AB 1065 defines key players and terms in card payments (issuers, acquirer banks, processors, payment card networks, merchants) and treats ‘‘tax’’ as a distinct line-item for electronic payment transactions. The bill makes it actionable under California’s Unfair Competition Law (UCL) for a person or entity to knowingly engage in a pattern or practice of assessing interchange fees on the tax portion of a transaction, and sets out factors the court must consider when determining liability.
The bill also creates practical rules about what counts as tax documentation (allowing single-transaction or aggregated records) and provides a limited safe harbor: payment card networks, acquirers, issuers, or processors are not liable for errors in tax data provided by merchants so long as they did not knowingly disregard reliable information. Together those definitions and the enforcement framework would push merchants, processors, and networks to segregate and transmit tax amounts reliably — with compliance, technical, and litigation consequences for the payments ecosystem.
At a Glance
What It Does
The bill treats tax as a separable component of an electronic payment and makes knowingly assessing interchange fees on that tax portion a UCL enforcement matter. It supplies detailed definitions for terms such as ‘‘tax,’’ ‘‘merchant,’’ ‘‘processor,’’ and ‘‘tax documentation,’’ and allows aggregated tax records as proof of tax amounts.
Who It Affects
Retailers and other merchants that collect and remit state or local taxes, payment processors and acquirer banks, card issuers and payment card networks, point-of-sale vendors, and tax compliance software providers are directly affected. Courts and plaintiff attorneys will also be engaged because enforcement runs through the UCL.
Why It Matters
If implemented, the bill would force payments players to change authorization/settlement flows so tax can be excluded from interchange calculations or risk UCL liability. That raises engineering, contractual, and revenue-allocation issues across the payments chain and creates a new source of California litigation tied to how tax data is transmitted and used.
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What This Bill Actually Does
AB 1065 begins by defining the cast of characters and the transaction steps that matter for this policy: authorization, clearance, and settlement. It clarifies that a ‘‘merchant’’ for the statute is anyone who collects and remits tax, and it explicitly treats general-use prepaid cards as debit cards for the division’s purposes.
Those definitions matter because the statute’s enforcement hook targets entities that assess interchange fees during payment processing.
Crucially, the bill identifies ‘‘tax’’ as any state or local tax calculated on the transaction amount and enumerates the California tax laws that count (sales and use tax, Bradley-Burns local sales tax, transactions and use tax, and select excise taxes including cigarette, alcohol, and cannabis taxes). It also defines ‘‘tax documentation’’ broadly: invoices, receipts, journals, ledgers, and even tax returns can prove the total transaction and the tax amount, and those records may relate to a single transaction or be aggregated across multiple transactions over time.On enforcement, AB 1065 routes alleged violations to California’s Unfair Competition Law: a person or entity that knowingly engages in a pattern or practice of assessing interchange fees on the tax portion ‘‘in violation of this division’’ may be subject to UCL enforcement.
The bill instructs courts to weigh three factors when deciding liability: whether the defendant had control over or access to the tax amount data; whether the defendant took reasonable steps to implement and enforce compliant processes for authorization, settlement, and fee computation; and whether the violation resulted from merchant or point-of-sale vendor error or from failure to transmit sufficient or accurate tax data.Finally, the bill carves out a practical limitation on liability: payment card networks, acquirer banks, issuers, and processors will not be liable for errors, omissions, or misstatements in tax data provided by a merchant or its point-of-sale vendor, provided those entities did not knowingly disregard reliable information about such errors. That language creates a conditional safe harbor but leaves open how ‘‘knowingly’’ and ‘‘reliable information’’ will be proven in disputes.
The Five Things You Need to Know
The bill defines ‘‘tax’’ to explicitly include sales and use tax, Bradley-Burns local sales tax, transactions and use tax, and specified excise taxes (cigarette, alcohol, cannabis).
‘‘Tax documentation’’ may be a single invoice or aggregated records (ledgers, journals, or tax returns) — the statute permits proving tax amounts across multiple transactions.
A person or entity that knowingly engages in a pattern or practice of assessing interchange fees on the tax portion of an electronic payment transaction may be subject to enforcement under California’s Unfair Competition Law.
Courts must consider three factors when deciding liability: control or access to tax data; whether the defendant implemented reasonable processes for authorization/settlement/fee computation; and whether errors stem from merchant or POS vendor failures.
The bill shields payment card networks, acquirer banks, issuers, and processors from liability for merchant-provided tax data errors if they did not knowingly disregard reliable information, creating a conditional safe harbor.
