HB 171-INTERCHANGE FEES: TAX & GRATUITY  3:32:19 PM CO-CHAIR HALL announced that the final order of business would be HOUSE BILL NO. 171, "An Act relating to interchange fees on tax and gratuity; and relating to the Alaska Unfair Trade Practices and Consumer Protection Act." 3:32:40 PM REPRESENTATIVE BILL ELAM, Alaska State Legislature, as prime sponsor, presented HB 171. He gave the prepared sponsor statement [included in the committee file], which read as follows [original punctuation provided]: In an effort to reduce unnecessary costs for Alaska's small businesses, House Bill 171 addresses how interchange fees commonly known as swipe fees are applied to electronic transactions. Right now, when a customer pays with a credit or debit card, businesses are charged fees on the entire amount of the transactions. This includes not only the cost of goods or services, but also any sales tax collected on behalf of the government and gratuity intended for employees. In both cases, that money is passed through the business and not retained as revenue, yet the business is still charged a fee for it. HB 171 prohibits financial institutions from charging interchange fees on the tax and gratuity portions of a transaction when proper documentation is provided. It also allows businesses a reasonable window to submit that documentation after the transaction and receive a refund for any related fees. The bill includes penalties for violations and ensures payment data is used appropriately and securely. This legislation helps ensure that small businesses aren't penalized for handling money they never keep. It provides a level of fairness and transparency in how fees are applied, without creating new programs or expanding state bureaucracy. Alaska's business owners already face rising costs and tight margins. House Bill 171 offers targeted relief by removing a hidden cost that adds up over time making a real difference for the many small businesses that power our local economies. 3:34:43 PM KENDRA BROUSSARD, Staff, Representative Bill Elam, Alaska State Legislature, on behalf of Representative Elam, prime sponsor of HB 171, gave the sectional analysis [included in the committee file], which read as follows [original punctuation provided]: Section 1 adds a new section  a. Prohibits issuers, payment card networks, acquirer banks, or processors from receiving or charging merchants interchange fees on the tax or gratuity portion of an electronic payment transaction if proper documentation is provided during the authorization or settlement process. b. Allows merchants to submit tax or gratuity documentation up to 180 days after the transaction if it was not originally transmitted. The issuer must refund the merchant within 30 days of receiving this documentation. c. Clarifies that documentation may be for individual or multiple transactions, as long as it clearly shows total transaction amounts and tax or gratuity portions. d. States that payment card networks are not liable for the accuracy of the tax or gratuity documentation submitted by merchants. e. Prohibits raising interchange fees on the remaining (non-tax/gratuity) portion of a transaction to compensate for prohibited fees on tax or gratuity. f. Establishes a civil penalty of $1,000 per violation and requires refunding the improper fee to the merchant. g. Restricts use of electronic payment transaction data to processing or legal requirements only, safeguarding data privacy. h. Defines key terms such as "acquirer bank," "issuer," "interchange fee," "electronic payment transaction," "settlement," "tax," and others for the purposes of this section   Section 2  Amends AS 45.50.471 (b) adding a new violation under the Act for misuse of electronic payment transaction data as described in section 1 (g) 3:36:39 PM REPRESENTATIVE ELAM surmised that waiters, waitresses, bartenders, and baristas are currently being charged additional fees on their tips. He stated that a lot of money is going out of state. He advised that the intent of the proposed legislation was to create a "less restrictive ability to maintain more of the profit within ... goods and services in an already very competitive market" for service industries. 