Merchants accepting credit cards face a dilemma—as much as six percent (6%) of the funds received when a customer pays with a credit card are applied to transaction fees, also known as “swipe fees” which are payable to a combination of the credit card company, various global, regional and local credit card processors, and financial institutions. Until recently, merchants were barred by the merchant agreements governing the relationship between the major credit card companies and the average merchant from passing along such fees directly to their credit card-using customers. Violation of such prohibitions could result in fees and/or the refusal of credit card companies to allow merchants to accept credit cards.
In January of 2013, a preliminary settlement was reached in a class action lawsuit filed by various merchants and merchant groups against Visa and MasterCard. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 2013 U.S. Dist. LEXIS 179340 (E.D. N.Y. Dec. 13, 2013) (the “Interchange Fee Settlement”). The basis for the suit and resulting Interchange Fee Settlement was the amount and policies surrounding the “swipe fees” assessed against merchants when their customers use credit cards. Pursuant to the Interchange Fee Settlement, Visa and MasterCard agreed that they would permit merchants to assess surcharges on those customers using credit cards, in certain situations. The preliminary settlement became final on December 13, 2013. Also in late December, 2013, American Express reached a preliminary settlement (which has yet to be approved by any judge) of two class action lawsuits that have been pending for several years. See American Express Anti-Steering Rules Antitrust Litigation, 1:11-md-2221, U.S. District Court, Eastern District of New York (Brooklyn) and Marcus Corp. (MCS) v. American Express Co., 1:04-cv-5432, U.S. District Court, Southern District of New York (Manhattan) (collectively, the “AmEx Settlements”). The AmEx Settlements provide for similar terms to the Interchange Fee Settlement as it relates to surcharging. Certain states have laws prohibiting the assessment of credit card surcharges, however, and thus the Interchange Fee and AmEx Settlements cannot serve to permit surcharging in those states.
A. Existing Laws Relating to the Ban or Restriction of Credit Card Surcharging
Statutes in ten states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, Texas and Utah) prohibit merchants from assessing credit card surcharges. Another state (New York) has a statutory ban in place; however, New York’s ban is currently enjoined from enforcement pursuant to a preliminary injunction ordered in a case where the New York statute is being challenged as unconstitutional. State legislators in twenty-two (22) of the remaining thirty-nine (39) states have recently considered adopting legislation that would ban the surcharging.
The following analysis sets forth and highlights pertinent state statutes where surcharging is not permitted. Please note, however, that any merchant either: (i) remotely charging (i.e., card is not physically present at the time of the transaction) a credit card issued to a resident of a different state, or (ii) charging a credit card pursuant to a contract or transaction entered into another state, it is the law of the state of the customer’s residence and/or the state where the contract or transaction was entered into whose surcharging laws will control, not the law of the state where the merchant resides or the credit card is charged.
(a) No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers.
Cal. Civ. Code § 1748.1, Credit Card surcharges; Cash discounts (2014). The term 'retailer', as used above,
(f) . . . means every person other than a card issuer who furnishes money, goods, services, or anything else of value upon presentation of a credit card by a cardholder. “Retailer” shall not mean the state, a county, city, city and county, or any other public agency.
Cal. Civ. Code § 1747.02, Definitions. If a retailer violates Cal. Civ. Code § 1748.1(a), Cal. Civ. Code § 1748.1(b) provides that:
Any retailer who willfully violates this section by imposing a surcharge on a cardholder who elects to use a credit card and who fails to pay that amount to the cardholder within 30 days of a written demand by the cardholder to the retailer by certified mail, shall be liable to the cardholder for three times the amount at which actual damages are assessed. The cardholder shall also be entitled to recover reasonable attorney's fees and costs incurred in the action.
Cal. Civ. Code § 1748.1(b).