Section-by-Section Breakdown
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Definitions for the payments chain and transactions
This section supplies working definitions for acquirer banks, issuers, processors, payment card networks, authorization, clearance, settlement, and electronic payment transaction. For practitioners, those definitions determine who falls within the statute’s reach and which technical processes (authorization, clearance, settlement) are relevant to compliance. They also make clear that the statute applies to both credit and debit flows and to intermediaries that route or process transactions.
What counts as ‘tax’ and how tax is documented
Subsection (n) lists the California tax laws covered and treats any separately listed tax amount on an invoice or demand for payment as ‘‘tax.’’ Subsection (o) allows a range of documentary evidence — from single receipts to aggregated ledgers or filed tax returns — to show the tax amount. Practically, that gives merchants flexibility in proving tax amounts but also raises questions about how reliably aggregated records can be tied to interchange calculations in a settlement flow.
Enforcement under the UCL with specified evidentiary factors and a conditional safe harbor
Section 100056 makes a pattern-or-practice of knowingly charging interchange on tax an actionable unfair business practice under Chapter 5 of the Business and Professions Code. It instructs courts to weigh whether the defendant controlled tax data, took reasonable procedural steps, or was dealing with merchant/Vendor error. The subsection also limits liability for card networks, acquirers, issuers, and processors when mistakes originate from merchant-supplied tax data and the entity did not knowingly disregard reliable information — an operationally significant allocation of risk that preserves a route to defend against claims where upstream data is faulty.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Retail and service merchants that currently pay interchange on gross totals — excluding tax from interchange calculations could reduce per-transaction costs and compress card acceptance margins. Smaller merchants with low negotiating leverage may see the clearest benefit.
- Small businesses and independent retailers that struggle with thin margins — removing a fee layer on taxes can improve cash flow and reduce the effective cost of taking cards for taxable sales.
- Point-of-sale vendors and tax compliance software providers — the need to segregate and transmit tax amounts cleanly will create demand for updated POS firmware, reporting modules, and integrations that can produce the ‘‘tax documentation’’ the statute contemplates.
Who Bears the Cost
- Acquirer banks, card issuers, payment card networks, and processors — they will have to change transaction routing, messaging, and settlement rules or risk UCL exposure, and may also see reduced interchange revenue or reallocate fees elsewhere.
- Point-of-sale vendors and integrators — while some will benefit, many will face one-time engineering and certification costs to ensure tax amounts are transmitted in a format that supports exclusion from interchange calculation.
- Merchants and third-party aggregators — even if the rule benefits merchants on paper, they will bear short-term compliance costs to change receipts, invoicing, and reconciliation processes and may face disputes or audits over tax documentation accuracy.
Key Issues
The Core Tension
The bill balances two legitimate aims — preventing cardholders and merchants from paying interchange on public taxes, and avoiding undue disruption of the payments infrastructure — but solving one creates the other: excluding taxes from interchange appears fair, yet the technical, contractual, and litigation costs of segregating tax data across a complex chain risk shifting fees elsewhere or imposing heavy compliance burdens on the very merchants the bill intends to protect.
AB 1065 frames a straightforward policy goal — don’t charge interchange on taxes — but implementation is messy. Payment systems were not uniformly built to treat tax as a separately routable data element for authorization, clearance, and settlement.
That means the statute will force technical changes across a fragmented ecosystem of acquirers, processors, POS vendors, and merchants. Even where systems can be changed, commercial agreements and network rules may need renegotiation, and networks or processors could respond by creating new fee lines or pricing adjustments that blunt merchant savings.
Litigation and proof present a second set of headaches. The statute targets a ‘‘pattern or practice’’ of ‘‘knowingly’’ charging interchange on tax, but it then requires courts to evaluate fact-intensive considerations — who controlled the tax data, whether reasonable steps were taken, and whether merchant or vendor error caused the problem.
Those questions are often contested and expensive to litigate, which encourages class actions and settlements even when the underlying technical failure was a bug or a third-party vendor mistake. The conditional safe harbor for processors and networks narrows exposure, but it depends on courts’ interpretations of ‘‘knowingly’’ and what amounts to ‘‘reliable information,’’ leaving room for contested discovery fights.
Finally, allowing aggregated tax documentation as proof is practical but risky: aggregations simplify enforcement where transaction-level data is unavailable, but they also create reconciliation disputes and open the door to retroactive claims if tax reporting practices change. Regulators and courts will need to develop standards for when aggregated records are ‘‘sufficient’’ — a process that could take years and generate uneven outcomes across cases.
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