3:38:44 PM SARAH OATES HARLOW, President & CEO, Alaska CHARR, as an invited testifier, gave a prepared statement [included in the committee file] in support of HB 171, which read as follows [original punctuation provided]: I have served as President & CEO of the Alaska Cabaret, Hotel, Restaurant, and Retailers Association (commonly known as Alaska CHARR) since 2018. Alaska CHARR is based in Anchorage but has over 750 members across Alaska communities and represents over 2,000 hospitality establishments that employ over 36,000 workers around the state. You have heard me testify in this committee multiple times that Alaska's hospitality industry continues to face significant ongoing challenges to business operations, including major increases to operating and labor costs one of those being interchange fees. I th spoke specifically to this matter on March 24 in this committee with a request to amend a separate bill, and in response, I greatly thank Representative Elam for introducing HB 171 as independent legislation on this important issue. Hospitality businesses are the cornerstones of our communities and an engine of our economy. In 2024, Alaska's restaurant industry exceeded $4.02 billion in economic output and collected $254 million in taxes for all levels of government. However, this service for the government comes at a significant cost for the business owner, because credit card networks require businesses to pay interchange fees (also known as "swipe fees") on the taxes they collect. The same is true for tips left by credit card for servers and bartenders. In both cases, the operator collects the money, but 100% of the amount is passed on to either the government or hospitality employees. But the swipe fees (averaging 2-4% per transaction) must still be paid on the total check amount, so those fees are coming out of businesses' margins. Because of the power of the credit card companies, our small businesses in Alaska have no ability to negotiate these fees. Restaurants alone in Alaska are paying over $6.2 million in credit card swipe fees annually just to carry out their role in collecting taxes on behalf of localities. This does not include all other Alaska businesses across the state that collect and remit taxes on behalf of governments. This figure is certainly much higher for gratuities and tips given that a conservative estimate for the typical restaurant tip is 15% across the nation. Alaska businesses should be protected from paying costly interchange fees when collecting money on behalf of the government or employees. You heard me speak about one of our members who owns stores around Alaska spent over $50,000 last year on interchange fees just on the alcohol tax collected on behalf of the Municipality of Anchorage. To be clear, these are not the fees charged for the transaction of the actual products purchased; these are fees charged on the just taxes collected. That vendor, which is an Alaskan-owned business, had to pay $50,000 to the credit card processor to collect monies that the business doesn't even get to keep. Dozens of restaurants and other small hospitality businesses have reported to the Alaska CHARR team that the money they would save if the language in this legislation passes would enable them to hire additional employee positions on their teams. HB 171 will help thousands of Alaskan-owned establishments around the state that collectively represent Alaska's largest private employer and second-largest industry, in addition to all other businesses that collect and remit sales or other taxes on behalf of the government. This legislation would keep millions of dollars in Alaska rather than sending them to massive corporations in New York, meanwhile supporting small and Alaskan-owned businesses, increasing employment opportunities for Alaskan workers, and further contributing to Alaska's economy. If I make one small request for an amendment, it would be to remove "issuers," "acquirer banks," and "processers" from this legislation, and just have it apply to payment card networks, as the networks are the entities who set the fees. Illinois passed similar legislation this year, which I believe this legislation may be based off of, and that is being litigated in court. We learned that this type of legislation is best pursued by limiting the language and the applicability to the actual payment card networks. This will still result in the same impact on small businesses. As the voice of Alaska's hospitality industry, I urge your support of HB 171. 3:43:35 PM REPRESENTATIVE SADDLER asked what the average profit margin in the hospitality industry is. MS. OATES HARLOW replied that the average profit margin for restaurants is between 3 to 5 percent pre-COVID-19 pandemic. She further stated that post-pandemic, the profit margins for package liquor stores are closer to 1 percent on average. She reported that the estimated profit margins for restaurants were 1 to 2 percent because of increased operating and labor costs. 