Colorado law, as set forth at C.R.S. 5-2-212 (2013) provides as follows:
5-2-212. Surcharges on credit transactions - prohibition
(1) Except as otherwise provided in sections 24-19.5-103 (3) and 29-11.5-103 (3), C.R.S. [each relating to sales by governmental entities] no seller or lessor in any sales or lease transaction or any company issuing credit or charge cards may impose a surcharge on a holder who elects to use a credit or charge card in lieu of payment by cash, check, or similar means. A surcharge is any additional amount imposed at the time of the sales or lease transaction by the merchant, seller, or lessor that increases the charge to the buyer or lessee for the privilege of using a credit or charge card. For purposes of this section, charge card includes those cards pursuant to which unpaid balances are payable on demand.
(2) A discount offered by a seller or lessor for the purpose of inducing payment by cash, check, or other means not involving the use of a seller or lender credit card shall not constitute a finance charge if such discount is offered to all prospective buyers and its availability is disclosed to all prospective buyers clearly and conspicuously in accordance with regulations of the administrator.
Further, Colorado law expressly establishes the territorial application of the above statute, which is comparable to the language used in most of the other states with surcharge bans, to the extent they specify a territorial application:
5-1-201. Territorial application - definitions
(1) Except as otherwise provided in this section, this code applies to consumer credit transactions made in this state and to modifications, including refinancing, consolidations, and deferrals, made in this state, of consumer credit transactions, wherever made. For purposes of this code, a consumer credit transaction is made in this state if:
(a) A written agreement evidencing the obligation or offer of the consumer is received by the creditor in this state; or
(b) A consumer who is a resident of this state enters into the transaction with a creditor who has solicited or advertised in this state by any means, including but not limited to mail, brochure, telephone, print, radio, television, internet, or any other electronic means.
C.R.S. 5-1-201 (2013).
Thus, as stated above, even though a merchant may be charging the customer's credit card in a state where surcharging is permissible, to the extent the contract was signed in the customer's state or a merchant solicited the customer to enter into the contract via any communication directed into the customer's state, the customer's state law, to the extent its bans surcharging, will control the transaction.
Conn. Gen. Stat. § 42-133ff (2013) provides:
(a) No seller may impose a surcharge on a buyer who elects to use any method of payment, including, but not limited to, cash, check, credit card or electronic means, in any sales transaction.
(c) Nothing in this section shall prohibit any seller from offering a discount to a buyer to induce such buyer to pay by cash, debit card, check or similar means rather than by credit card.
Florida law provides, at Fla. Stat. § 501.0117 (2013):
§ 501.0117. Credit cards; transactions in which seller or lessor prohibited from imposing surcharge; penalty
(1) A seller or lessor in a sales or lease transaction may not impose a surcharge on the buyer or lessee for electing to use a credit card in lieu of payment by cash, check, or similar means, if the seller or lessor accepts payment by credit card. A surcharge is any additional amount imposed at the time of a sale or lease transaction by the seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit card to make payment. . . . This section does not apply to the offering of a discount for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, if the discount is offered to all prospective customers.
(2) A person who violates the provisions of subsection (1) is guilty of a misdemeanor of the second degree, punishable as provided in s. 775.082 [a definite term of imprisonment not exceeding 60 days] or s. 775.083 [$500 fine].
Kansas law provides, at K.S.A. § 16a-2-403 (2012)
16a-2-403. Prohibiting surcharge on credit or debit cards.
No seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means. A surcharge is any additional amount imposed at the time of the sales or lease transaction by the merchant, seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit or debit card.
Although the Kansas statute does not specifically allow for discounts for other methods of payment (cash, check, etc.) as do most of the other state statutes, a 1986 attorney general opinion on the issue provides that such discounts do not constitute a violation of K.S.A. § 16a-2-403 (2012). See Kansas Attorney General Opinion 86-115.
9-A M.R.S. § 8-509 (2013) provides as follows:
§ 8-509. Credit card and debit card surcharge prohibition
1. SURCHARGE PROHIBITED. A seller in a sales transaction may not impose a surcharge on a cardholder who elects to use a credit card or debit card in lieu of payment by cash, check or similar means. For purposes of this section, “surcharge” means any means of increasing the regular price to a cardholder that is not imposed on a customer paying by cash, check or similar means. A discount or reduction from the regular price is not a surcharge.
