First Data Merchant Services, LLC v. Dep't of Revenue

• Court: Court of Appeals of Washington
• Decided: January 29, 2026
• Docket: 40584-2
• Status: Published

Opinion

FILED JANUARY 29, 2026 In the Office of the Clerk of Court WA State Court of Appeals, Division III

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION THREE

FIRST DATA MERCHANT SERVICES ) No. 40584-2-III LLC, a Florida limited liability company, ) ) Respondent, ) ) v. ) PUBLISHED OPINION ) STATE OF WASHINGTON, ) DEPARTMENT OF REVENUE, ) ) Appellant. )

LAWRENCE-BERREY, C.J. — First Data Merchant Services LLC is a processor of

payment-card transactions. The question on appeal is whether First Data is liable for

business and occupation (B&O) taxes for interchange fees charged by issuing banks.

Issuing banks are banks that issue credit cards to consumers. Issuing banks fund a

consumer’s purchase. When doing so, they deduct a fee—referred to as an interchange

fee or discount—before sending the funds through the processor to the merchant.

By law, First Data is liable for B&O taxes on its gross revenue; that is, the value

proceeding or accruing from its services without deduction for any expense whatsoever.

RCW 82.04.080. “Value proceeding or accruing” means the consideration actually No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

received or accrued. RCW 82.04.090.

It is uncontested that issuing banks deducted the interchange fees before they sent

payments through First Data to its merchants. Therefore, the interchange fees were not

consideration “actually received” by First Data. The question then becomes whether the

interchange fees were consideration that “actually accrued” to First Data. For the reasons

explained in our analysis, we conclude that those fees did not “actually accrue” to First

Data and should not have been included in First Data’s gross income for B&O tax

purposes. We affirm the trial court.

FACTS

Procedure

In June 2018, the Washington State Department of Revenue (DOR) issued an

excise tax advisory stating:

“The Merchant Discount[1] is consideration that accrues to the Processor, thus representing gross income, notwithstanding that fees charged by other parties may be netted out before the Processor receives payment. Consequently, the Merchant Discount amount is gross income to the Processor subject to tax under the service and other business activities B&O classification.”

Clerks Papers (CP) at 6.

1 The Merchant Discount is comprised of the interchange fee, the card network fees, and the fees charged by the processor for authorization, clearing, and settlement services.

2 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

To challenge the tax advisory, First Data reported and paid its October 2018 B&O

taxes consistent with the advisory. It then brought suit seeking a refund of $180,076.87,

representing the portion of its B&O tax payment attributable to the disputed interchange

fees. First Data asserted that under RCW 82.04.090, the interchange fees were not

taxable gross income because those fees were not consideration actually received or

accrued by it.

In September 2023, the trial court granted partial summary judgment in favor of

First Data, ruling that the interchange fees were not “actually receive[d]” by First Data.

CP at 3691. The parties then proceeded to a three-day bench trial on whether the

interchange fees “actually accrued” to First Data.

The trial court’s findings of fact 2

Payment-card participants and fees

Participants in a typical payment-card transaction are the cardholder, the merchant,

the network, the issuing bank, the acquiring bank, and the processor for the acquiring

bank. A network is an electronic system, such as Visa or Mastercard. The issuing bank

is the cardholder’s bank. The acquiring bank is the bank that submits payment-card

2 Because DOR did not assign error to any of the trial court’s findings, they are verities on appeal. In re Marriage of Watanabe, 199 Wn.2d 342, 349, 506 P.3d 630 (2022).

3 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

transactions to the networks on behalf of the merchants.

The acquiring bank is responsible for collecting electronic data about transactions

from its merchants and submitting that data to the networks. These responsibilities are

referred to as “acquiring services.” A processor enters into a sponsorship agreement with

an acquiring bank to allow the processor to provide acquiring services on the bank’s

behalf. Processors then enter into contracts with merchants that enable merchants to

access the funding services in accordance with network rules. First Data is a processor.

Networks charge various fees, referred to as network fees. These fees are what

networks receive for facilitating various aspects of the payment-card transactions.

Network rules are created by the networks and govern many aspects of the transactions,

including how participants in the payment-card process are compensated for their

respective roles in authorizing, clearing, funding, and settling payment-card transactions.

All parties to a payment-card transaction are subject to the network rules.

An interchange fee is the amount the network rules allow an issuing bank to

charge for funding an approved payment-card transaction. Once a payment-card

transaction is approved and the issuing bank receives the relevant information, the issuing

bank funds the transaction, less the interchange fee.

4 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

At trial, DOR established that First Data’s merchant contracts authorized First

Data to charge its merchants all fees set forth in those contracts, which included

interchange fees.

