaction fees are also known as convenience fees, credit card surcharges, processing fees, or service charges.

Federal law allows merchants to place a surcharge of up to 4% on credit card transactions, and federal law applies where state law doesn’t specifically allow or ban such fees, though some, like Colorado and New York, place limitations or requirements on them. Connecticut, Maine, Massachusetts, and Puerto Rico currently prohibit credit card transaction fees.

Like other laws, surcharge policies are subject to change. Oklahoma legalized credit card surcharges effective November 1, 2025, for example, and Massachusetts lawmakers are considering legislation to allow vendors to impose credit card surcharges. 

Distinguishing credit card transaction fees from interchange fees is particularly important right now because Illinois has banned interchange fees on taxes and/or tips — and a growing list states are looking to do the same.

Banking institutions are fighting the Illinois interchange fee law on the grounds that it’s preempted by federal law and would restrict how they’re compensated for providing banking services. They aren’t concerned with Alabama SB 221 because it doesn’t involve them; it only impacts retailers that elect to charge a fee to consumers who pay with a credit card. 

For more context, Illinois passed a law in 2024 prohibiting banks, payment card networks, and other institutions from applying interchange fees to the sales tax portion of a transaction. The Interchange Fee Prohibition Act (IFPA) is scheduled to take effect on July 1, 2026, but it may get hung up in court.

The U.S. District Court for the Northern District of Illinois ruled in February that Illinois can prohibit payment card processors from charging interchange fees on state and local taxes and gratuities. But in two separate rulings in April, the U.S. Office of the Comptroller of the Currency (OCC) asserted that national banks have the power to collect interchange fees and that federal law preempts the Illinois IFPA.

In light of the OCC’s rulings, the U.S. Court of Appeals for the Seventh Circuit canceled oral arguments scheduled for May 13. The court sent the case back to the district court to reconsider the issues raised by the OCC.

Despite the battle over the IFPA, on May 6 the Colorado Legislature passed a law prohibiting payment card networks with more than $60 billion in assets from including sales tax in percentage-based transaction fees. Whether Governor Jared Polis will sign it, potentially exposing Colorado to a legal challenge, remains to be seen.

More than a dozen other states have introduced similar legislation that would ban interchange fees on taxes, fees, and/or tips. You’ll find a list of them here. 

Prohibiting swipe fees on taxes and excluding credit card transaction fees from the sales tax base will affect businesses differently, but both have ramifications for merchants that accept credit card payments.

Impact of the Illinois IFPA

IFPA states that “an issuer, a payment card network, an acquirer bank, or a processor may not receive or charge a merchant any interchange fee on the tax amount or gratuity of an electronic payment transaction” so long as the merchant informs them of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction.

So, to avoid interchange fees being applied to taxes and gratuities, “the merchant must transmit the tax or gratuity amount data as part of the authorization or settlement process.” How much work this would entail depends on the payment network and retailer. Some retailers are already able to separately state sales tax and other charges from the price of the product, while others may not have that capability.

Merchants that fail to take this step have up to 180 days to submit the required tax document information to the acquirer bank or its designee, which then has up to 30 days to credit the merchant (this option isn’t available for tips). This process, too, could increase administrative burdens and costs.

According to the International Center for Law and Economics, the IFPA will increase compliance costs for the payment card industry. “Implementing the IFPA would not be as simple as flipping a switch to ‘no fees on taxes and tips,’” they explain. “It would require significant, system-wide changes to the nation’s electronic-payments infrastructure.” You can find more details about their take on potential compliance costs here.

Impact of Alabama SB 221

Alabama’s law will impact sales tax calculations for merchants that apply a credit card transaction fee to transactions paid by credit card. Businesses that manage sales tax internally will need to update their systems to ensure they don’t apply Alabama sales tax to their credit card transaction fees, even when the rest of the transaction is taxable. 

Avalara customers doing business in Alabama should have a leg up: The Avalara AvaTax rule for credit card processing fees will be updated to account for the taxability change in Alabama.

Learn how Avalara Agentic Tax and Compliance^TM solutions help businesses streamline sales and use tax compliance.