Massachusetts law, as set forth at ALM GL ch. 140D, § 28A (2013), provides:
§ 28A. Seller May Offer Discount for Payment by Cash or Check, But May Not Impose Surcharge for Use of Credit Card.
(a) (1) With respect to a credit card which may be used for extensions of credit in sales transactions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay cash, check or similar means rather than use a credit card.
(2) No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.
(b) With respect to any sales transaction, any discount from the regular price offered by the seller for the purpose of inducing payment by cash, check or other means not involving the use of an open-end-credit plan or a credit card shall not constitute a finance charge under section four if such discount is offered to all prospective buyers and its availability is disclosed clearly and conspicuously.
With respect to enforcement, ALM GL ch. 140D, § 31 (2013) provides:
§ 31. Penalties for Violations of Chapter.
Whoever willfully and knowingly:
(1) Gives false or inaccurate information or fails to provide information which he is required to disclose under the provisions of this chapter or any regulation issued thereunder,
(2) Uses any chart or table authorized by the commissioner or the board under section five in such a manner as to consistently understate the annual percentage rate determined under subclause (A) of clause (1) of subsection (a) of section five, or
(3) Otherwise fails to comply with any requirement imposed under this chapter, or any rule or regulation issued thereunder, shall be fined not more than five thousand dollars or imprisoned not more than one year, or both.
14A Okl. St. § 2-417 (2013) provides:
§ 2-417. Surcharge for use of credit or debit card
A. No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card or debit card in lieu of payment by cash, check or similar means.
Tex. Finance Code § 339.001 (2013) provides:
§ 339.001. Imposition of Surcharge for Use of Credit Card
(a) In a sale of goods or services, a seller may not impose a surcharge on a buyer who uses a credit card for an extension of credit instead of cash, a check, or a similar means of payment.
(b) This section does not apply to a state agency, county, local governmental entity, or other governmental entity that accepts a credit card for the payment of fees, taxes, or other charges.
(c) The consumer credit commissioner has exclusive jurisdiction to enforce this section.
(d) The Finance Commission of Texas may adopt rules relating to this section. Rules adopted pursuant to this section shall be consistent with federal laws and regulations governing credit card transactions described by this section.
(e) This section does not create a cause of action against an individual for violation of this section.
Tex. Finance Code § 14.251 (2013) provides:
§ 14.251. Assessment of Penalty; Restitution Order
(b) The commissioner may order a person who violates or causes a violation of Section 339.001, this chapter, . . . to make restitution to an identifiable person injured by the violation.
Utah Code Ann. § 13-38a-302 (2013) provides:
§ 13-38a-302. Credit card surcharges prohibited
(1) A seller may not impose a surcharge on a transaction for $ 10,000 or less that is paid for by using a credit card.
(2) This section does not prohibit a seller from offering a discount on a transaction that is paid for with a credit card that:
(a) is issued by the seller or an entity that is affiliated with the seller; or
(b) bears the seller's service mark or trademark.
Utah Code Ann. § 13-38a-302 (2013). The definitions applicable to the Utah law provide, inter alia:
(3) (a) “Seller” means a person that accepts payment by a financial transaction card.
(b) “Seller” does not include [a government entity; or a person acting on behalf of a government entity].
(4) (a) “Surcharge” means an additional charge added to a transaction paid for by using a credit card, but not added to a transaction paid for by a means other than a credit card.
(b) “Surcharge” does not include:
(i) an exclusion from a discount that is offered on transactions paid for by means other than a credit card . . . [or a fee charged by a credit card company for use of a credit card or ATM fees].