Processing of payment-card transactions

Processing payment-card transactions consists of three components—

authorization, clearing, and settlement. Authorization involves the transfer of the

cardholder and transaction data from the merchant to the processor, from the processor to

the network, and from the network to the issuing bank. The issuing bank determines

whether the payment card is valid and whether there is sufficient credit in the

cardholder’s account and then transmits either an approval or a decline code back through

the same channels. No funds are transmitted during the authorization process.

Clearing involves transmitting data through the payment-card system. The

merchant submits payment-card transaction data from all approved transactions that day

in bulk to the processor, called a batch. The processor consolidates information from all

the batches received from merchants for whom it processes, calculates the applicable

interchange fee for each transaction in accordance with network rules/schedules, and then

transmits that information to the networks for settlement. The networks then sort and

transmit to each issuing bank the relevant cardholder transaction information from all

5 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

processors, along with the network’s interchange fee calculation for each cardholder

transaction.

Settlement involves the movement of funds. For each payment-card transaction,

the network withdraws funds from the issuing bank’s account and deposits those funds

into the corresponding processor’s account in an amount equal to the approved

transaction amount, less the interchange fee retained by the issuing bank. The

interchange fee is not distributed to the processor during settlement. The processor then

deducts and transmits the appropriate fees and transfers the remaining amount to the

merchant. The issuing bank then bills the cardholder for the full purchase amount, and

the cardholder pays the issuing bank. The following diagram, from A through F,

illustrates the settlement process for a $100 transaction:

CP at 105.

6 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

Based on its findings of fact, the trial court concluded that the interchange fees

were not consideration that accrued to First Data. In reaching its conclusion, the trial

court focused on two principles. First, citing First American Title Insurance Co. v.

Department of Revenue, 144 Wn.2d 300, 27 P.3d 604 (2001), the trial court focused on

how payment-card transactions actually worked, rather than as DOR urged, a processor’s

contractual right to charge merchants the interchange fee. And because First Data did not

in fact charge its merchants the interchange fees, those fees were not consideration that

actually accrued to First Data. Second, citing one of DOR’s own published

determinations that prohibits it from taxing accounting entries in a manner not recognized

under normal rules of accrual accounting, the court concluded that the interchange fees

were not consideration that actually accrued to First Data. The trial court ordered DOR

to refund First Data that portion of its October 2018 B&O tax payment attributable to the

interchange fees, plus interest.

DOR appealed to this court.

ANALYSIS

We begin with a general overview of B&O tax principles. “The business and

occupation tax is not a tax on either profit or net gain or capital gain or sales, but a tax on

the total money or money’s worth received in the course of doing business.” Budget

Rent-A-Car of Wash.-Or., Inc. v. Dep’t of Revenue, 81 Wn.2d 171, 173, 500 P.2d 764

7 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

(1972). “Neither profit nor loss affect the ultimate decision as to whether an activity

comes under the business and occupation tax, for the tax is to be measured by the gross

revenues derived from engaging in the taxable activity.” Pullman Co. v. State, 65 Wn.2d

860, 867, 400 P.2d 91 (1965). The legislature intended the B&O tax to cover “‘virtually

all business activities carried on within the state.’” Avnet, Inc. v. Dep’t of Revenue, 187

Wn.2d 44, 50, 384 P.3d 571 (2016) (plurality opinion) (quoting Time Oil Co. v. State, 79

Wn.2d 143, 146, 483 P.2d 628 (1971)).

The B&O tax defines “gross income of the business” as “the value proceeding or

accruing . . . without any deduction . . . whatsoever.” RCW 82.04.080(1). “Value

proceeding or accruing” means “the consideration . . . actually received or accrued. The

term shall be applied, in each case, on a cash receipts or accrual basis according to which

method of accounting is regularly employed in keeping the books of the taxpayer.”

RCW 82.04.090. Because the parties agree that First Data never “actually received” the

interchange fees, this case turns on the meaning of “actually accrued.”

Actually accrued

We interpret statutes to implement the legislature’s intent. Avnet, 187 Wn.2d at

49. “When possible, the court derives legislative intent solely from the plain language

enacted by the legislature, considering the text of the provision in question, the context of

the statute in which the provision is found, related provisions, amendments to the

8 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

provision, and the statutory scheme as a whole.” Cashmere Valley Bank v. Dep’t of

Revenue, 181 Wn.2d 622, 631, 334 P.3d 1100 (2014). “We generally defer to the

statutory interpretation of the agency charged with implementing a statutory scheme.

However, any doubts as to the meaning of a tax statute is construed against the taxing

power. Substance rather than form should be used to assess tax classifications.” First

Am., 144 Wn.2d at 303 (citations omitted).

