5 March 1996 GST/HST Interpretation 11590-5[6] - Tax Status of Bank Card Management Services

We are writing in response to your queries regarding the tax status of certain services being provided by XXXXX to XXXXX with respect to the banks' XXXXX programs respectively as well as the services being supplied by XXXXX[.] Our comments also apply to the agreement between XXXXX with respect to their XXXXX program which was in effect until 1994.

Our understanding of the relevant facts may be summarized as follows:

XXXXX is engaged in financing credit accounts of customers of XXXXX purchasing goods and services at the XXXXX as well as providing various other services to XXXXX credit card holders.

XXXXX The parties to the respective agreements for the acceptance of the bank cards are XXXXX and the respective banks. The management of the bank card programs by XXXXX includes acting as liaison with the banks as well as processing all sales and merchandise returns to acceptable electronic media. XXXXX is also responsible for maintaining and retrieving copies of sales drafts when requested by the banks. In all material respects the services provided by XXXXX for XXXXX are identical.

The 1980 XXXXX agreement between XXXXX provides that:

1) the dealers are not a party to the agreement;

2) XXXXX agrees that the bank may debit XXXXX account monthly for the merchant discount payable by XXXXX to the bank;

3) XXXXX bank account will be debited for any "chargebacks" (credit sales not accepted by the bank where proper procedures are not followed including but not restricted to the use of expired or invalid cards, ineligible essential information, exceeding the floor limits and the unauthorized use of a card) and other charges;

4) the bank shall assume the credit risk for sales drafts deposited by XXXXX except for those subsequently determined to be chargebacks; and,

5) XXXXX indemnifies the bank from all claims by any cardholder or authorized user arising out of any transaction evidenced by a sales draft issued by a XXXXX[.]

The 1994 XXXXX agreement between XXXXX provides that:

1) the store dealers are not a party to the agreement;

2) XXXXX acknowledges that the bank will hold XXXXX liable for the performance of the obligations and responsibilities which will actually be performed by XXXXX or the store dealers;

3) XXXXX agrees that the bank may debit XXXXX account monthly for the merchant discount payable;

4) XXXXX bank account will be debited for any "chargebacks" or "rejects" (credit sales not accepted by the banks where proper procedures are not followed including but not restricted to the use of expired or invalid credit cards, ineligible essential information and the lack of an authorization number) and other charges; and

5) XXXXX indemnifies the bank from all claims, complaints or disputes by anyone (including XXXXX and the stores) arising out of any transaction evidenced by a sales draft issued by a XXXXX[.] The XXXXX dealers sell goods and services to their customers and accept XXXXX XXXXX credit cards under XXXXX agreements with the banks. XXXXX acquires the credit card vouchers from the dealers by purchasing them daily and credits their accounts for the full value of the vouchers.

Weekly, XXXXX debits the store dealers' accounts for a fee similar to the merchant discount fee charged by the XXXXX[.] This merchant discount fee is for accepting the risk XXXXX has taken in acquiring the credit card vouchers from the store dealers.

For the period January to May, 1995, XXXXX has written off approximately XXXXX for chargebacks or rejects on bank card sales not accepted by the banks which were not, in turn, recovered by XXXXX against the store dealers.

The merchant discounts and the processing fee are charged and calculated as follows:

For XXXXX credit sales, XXXXX charges XXXXX a merchant discount calculated as XXXXX of the total dollar amount of sales drafts deposited together with a rebate of XXXXX per transaction. In turn, XXXXX charges the store dealers a merchant discount of XXXXX of gross sales.The rebate of XXXXX per transaction is the consideration for the provision of data processing services supplied by XXXXX to the bank with respect to the sales drafts.

For XXXXX credit sales, XXXXX charges XXXXX a merchant discount calculated as XXXXX of the net dollar value of all sales drafts delivered. In turn, XXXXX charges the store dealers a merchant discount of XXXXX of gross sales.

With respect to the agreement between XXXXX, it is our understanding that XXXXX charged XXXXX a merchant discount calculated as XXXXX of the total dollar amount of the face value of credit card vouchers deposited. In turn, XXXXX charged the store dealers a merchant discount of XXXXX of gross sales

Your queries related to the tax status of the fee charged to the store dealers as described above as well as the tax status of the rebate payable by the XXXXX for the processing services provided by XXXXX. You are of the view that the fee charged by XXXXX to the store dealers as well as the rebate paid by the XXXXX may be taxable supplies and not exempt supplies of financial services.

With respect to the fee charged by XXXXX to the store dealers, we are of the view that such fees are exempt as they would come within the definition of "financial service" pursuant to subsection 123(1) of the Excise Tax Act by virtue of paragraph (i) of that definition.

With respect to the fee charged by XXXXX we have reviewed the agreements and are of the view that as XXXXX is acquiring the credit card vouchers from the bank, the purchase of these vouchers by XXXXX comes within the meaning of the definition "person at risk" as defined in the Financial Services (GST) Regulations.

Accordingly, the processing services provided by XXXXX to the XXXXX with respect to these vouchers does not come within the scope of the exclusion from financial services by virtue of paragraph (t) of the definition of "financial service" in subsection 123(1) of the Excise Tax Act and, as such, are exempt supplies of financial services.

Should you require further information, please contact Duncan Jones at (613) 952-9210.

J. Sitka
A/Director
Financial Institutions and Corporate Reorganizations Division
GST Rulings and Interpretations
Policy and Legislation Branch