Several states are considering proposals to exempt the sales tax portion of business transactions from credit-card processing fees. These fees—imposed by interchange platforms such as Visa, MasterCard, and American Express—typically amount to around 2% of the total transaction.

Since 2006, 29 states have considered variations of this proposal. None have passed—for good cause. The onerous compliance costs and equipment changes would fall disproportionately on smaller businesses—often surpassing the promised savings.

Meanwhile, past experience with similar price caps on credit-card processing fees suggests the handful of big box retailers likely to benefit from this proposal will pocket the savings rather than pass them along to consumers.

Some supporters insist on calling this proposal a “tax cut.” How Orwellian. A tax is imposed by the government to fund services such as roads, police and fire protection, and education. This proposal does not reduce a tax. Instead, it attempts to outlaw the mutually agreed upon fee for the service of processing sales taxes on credit and quickly transferring these funds from the lending bank to the retailer.

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Some argue that it’s unfair to require businesses to bear the costs of collecting and transmitting sales taxes on behalf of the state. But if legislators truly want to avoid forcing businesses to incur these costs, a better solution is readily available: a sales tax collections allowance.

Twenty-eight states already allow retailers to deduct at least a portion of the collection costs incurred from the total sales tax they are required to remit. Florida grants an allowance of 2.5% of the first $1,200 in sales tax due each month. This ensures that most businesses processing under $200,000 in credit-card transactions already escape the sales tax collection costs.

In other words, it’s big box retailers—rather than small businesses—that stand to benefit from this cronyist attempt to use the force of law to shift costs from themselves onto financial institutions and consumers.

How much will this cost? Because all proposals since 2006 have failed, exact cost estimates are unavailable. However, a study was conducted on the compliance costs associated with a Massachusetts proposal to require merchants remit sales tax payments daily to the state. The technical process proposed in that bill is similar to that involved with excluding the sales tax from interchange calculations.

In addition to implementation costs, the study estimated recurring compliance costs of $3,500 annually for smaller businesses. That’s far more than the estimated savings small businesses would realize from excluding the sales tax from interchange processing fees.

Consider a Florida restaurant with $1 million annual revenue and $72,800 of annual sales taxes. With a typical mix of cash, credit-card, and debit-card transactions, the total interchange fee on sales taxes amounts to under $700 annually—less than $60 each month. These savings are dwarfed by the estimated recurring compliance costs of $3,500 annually in addition to expensive initial technological upgrade costs.

It's the big box retailers—not small businesses—that stand to benefit. Consider Home Depot. Its 156 Florida locations average $56 million gross revenue annually, per store. With a similar mix of cash, credit-card, and debit-card transactions, Home Depot may save upwards of $6.6 million annually in Florida operating costs by avoiding an interchange processing fee on sales taxes—more than $553,000 each month. For Big Box retailers, these artificially generated savings from regulatory capture will far exceed the additional compliance costs.

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And don’t think for a second that the handful of big box retailers realizing cost savings will pass these savings onto consumers by lowering prices. A similar situation occurred more than a decade ago when the Dodd-Frank act limited debit card transaction fees. Most big retailers pocketed the savings. A Federal Reserve study estimates that only 1.2% of merchants lowered prices. Meanwhile, banks recouped their revenue losses by adding fees and eliminating free checking for some lower-net-worth clients.

In short, this proposal to exclude sales taxes from interchange processing fees shifts costs from big box retailers onto financial institutions and unwitting consumers, while saddling smaller retailers with needless tech upgrades and onerous compliance burdens. Saddled with recurring compliance costs that exceed their savings, most smaller businesses will end up at a competitive disadvantage. Meanwhile, their large competitors see an artificial boost in profitability.

Of course, these big box retailers will also gain market share at the expense of their small competitors who must raise prices to cover their increased net costs. In the world of big government/big business cronyism, this is a feature, not a bug. Crony capitalism thrives by perverting free market competition into an artificial competitive advantage for big box retailers derived from regulatory capture.