As quoted above, RCW 82.04.090 directs us to apply the accounting method—

cash receipts or accrual basis—regularly employed by the taxpayer. For this reason, we

include further uncontested facts found by the trial court.

First Data is an indirect subsidiary of Fiserv, Inc., a publicly traded company.

First Data, as an indirect subsidiary of Fiserv, is part of Fiserv’s affiliated groups for

financial statement and federal income tax reporting purposes. Fiserv and its subsidiaries

prepare audited financial statements in accordance with “Generally Accepted Accounting

Principles” (GAAP). GAAP standards are reflected in “Accounting Standards Updates”

and are codified in “Accounting Standards Codification Topics” (ASCs). When GAAP is

used in certain settings such as “United States Securities and Exchange Commission”

(SEC) reporting and federal income tax returns, GAAP provides the concepts, objectives,

standards, and conventions that define accrual accounting.

9 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

Since at least 2006, First Data and its parent companies have not reported

interchange fees as revenue on their 10-K audited financial statements for SEC reporting

requirements. Using GAAP accounting and applying ASC 606, interchange fees are not

considered part of First Data’s revenue or gross income.3

DOR promulgates administrative rules to assist in determining the meaning of

various tax concepts, including when value accrues to a taxpayer. WAC 458-20-

197(2)(a) provides, “When excise tax returns are made upon the accrual basis, value

accrues to a taxpayer at the time: (i) The taxpayer becomes legally entitled to receive the

consideration, or, (ii) In accord with the system of accounting regularly employed, enters

as a charge against the purchaser, customer, or client the amount of consideration agreed

upon, whether payable immediately or at a definitely determined future time.”

Subsection (2)(a)(i) supports DOR’s argument that consideration accrues to First Data

if it is legally entitled to receive interchange fees from its merchants. But because

RCW 82.04.090 adds the concept of “actually” to “accrued,” our focus turns to whether

First Data is actually entitled to receive interchange fees from its merchants.

As borne out by the earlier depiction of how a $100 transaction actually is settled,

a merchant does not receive $100 from the issuing bank for a $100 sale. Rather, the

3 We recognize that this “finding” is a legal conclusion and undertake an independent review of this conclusion.

10 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

merchant actually receives $97. This is because the issuing bank already deducted the $2

interchange fee and the processor already deducted the $1 fee for distribution to the

network, the acquiring bank, and itself. If First Data, after forwarding only $97 to its

merchant, attempted to charge it the $2 interchange fee, First Data would be

unsuccessful. This is because the merchant effectively paid the $2 interchange fee (and

the $1 combination fee) when it received only $97 from First Data.

This is the same result required by First American. There, First American

provided title insurance through its branch offices and also through separate underwritten

title companies (UTCs). 144 Wn.2d at 301-02. The UTCs performed title searches, a

policy known as “abstracting,” that culminated in a preliminary title report. Id. at 302.

Customers purchased the preliminary title reports and the title insurance from the UTCs.

Id. The UTCs retained the portion customers paid associated with abstracting services

and remitted the balance to First American. Id. DOR collected B&O taxes from the

UTCs for abstracting services and sought to collect B&O taxes from First American for

both its insurance services and the UTCs abstracting services. Id. The First American

court recognized that the title insurer and its UTCs were separate legal entities that

provided separate and distinct services. Id. at 303-05. It refused to treat the relationship

as one of principal and agent. Id.

11 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

Similar to First American, First Data did not “receive” the consideration for which

DOR sought to impose B&O taxes. Also, similar to First American, First Data and the

issuing banks are separate legal entities performing separate and distinct services.

Issuing banks verify that their cardholders have sufficient credit for the purchase

transactions, and, if so, the banks fund the transactions. Credit checking and funding are

not services provided by First Data. First American prohibits DOR from assessing B&O

taxes on First Data for consideration it did not receive and for separate services provided

by a separate and distinct legal entity.

DOR argues that the relationship between the issuing banks and First Data is

comparable to the relationship between a pepperoni maker and a pepperoni pizza maker,

in which DOR assesses B&O taxes against the pizza maker for the value of the entire

pizza, including the pepperonis. DOR’s example does not apply here. DOR is able to tax

the pepperoni pizza maker for all of the pizza toppings because the pizza maker receives

from the customer the full price for the pizza, including toppings. Here, First Data did

not receive the full price for the $100 transaction. It received only $98.

We conclude that the interchange fees did not actually accrue to First Data and

those fees should not have been included in its October 2018 B&O gross revenue

calculation.

12 No. 40584-2-III First Data Merchant Servs. v. Dep’t of Revenue

We affirm the trial court.

_______________________________ Lawrence-Berrey, C.J.

WE CONCUR:

____________________________________ Staab, J.

____________________________________ Murphy, J.