11. New York:
New York's law banning surcharging, set forth at N.Y. Gen. Bus. Law § 518 (213) (“§ 518”) was recently challenged by various New York merchants who sought, as part of their facial attack on the constitutionality of § 518, a preliminary injunction barring enforcement of § 518 during the pendency of the litigation. See Expressions Hair Design, et. al. v. Schneiderman, 2013 U.S. Dist. LEXIS 143415 (S.D. N.Y. Oct. 3, 2013). Judge Jed S. Rakoff ruled in favor of the plaintiffs with respect to their request for preliminary injunction, holding that § 518 may not be enforced until, at the earliest, the conclusion of the case (and only if §518 is ultimately upheld). Id. While this is a preliminary injunction, and not yet final, Judge Rakoff's extensive analysis of the constitutional concerns relating to § 518 (namely, that it is void for vagueness and constitutes in impermissible restraint on free speech, in violation of the First Amendment) indicate that a final ruling declaring § 518 to be unconstitutional is somewhat likely.
The logic behind Judge Rakoff's ruling is compelling because his opinion begs the question why merchants should be allowed to bring about the same effect of a surcharge through discounting of cash and check payments, and yet not be permitted to assess a surcharge, which has the same result by a different name. Id. It does not appear that any other legal challenges have yet been filed against other state laws banning surcharging. However, in the event § 518 is ultimately adjudged unconstitutional, it will likely lead to similar actions in other states with the possibility that judges in those other states will come to the same conclusion preliminarily reached by Judge Rakoff.
12. Relevant Federal Law:
Although not all state statutes banning surcharges expressly provide that the discount of non-credit payment methods is permissible (Oklahoma is the only state that does not either expressly allow discounting within the statute or provide for it in an attorney general opinion), federal law expressly permits the discount for non-credit payments. 15 U.S.C. § 1666f provides:
§ 1666f. Inducements to cardholders by sellers of cash discounts for payments by cash, check or similar means; credit card surcharge prohibition; finance charge for sales transactions involving cash discounts
(a) Cash discounts. With respect to credit card which may be used for extensions of credit in sales transactions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay by cash, check, or similar means rather than use a credit card.
(b) Finance charge. With respect to any sales transaction, any discount from the regular price offered by the seller for the purpose of inducing payment by cash, checks, or other means not involving the use of an open-end credit plan or a credit card shall not constitute a finance charge as determined under section 106 [15 U.S.C. § 1605] if such discount is offered to all prospective buyers and its availability is disclosed clearly and conspicuously.
Thus, the only means by which a merchant can implement a uniform sales process, and still pass along the cost of credit card swipe fees to credit card users, is to adopt a policy whereby the merchant raises its prices by, say 2.5%, then set forth expressly in its contracts that those customers paying with cash or check will receive a discount of 2.5% by utilizing such payment methods.
If, instead, a merchant wishes to surcharge only credit card users and not allocate the cost through a cash discount program, such merchant must look to its own state laws (if the customer is physically present at the merchant’s location when the card is swiped) or to the laws of the customer’s state of residence (if the card is being keyed remotely) in order to determine whether the merchant may legally assess a surcharge. Depending on the nature of a merchant’s business, this could obviously become a very complex endeavor.
B. 23 States Have Recently Considered Adopting Legislation Banning Surcharges:
Although the potential demise of New York’s § 518 may lead to the challenge of other state laws banning surcharging, the legislatures of several states are actually moving in the opposite direction as a result of the Interchange Fee and AmEx Settlements. State legislatures in Arkansas, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, West Virginia and Wisconsin all, at some point in 2013 (subsequent to the preliminary approval of the Interchange Fee Settlement in January of that year), drafted and considered bills to ban credit card surcharges in similar fashion to the laws set forth, supra. Only in Utah did an actual complete ban pass (see section A.9, supra), which ban sunsets June 30, 2014, absent additional legislation. In Mississippi, a ban on surcharging of credit cards also passed, but the ban only applies to state-issued credit cards. See Miss. Code Ann. § 31-7-9(d) (2013) (“In a sale of goods or services, the seller shall not impose a surcharge on a buyer who uses a state-issued credit card, procurement card, travel card, or fuel card.”)
