Credit Card Surcharging: A State-by-State Legal Analysis

As businesses strive to maintain profitability in the competitive commerce environment, surcharging is one strategy that’s garnered attention and controversy.

This article will dive into the legality of surcharging on state and federal levels to help merchants gain more insight into best practices and their impact on their businesses and consumers. It will also answer common questions, such as are credit card surcharges legal and is it illegal to surcharge debit cards.

What is credit card surcharging?

When you purchase with a credit card, the merchant’s financial institution processes the transaction and charges an interchange fee to the merchant for these services. However, the merchant isn’t always obligated to pay it. In some cases, merchants can pass these fees on to their customers as surcharges.

Surcharges are additional fees imposed on top of the cost of a product or service that can be charged as a specified amount or a percentage. Surcharges are commonly added to credit card transactions, utility bills, or transactions where the merchant is charged an interchange fee.

Merchants are prohibited from profiting from surcharges and can only charge the necessary amount to cover the cost of the interchange fee.

Surcharges are often confused with convenience fees since both can be applied to certain transactions, but there are some critical differences between the two.

What are the differences between convenience fees and surcharges?

Despite convenience fees and surcharges sharing several similarities, they differ in their purpose.

Convenience fees are added to the total amount of a transaction to provide convenient payment options to customers, often covering administrative costs, technological expenses, or third-party service fees.

For example, when customers order food online through a third-party delivery service, they’ll likely be charged a convenience fee for the convenience of browsing through menus, placing orders, and having meals delivered to their location. In this case, the convenience fee would cover the costs of delivery logistics and maintaining the platform.

Convenience fees are typically flat fees, meaning they won’t change based on a percentage of the transaction. Instead, they remain a set price added whenever alternative payment methods are used.

In contrast, surcharges can differ in price depending on the cost of the transaction. They can be fixed amounts but are often calculated as a percentage of the transaction value.

Surcharges are also associated with credit cards, whereas convenience fees tend to be associated with less traditional payment methods, including online payment platforms like Venmo and mobile wallets such as Apple Pay and Google Pay.

Surcharges are a topic of controversy since some consumers don’t feel they should have to cover processing costs. Considering this controversy, it’s important to be mindful of credit card surcharge rules and regulations.

Are credit card surcharges legal?

The permissibility of surcharging credit cards falls under the jurisdiction of individual states and card networks, as there are no federal restrictions on the practice. This means states can enact their own credit card surcharge laws as they see fit. Some states prohibit surcharging altogether, whereas others enforce various credit card surcharge regulations and restrictions.

In most states where surcharging practices are permitted, merchants must disclose their surcharging policies to customers. However, no federal regulations mandate the disclosure of surcharging amounts. Under the Expressions Hair Design vs. Schneiderman case, the Supreme Court ruled that requiring disclosure of surcharging amounts violates the first amendment and will therefore be left to individual states to determine their own disclosure practices. That said, most states that permit surcharging require this disclosure.

To understand credit card surcharge laws by state, businesses should consult their state legislature to stay up-to-date on updated credit card surcharge laws and restrictions, and they can also refer to this next section.

States where credit card surcharging is illegal

Surcharging is legal in most states, with the exception of a few. Here is a complete list of states and jurisdictions that permit credit card surcharging:

While most states permit credit card surcharging, several state-level governments vary in the surcharging regulations they impose.

Special considerations regarding state surcharging policies

Since states can create their own restrictions on surcharging practices, some legislatures take disclosing this information very seriously.

Maine and New York have implemented laws requiring merchants to provide customers with surcharging policy information. Merchants must display the cost of paying with cash versus the cost of paying with a credit or debit card for customers to clearly understand any additional charges they may incur when using cards.

Since merchants are prohibited from making a profit from surcharging, there’s a limit to how much can be charged on any given surcharge. Although the average maximum amount in the U.S. is capped at 4%, Colorado merchants can charge either 2% or the total amount of the processing fee.

With regulations that differ from state to state, the legal landscape of credit card surcharging can be tricky to navigate. Debit card surcharging, on the other hand, carries more concrete restrictions.

Are debit card surcharges legal?

Under the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, surcharges on debit cards are prohibited in the U.S.

The amendment outlines regulations related to interchange fees imposed by card networks, instituting a cap on these fees to regulate costs associated with debit card processing. In other words, this limits debit interchange rates imposed on merchants by reducing the overall costs of transaction fees on debit card transactions.

The rise of credit card surcharging

Although some negative connotations are associated with surcharging, they can yield financial benefits for merchants.

