Kansas – Taxability of Bad Check Fees and Late Charges

SALT Report 3024 – The Kansas Department of Revenue issued an opinion letter that discusses the application of retailer’s sales tax to bad check fees and late charges that are imposed by utility providers on their customers.

The Department stated that generally, when a retail business extends credit to a customer as an incentive to purchase goods and the customer fails to timely pay the minimum amount due on its credit balance, the late charge is not subject to Kansas sales tax.  This type of late charge is considered a finance charge that the lender bills for the debtor’s untimely payment of its credit obligations.

Therefore, in a retail situation, businesses should not consider late charges as part of the “sales or selling price” charged for goods and services as provided in K.S.A. 79-3602(ll)(3)(B). This regulation states that the, “sales or selling price’ shall not include: . . .interest, financing and carrying charges from credit extended on the sale of personal property or services, if the amount is separately stated on the invoice, bill of sale or similar document given to the purchaser…”

However, the Arkansas Supreme Court has ruled that a public utility cannot be compared to an ordinary business.  Specifically, the Court stated that utility companies serve a public interest and are prohibited from discriminating against slow-paying customers by refusing to serve them.  In order to compensate for this, utility companies are allowed to require security deposits and to impose late charges to minimize the risk of bad debts.

Based on the Court’s decision, the Department determined that utility late fees are different from finance charges in that they are not interest or penalties charged for the late payment of consumer credit. Therefore, late fees imposed by utility providers are subject to retailers’ sales tax and must be included in the tax base along with any other taxable charges.

As for bad check fees, these should not be included in the tax base for utility charges as provided in K.A.R. 92-19-3a(d)(5).  This regulation states “a retailer shall not collect sales tax on charges to customers for insufficient funds checks or closed-account checks. The receipts from these charges shall not be included in the retailer’s report of gross receipts.”  This regulation applies to both retailers and utility providers.

For Further Information

Kansas Department of Revenue – Opinion Letter #O-2013-004