Simply put, this is a dynamically shifting legal landscape. Although the surcharge ban legislation did not become law in any of the remaining 21 states where such legislation was considered in 2013, it remains unclear the extent to which such laws may be revisited in the 2014 legislative sessions for these states (Rhode Island at least has re-introduced its bill to this effect, see RI H7007, the status of which is “Committee recommended measure be held for further study”).
C. In States Where Surcharging is Currently Legal, Visa and MasterCard Still Require Merchants to Comply with Certain Surcharging Requirements, and Surcharging Remains Barred in these States Under Certain Circumstances.
1. Notice to MasterCard and Visa.
Both Visa and MasterCard require merchants who wish to assess surcharges to notify them of such intent, in writing and via specific forms, at least thirty (30) days in advance of the inception of such surcharging.
2. Surcharge Caps.
Both Visa and MasterCard have set specific caps on the amount of the surcharge that can be passed on to the credit card using customer. These caps correlate to the amount of the fees assessed by Visa or MasterCard on the particular merchant, which can be determined either based upon the category of merchant or by the type of credit card, as set forth in documents made available on Visa and MasterCard’s websites.
3. Notice of Surcharge.
Merchants choosing to surcharge customers also “must provide clear disclosure to the merchant's customers of the merchant's surcharging practices at the point of interaction which shall include the amount of the surcharge and the dollar amount of the surcharge on the transaction receipt provided by the merchant to its customers.”  Visa even provides draft merchant disclosure notices, which are available on its website.
4. Other Requirements for Merchants that Accept Other Competing Credit Cards Besides Visa and MasterCard.
Finally, the Interchange Fee and AmEx Settlements also expressly state that, where merchants accept other credit cards besides Visa, MasterCard and American Express (e.g., Discover, Diner's Club, etc.), such merchants cannot assess a surcharge as to Visa, MasterCard and/or American Express usage unless a comparable surcharge is assessed for all other credit cards. Although the other competing credit cards were not a part of the Interchange Fee or AmEx Settlements, it appears that all credit card companies now allow surcharging along similar lines to that which has been permitted by Visa, MasterCard and American Express.
Although the Interchange Fee and AmEx Settlements have resulted in the major credit card brands’ allowance of surcharging, state laws with respect to surcharging diverge on the issue, and it appears likely that 2014 will bring even greater change and uncertainty as state legislatures determine whether their constituents want these bans in place and courts decide whether those bans are constitutional. Given the state of flux with respect to credit card surcharging law, the safest route (and likely the most efficient due to uniformity in application) for merchants, particularly merchants charging credit cards remotely, to pass along the cost of credit card swipe fees is for such merchants to raise their prices and offer a discount for cash or check payment equal to the amount of such price increase.
Although this article provides an outline of the laws relating to merchants’ ability to assess surcharges in lieu of raising prices/offering cash discounts, it is imperative that any merchant that chooses to surcharge stay abreast of changing state legislation regarding surcharge bans in order to avoid the penalties associated with violation of such bans (which penalties, as set forth above, can include treble damages and/or compensation of attorney's fees and/or imprisonment).
Any merchant intending to begin assessment of credit card surcharges should carefully review the applicable credit card brand websites and merchant agreements, and consider retention of counsel. If you have any questions relating to the information provided in this article, or would like to retain the services of Rubin & Levin, P.C. for this or other matters relating to collections, commercial litigation or otherwise, please contact us through the contact information provided on our website at www.rubin-levin.com.
This article is designed to provide a basic understanding of concepts of the law. The law, however, is very much subject to change and to interpretation by different courts. Additionally, the applicable law varies from situation to situation. Accordingly, this article should be viewed as educational in nature, and not to be considered as either legal advice or a substitute for competent advice from a qualified attorney. Rubin & Levin, P.C., and the author of this material encourage that you seek independent legal counsel to address any questions pertaining to particular issues or situations which you may encounter.
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