Surcharges can offset expenses related to processing transactions, so businesses with thin profit margins can save substantial funds to generate more revenue.

Implementing surcharges for credit cards can also incentivize customers to use lower-cost payment methods, lowering the average processing costs for merchants. By mitigating the impact of credit card processing fees, surcharging carries the potential to contribute to a merchant’s overall financial stability and profitability.

Applying surcharges to your credit card payments

With consideration of the legality of surcharging credit cards, merchants should be cautious when applying them to transactions. Before surcharging, you’ll first need to verify the state you’re operating in permits its use.

To help you ensure compliance with both state and federal surcharging laws, here’s a checklist to get started:

• Understand the legal landscape. With states retaining the ability to impose their own rules and regulations on surcharging, it’s imperative to stay up to date on the latest guidelines to ensure compliance.
• Determine suitable payment methods. When deciding which payment methods to offer, you should verify that surcharges can be added to these payments. Your business also must understand and follow the specific laws and restrictions that apply to surcharging in your region or jurisdiction.
• Calculate the surcharge amount. Whether surcharging on a flat fee or a percentage, you must ensure the amount is within the legal limits to avoid any overcharging penalties.
• Be transparent. Communicate surcharging information to maintain transparency and create a more honest relationship between you and your customers. This can be done by displaying the surcharge amount or percentage at the point of sale so your customers know what they’re being charged for.
• Comply with updated policies and procedures. Before implementing surcharging, businesses should update their policies and procedures to reflect these additional charges. You should also ensure all employees are aware of the surcharging guidelines and can communicate them effectively.
• Choose a compliant payment processor. When selecting a payment processor, you’ll need to confirm they support surcharging credit cards and operate within the legal standards of surcharging laws on the state level.
• Test and monitor functionality. Merchants should test payment processing systems to verify that surcharges are being applied correctly. Monitor these transactions and customer feedback to identify any issues or concerns.

You’ll also want to work with payment processors that fit the needs of your business and can guide you through the legal framework of surcharging to avoid any penalties.

Find the best payment processor to apply surcharging in your business

When looking for a payment processor, you should seek established and reputable credit card processing providers with expertise in surcharging. Given that it’s not standard practice, you must assess providers’ surcharging capabilities to verify their compliance with federal and state laws and regulations.

It’s important to remember that not all payment processors accept all forms of payment, so you’ll want to find a processor that accepts the payment methods that work best for your business to accommodate your customers.

For merchants that wish to surcharge their customers, there are a few common questions that you’ll likely want answers to.

Understanding surcharging: 4 FAQs answered

While surcharging customers may seem like an overwhelming task, these charges can lead to long-term financial rewards for your business.

To help you get started with the surcharging process, here are the answers to four frequently asked questions:

1. Why do merchants surcharge credit card transactions?
2. How can consumers identify if a business applies surcharges?
3. Can consumers avoid surcharges when purchasing with credit cards?
4. Can businesses set their own surcharge amounts?

1. Why do merchants surcharge credit card transactions?

Surcharges are implemented to offset the costs associated with processing credit card payments.

Credit card processing fees charged by card networks and financial institutions can impact a business’s profitability, and surcharging is seen as a way to pass some of these costs onto the consumer.

2. How can consumers identify if a business applies surcharges?

Businesses that surcharge are typically required to provide clear and conspicuous notice to consumers — in-store and online — about the surcharging policy.

Surcharging notices may include signage at the point of sale, website disclosure, or other means of communication.

3. Can consumers avoid surcharges when purchasing with credit cards?

Consumers have the option to use alternative payment methods, such as cash or debit cards, to avoid potential surcharges on credit card transactions.

However, it’s essential to consider the convenience, security, and rewards associated with credit card usage when making purchasing decisions.

4. Can businesses set their own surcharge amounts?

Surcharging regulations often provide guidelines on the maximum surcharge amount a business can impose so it doesn’t exceed the actual processing cost.

However, there may also be specific state-level surcharging limitations and restrictions that businesses must adhere to.

With many state and federal surcharging regulations, it can seem daunting to navigate legalities. With the right resources, your business can make more informed decisions on how best to implement surcharging for its credit card transactions.

Businesses can effectively navigate surcharging laws to optimize the payment process

Understanding the legal landscape of credit card surcharging is crucial for businesses and consumers alike. Compliance with disclosure requirements, limitations on charge amounts, and adherence to state-specific laws are essential to consider before surcharging.

By navigating the complexities of surcharging regulations and using compliant payment processors like EBizCharge, your business can offset processing costs while maintaining transparency and fairness for consumers.