Purchase Card Transaction Fees

We noted a cases recently where contractors voluntarily deleted the fees it pays to banks for processing credit card charges on the basis that they represent interest expense. We are also aware of a case in the not too distant past where an auditor questioned these fees as unallowable interest.

Most likely, these fees are allowable.

Many contractors allow purchasers, including the Government, to pay for purchases through the use of a purchase card (P-Card, credit card, etc.) When a contractor accepts a purchase card for payment of goods and services, the contractor is charged for transaction costs, generally referred to as "merchant fees". Merchant fees include fees paid by the contractor for processing payment through the credit card network for:

• the contractor's bank,
• the credit card company (e.g. VISA or MasterCard), and 
• the card-issuing bank 

Auditors sometimes take the position that these fees represent unallowable interest costs because the fees are expressed as a percentage of the amount of the transaction. However, the transaction fees associated with the use of the purchase card represent a charge for administrative processing and do not represent interest on borrowings.

While these fees are not unallowable under the "Interest" cost principle (FAR 31.205-20), there could still be an "allocability" issue. For example, if commercial customers pay using a credit card but the Government customers do not, its likely that an auditor will say that the Government does not benefit from the fees and those fees should be excluded for indirect costs allocated to Government contracts. On the other hand, there could be similar "processing" costs that benefit the Government in greater proportion than commercial customers.

Contractors that have been questioned in this area may benefit from outside help.