Are merchant fees considered COGS?

Are Merchant Fees Considered Cost of Goods Sold (COGS)?

The question of whether merchant fees, the costs associated with processing customer payments, should be considered part of the cost of goods sold (COGS) is often debated, especially in the context of subscription-based software as a service (SaaS) businesses. While a simple yes or no answer isn’t universally applicable, a closer examination reveals a nuanced perspective, particularly for SaaS companies where subscriptions are the fundamental unit of service delivery.

The core argument for including merchant fees within COGS centers on the direct relationship between the fee and the provision of the service. In the SaaS model, the payment processing fee is an integral part of the transaction that enables the delivery of the subscription itself. Subscriptions, by their nature, require upfront payment. The fees incurred to process this payment are directly linked to generating revenue from the sale of these subscriptions, much like the raw materials or labor required to create a physical product are part of its cost.

However, the classification of merchant fees as COGS is not straightforward. Traditional definitions of COGS usually focus on the direct costs of producing or acquiring goods for sale. In the SaaS context, the “good” being sold isn’t a tangible product; it’s a service, specifically the access to software and its features. A key differentiator lies in the timing and nature of the expense. While the merchant fee is incurred at the point of sale, its impact on the cost of acquiring the subscription is undeniable.

The key point to recognize is that the merchant fee is not simply an administrative overhead. It is a cost intrinsically tied to the process of delivering the subscription, and therefore the revenue derived from it. This ties closely to the concept of matching expenses to the relevant revenue streams.

Crucially, businesses should consider their specific financial reporting requirements and accounting standards when determining the proper treatment of merchant fees. Different accounting frameworks may have differing guidelines. While the direct link to delivering a service suggests inclusion within COGS, it’s imperative to consult with financial advisors and accounting professionals to ensure compliance and accurately reflect the financial position of the company.

Ultimately, while the connection between merchant fees and COGS is strong in the SaaS model, the exact treatment within financial reporting warrants careful consideration tailored to individual business circumstances.