This is definitely not the case anymore. I got my Discover It card in January 2013 and I tested this at multiple stores (Walmart and a few different grocery stores) shortly after I learned about their "cash over" feature. I only received rewards for the actual amount of the purchase and not the cash. I did notice that doing lots of sub $1 purchases and getting $60 in cash (the per-transaction maximum) will get you a lot of fraud alerts, but that's no big deal. Discover's system is really nice, I just have to text them a Y to confirm that I authorized the transaction. My guess is that stores don't pay swipe fees on the portion of the purchase that is cash, so they have a strong incentive to report that correctly to Discover.

It can be nice when you actually need a small amount of cash for whatever reason, though I have multiple checking accounts that allow me to use any ATM anywhere and be reimbursed for any fees charged, so that's not really a big deal. And of course, it means you have to use your Discover card for a purchase rather than another card that might earn you a better reward.

In my opinion, the main reason to get a Discover CC is the ShopDiscover portal which frequently offers more cash back than anywhere else for some retailers (both MS-relevant and otherwise). The 5% cash back rotating categories are nice, too. They also offer a checking account which gives 10 cents for every debit purchase, bill pay, or check written, though they will shut you down if you blatantly abuse it. I think they pretty much just look for multiple transactions in rapid succession at the same place. I got a signup bonus for opening mine and I just keep $50 or so in it and use the debit card for legitimate small transactions. If you use it for a $1 purchase that's 10% cash back.