The first time I became aware of a seller trying to defray the cost of credit card fees was some years ago when I was purchasing gas and saw that at this particular station the price was less when the payment was in cash. For many years in my universe that price dichotomy stopped at gas stations. Not so much today, as more and more businesses are trying to decrease costs to hold the bottom line.
Some businesses[1] follow the gas station model, advertising two different product costs depending on the method of payment, but more seem to be opting for a surcharge, and my guess is that many don’t realize that there is a right way to go about that. Rules, in fact, vary by state, and there are some states that as of this writing do not allow merchants to impose a surcharge. Remember, as well, that each credit card company has its own requirements for merchants imposing a surcharge, since, in truth, surcharging is designed to discourage using their products.
The first thing to remember is that there is federal legislation that prohibits ANY surcharge on a prepaid or debit card purchase, so it is essential to have good controls in place. The companies whose credit cards the seller takes usually have published guidelines that will help set those up because the merchant must register with the credit card companies to be able to impose a surcharge.
The notice that there will be a surcharge if using a credit card must be clearly disclosed before the transaction is run. So, at the point of entry of the business and at the register or, in a restaurant, on the menu, it must state that a fee for credit card usage will be added and the percentage that will apply. The surcharge must be separately stated on the receipt both as a percentage and dollar amount. That surcharge can never exceed the actual amount charged to the merchant to process that sale and is capped at 4%, although some credit card companies[2] have a lower cap.
When the transaction is processed the surcharge must be separately identified to the credit card company. In New Jersey, the surcharge will be subject to sales tax.
In 2023 legislation was passed in New Jersey codifying many of the requirements above and putting monitoring of surcharging by merchants under the Division of Consumer Affairs. The act requires that for online purchases there must be a conspicuous notice of the additional charge on the website, mobile application, or electronic kiosk. For telephone purchases, the seller is required to provide verbal notice of the additional charge prior to processing. Since there could be differing fees depending on the credit card used, the merchant is required to disclose each individually if that is the case. This act incorporates the penalty provisions of the New Jersey Consumer Fraud Protection Act, which allows both fines imposed by the attorney general and redress by customers through individual and class action lawsuits. The fine could be up to $10,000 for a first offense and $20,000 for subsequent occurrences.
So, imposing a surcharge can be a way of recouping costs when the seller has complied with the requirements of the credit card companies and federal and state law. If you have questions about how to be sure you are in compliance if you are imposing a surcharge now or what to consider before instituting a surcharge, please contact us.
Article submitted by Lois S. Fried, CPA, CFE, CVA, ABV.
[1] These requirements do not apply to government entities.
[2] Visa, for example, allows a maximum surcharge of only 3%