3:44:40 PM REPRESENTATIVE COULOMBE asked how the interchange fees are tracked in restaurants. MS. OATES HARLOW replied that due to legislation passed in Illinois, there is software currently being developed by processing networks to automatically calculate fee application. She noted that, as written, HB 171 would require businesses to keep track of the interchange fees and spoke to a need for itemization. REPRESENTATIVE COULOMBE asked whether there was a concern about burdens on small businesses. She noted that businesses keep track of their taxes. MS. OATES HARLOW reiterated that due to the legislation in Illinois, there are big companies already developing software. She stated that there was no concern about potential burden on small businesses and noted that many small businesses are already tracking these types of transactions, especially due to slim profit margins. She asserted that the potential benefit to the small business would outweigh the administrative burden of tracking the fees. 3:47:50 PM MS. OATES HARLOW, in response to a question from Representative Saddler regarding how tips are differentiated from the total cost of food service in a restaurant, said credit card processing systems calculate that data with daily and monthly reconciliations. 3:49:28 PM REPRESENTATIVE BURKE questioned whether servers were receiving the entirety of their tips or if those tips were being reduced to cover the cost of the fees. MS. OATES HARLOW replied that it varies drastically from one business to another. She reported that some large businesses are passing that fee onto the server, but that the majority of businesses are "eating the cost." 3:50:39 PM REPRESENTATIVE SADDLER queried how much commerce in Alaska is conducted on credit cards that are subject to interchange fees. 3:51:12 PM ROBERT SCHMIDT, Director, Division of Banking & Securities, Department of Commerce, Community & Economic Development (DCCED), replied that he has no hard data on the potential reach of the proposed legislation. He noted that "lots of businesses in Alaska use credit cards." 3:51:41 PM REPRESENTATIVE COULOMBE referred to the legal memorandum ("memo") attached to HB 171, stating: "The U.S. Constitution prohibits states from enforcing laws contrary to federal law. Federal banking laws preempt state law if the state law prevents and significantly interferes with the exercise by the National Bank." She asked whether there was something that could be done to remove the legal memo and whether the sponsor had discussed the legal memo with any authorities. 3:52:23 PM REPRESENTATIVE ELAM stated that there was federal law that applied to national banking institutions. He noted that the proposed legislation would apply to state institutions. He noted that there would likely be litigation regarding similar legislation in other states. He referenced the invited testifier, noting that there might be language in need of refinement. REPRESENTATIVE COULOMBE requested the presence of Legislative Legal Services for the next hearing on HB 171. She offered her support for HB 171 but stated her desire to amend the proposed bill to avoid legal complications. 3:54:16 PM REPRESENTATIVE SADDLER asked the sponsor's thoughts on the suggestion from Ms. Oates Harlow to eliminate "issuer", "acquirer bank", or "processer". REPRESENTATIVE ELAM opined that sometimes "less is more," but ultimately deferred to Legislative Legal Services. 3:54:57 PM REPRESENTATIVE COULOMBE, referring to terms on page 3, asked whether HB 171 would provide brand new definitions or make changes to existing definition in Alaska Statute (AS). REPRESENTATIVE ELAM replied that they were mostly changes to existing definitions in statute. 3:55:36 PM REPRESENTATIVE SADDLER asked for the justification for swipe/interchange fees. He further asked for confirmation that the proposed legislation would not prevent interchange fees. MR. SCHMIDT explained that interchange fees constitute 70 to 90 percent of all credit card fees. He confirmed that Representative Saddler's understanding of HB 171 was correct and used a scenario to illustrate that for a purchase of $20, with $2 tax and a $5 tip, the interchange fee would be applicable only on the $20, not on the tax and tip. 3:58:15 PM CO-CHAIR FIELDS reported that two companies control 80 percent of the market. He stated that credit card swipe fees have doubled from $51 billion in 2012 to over $126 billion in 2022. He asserted that there were a "small number of companies taking advantage of a noncompetitive market to raise prices." 3:58:52 PM REPRESENTATIVE COULOMBE referred to page 2, line 19, of the proposed legislation, citing a civil penalty of "$1,000 for each payment transaction in violation". She asked what might incur a $1,000 civil penalty and who would be subject to the fee. REPRESENTATIVE ELAM responded that a $1,000 fee would be imposed on the cardholder network were a vendor to submit reimbursement for interchange fees and be declined or if a vendor were wrongly charged for interchange fees. In response to an additional question from Representative Coulombe, confirmed that it was $1,000 civil penalty per transaction. 4:00:03 PM CO-CHAIR FIELDS thanked the bill sponsor. 4:00:34 PM CO-CHAIR HALL announced that HB 171 was held over.