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Surcharging Now Allowed…Mostly
Starting this week merchants in 40 U.S. states can now add a surcharge to purchases paid with a Visa or MasterCard branded credit card without the threat of repercussion. Under a $7.2 billion swipe fee settlement last November (In re-Payment Card Interchange Fee and Merchant Discount Antitrust Litigation [MDL 1720]), new policies came into effect on January 27th that removed restrictions preventing merchants from passing processing fees onto consumers in the form of surcharges. Despite the settlement, ten states will not allow merchants to add surcharges to credit card transactions due to laws that prevent such practices. These states are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. Adding surcharges is optional in all other states and widely considered a poor business practice as most merchants already build processing costs into the pricing of products and services.
Limitations
The new surcharge policies are not unconditional and merchants must comply with a strict set of policy and pricing rules. Under the rules, merchants may impose a surcharge either at a “brand level” or “product level” but not both, each with a 4% cap. Merchants are also prohibited from adding surcharges to Debit and Prepaid card transactions
Brand Level
Surcharge Rules (Visa)
- The surcharge must be the same for all Visa branded card types.
- Merchants may not impose different fees on different Visa transactions.
Fee Restrictions
- The surcharge amount cannot be greater than a merchant’s average discount rate for all Visa credit card transactions from the month prior, or the average for the preceding 12 months -OR-
- Merchants may set up to a 4% surcharge if the merchant’s average discount rate exceeds 4%.
Surcharge Rules (MasterCard)
- The surcharge must be the same for all MasterCard branded card types.
- Merchants may not impose different fees on different MasterCard transactions.
Fee Restrictions
- The surcharge amount cannot be greater than a merchant’s average discount rate for all MasterCard credit card transactions
- Merchants may set up to a 4% surcharge if the merchant’s average discount rate exceeds 4%.
Product Level
Product Level Surcharge Rules (Visa)
- The surcharge for a particular Visa card product must be the same for all transactions, regardless of the card’s issuing bank. For example, all Visa Signature cards must have one surcharge level but the level for Visa Platinum cards can be different from the Visa Signature level, etc…
Fee Restrictions
- The surcharge amount cannot be greater than a merchant’s average discount rate for Visa credit card transactions associated with a particular Visa product for the preceding one month or 12 months, minus the regulated debit cap established by the Durbin Amendment –OR-
- Merchants may set up to a 4% surcharge if the merchant’s average discount rate exceeds 4%.
Surcharge Rules (MasterCard)
- The surcharge for a particular MasterCard card product must be the same for all transactions, regardless of the card’s issuing bank. For example, all MasterCard Signature cards must have one surcharge level but the level for MasterCard Platinum cards can be different from the MasterCard Signature level etc…
Fee Restrictions
- The surcharge amount cannot be greater than a merchant’s average discount rate for Visa credit card transactions associated with a particular Visa product for the preceding one month or 12 months, minus the regulated debit cap established by the Durbin Amendment –OR-
- Merchants may set up to a 4% surcharge if the merchant’s average discount rate exceeds 4%.
Other Conditions
The “Level Playing Field” Limitation
Merchants that also accept payment through other competing payment networks such as PayPal, Discover and American Express will have additional restrictions on their surcharging abilities:
- Merchants are only allowed to add surcharges to Visa and MasterCard transaction that are equal to those allowed by the other payment networks the merchant accepts. For example, if a competing network only allows merchants to add a 1% surcharge, then the merchant may only add surcharges of up to 1% on Visa and MasterCard transactions.
- If a competing network forbids surcharging, the merchant may not add surcharges to Visa or MasterCard transactions unless it adds them for the competing network. The surcharge must be at least or equal to the competing networks cost, or the surcharge used for Visa and MasterCard transactions
Surcharge Disclosure
Merchants that wish to add surcharges must provide advanced written notice of at least 30 days to Visa and/or MasterCard and their processing company. Additionally, merchants must disclose to consumers at the point of store entry (if online, the first page that references credit card brands) that the merchant will impose a surcharge to credit card transactions in an amount that does not exceed its own discount rate. Notices may not be posted in a manner that disparages the brand, payment network, card product or card issuing bank. Merchants must also include the dollar amount of the surcharge on the customer’s receipt.
To read the full text of the revised rules, see the following Visa and MasterCard links:
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Great article. We develop software and want to make sure we are calculating the surcharge correctly, in respect to sales tax. For example, if there is a $100 retail purchase and 7% sales tax and the merchant wants to apply a 2% surcharge which is the correct way to calculate? See two examples below:
A) If the surcharge is applied BEFORE sales tax (our merchant provider THINKS this is the way to go):
$100.00 charge
2% surcharge ($2.00)
$102.00 subtotal
7% sales tax applied to the $102.00 = $7.14 in sales tax
$109.14 TOTAL
OR
B) If the surcharge is applied AFTER sales tax
$100.00 charge
7% sales tax applied to the $100.00 = $7.00 in sales tax
$107.00 subtotal
2% surcharge ($2.14)
$109.14 TOTAL
So while the total is the same, the way that the surcharge is calculated has an impact on tax and on the amount that the retailer recoups.
Hi Dan,
It doesn’t appear that this detail has been worked out yet as I cannot find anything about it in the surcharging rules provided by Visa and MasterCard. My assumption is that each state will, or has, dictated how surcharges of any kind can be taxed. This could make programming the rules very difficult if your software needs to calculate multi-state transactions.
It appears there may be a third option. Neither the state taxing authority nor the credit card company has a legitimate interest in the percentage each charges. That is, if the state tax is calculated with the surcharge included, the state benefits from the surcharge.
Conversely, if the surcharge calculation includes the state tax, then the credit card company benefits from the state tax. Either path could face resistance from lawmakers and constituents.
The third approach is to calculate these charges separately. In your example, on a $100 purchase, the state tax of 7% results in $7.00 being added to the charged amount. The surcharge of 2% adds another $2.00 to the charged amount. All of which results in a final charged amount of $109.00.