Killing the Penny Is Smart but Shouldn’t Cost More Than It Saves

With the federal government preparing to kill off the penny, states revising sales and use tax regulations must adopt a dual-rounding policy that preserves cent-level tax calculations while allowing nickel-based rounding only for cash—avoiding legal pitfalls under the Internet Tax Freedom Act and practical chaos for retailers at the point of sale.

This method will keep the state sales tax system from unraveling over a coin we should have eliminated years ago. However, it will occasionally eat a few cents when rounding down. Over the course of thousands of transactions, that can add up.

But it encourages a shift toward electronic payments, where totals are exact, transactions are fully auditable, and opportunities for underreporting sales tax shrink. And if the rounding losses start to sting, nothing’s stopping retailers from bumping their prices up a nickel.

The temptation for states—and point-of-sale vendors by extension—to simply round the tax amount to the nearest nickel for cash purchases may feel like an administrative efficiency, but it isn’t. It’s a potential compliance nightmare.

Among other things, the ITFA bars discriminatory treatment of electronic commerce. Calculating the tax to the penny for all transactions, and allowing retailers to round the final amount due only for cash payments, isn’t an ideal solution for retailers.

Thanks to some ambiguous statutory language, the ITFA prohibition against states imposing discriminatory taxes on electronic commerce may extend to disparate tax burdens for cash and credit transactions—even offline. If a $10 item is taxed at 62 cents for a credit card user, but only 60 cents for a cash buyer because the tax itself is rounded, one could argue that the tax obligation for a customer engaged in electronic commerce is higher than that of a cash customer.

This hypothetical situation is the kind of digital discrimination the ITFA was designed to prevent. While rounding a few cents may seem like a de minimis imposition, tax disputes scale by the volume of transactions. States that round the tax instead of the total are asking for a lawsuit, a revenue reporting disaster, or both.

There are also technical limitations. Electronic payment systems are built for penny precision, not nickel rounding. Every major point-of-sale system, credit card processor, and e-commerce platform in the country is designed to operate in one-cent increments—because, until now, there was no reason to design them any other way.

A pile of US pennies.

Photographer: Saul Loeb/AFP via Getty Images

Trying to force those systems to round to the nearest nickel to mirror cash transactions isn’t just technically difficult; it’s commercially absurd. You’d need a full-scale rewrite of some merchant software, reconciliation code, and tax reporting tools. The better approach is to leave digital systems alone and let cash catch up—or better yet, be phased out wherever possible.

For example, imagine you run a small coffee shop, and a customer buys a muffin and a small coffee. The subtotal before tax comes to $14.75, and sales tax is 6.5%—or 96 cents. The total comes to $15.71. If the customer pays by credit card, you charge the exact total.

If they pay in cash, you still calculate and record the tax exactly, and you still report and remit the tax to the state. But for purposes of the cash transaction, you round the total amount due to $15.70 and you eat the one-cent loss. On the other hand, if the total had come to $15.78, you would charge $15.80 and pocket the two pennies.

Two important factors that make this the best path forward. First, the sales tax calculation remains identical in both electronic and cash transactions. Second, nothing needs to change at the point-of-sale and payment processing level. Auditors can be trained to expect minor discrepancies between total tax collected and reported tax remittances due to rounding adjustments, particularly when reconciling end-of-day receipts.

This creates a silver lining tax policy situation for states. It’s an opportunity to subtly encourage more electronic payments, which are easier to track, audit, and tax accurately.

When cash totals get rounded and retailers occasionally lose a cent or two, it creates a small but real financial incentive to shift customers toward card payments or mobile payment platforms. Electronic transactions leave digital records, reducing the risk of underreporting or “zapper” software abuses. This helps tax authorities close the compliance gap, especially in higher-cash industries.

The penny may be obsolete and is rightly about to be done away with, but state sales tax systems can’t afford to get sloppy in that transition. Otherwise, pennies will wind up costing states a lot more in litigation than they ever did to mint.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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