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Can You Charge Your Customers Credit Card Processing Fees

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Are Convenience Fees Legal

How to Lower QuickBooks Credit Card Processing Fees

In most states, convenience fees and surcharges are legal under a certain percentage of the purchase price. There are currently 10 states where convenience fees and surcharges are prohibitedCalifornia, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas and Puerto Rico. If a customer is illegally charged a convenience fee or surcharge in these states, they can report the retailer to the state attorneys general office.

Surcharges over 4% are illegal everywhere. Also, a convenience fee or surcharge is illegal if the payee has not alerted you of the fee ahead of payment. There must be a sign displayed outside in the store or online stating a surcharge exists for credit card purchases and a notification of the amount of the fee at the point of sale.


Reasons Some Businesses Charge A Fee

You may be wondering why a seller would charge you a fee if youve already paid for your purchase. The reason most sellers charge fees boils down to how credit card transactions work.

Card issuers charge a merchant fee whenever you use your credit card. The merchant is expected to cover this fee in order to process credit card payments. However, those fees can add up. In order for a business to avoid paying that fee every time someone uses a credit card, the fee is passed on to the consumer in the form of a surcharge.

While some merchants dont know that they can charge extra, many avoid it simply because they value their customers. It can also present a hassle for certain businesses to figure out how to impose the charges. Instead, many businesses take on the cost of processing credit card payments as a part of their overhead.

Did You Properly Notify Everyone Involved

Before you can start charging a convenience fee or surcharge, you must notify:

  • The credit card association
  • Your credit card processor
  • Your customers

The credit card association, acquirer, and credit card processor require at least 30 days written notice of your intentions to levy a convenience fee or surcharge.

Youll also need to give your customers advanced notice ahead of the sale. For brick and mortar stores, this could include physical signs by the door and cash register. For eCommerce stores, this could be a notice on the checkout page. The convenience fee or surcharge must also appear as a line item on the customers receipt that clearly states the amount of the fee.

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Can I Change How I Process Transactions To Avoid Paying Fees On Sales Tax

Theres nothing you can do to rectify this issue at the point of sale. The logistical obstacles involved in creating a system to accurately divide transactions into sales amount and taxes and only apply the processing fee to the sales portion of a transaction make the prospect all but impossible.

To allow separation of transaction total and sales tax, you would either have to divide transactions based on the honor system prior to authorization, or processing banks would have to perform the additional task of deducting sales tax from your gross processing volume prior to settlement.

Allowing merchants to declare sales tax is impractical due to the likelihood of abuse with such a system. Processing banks would see sharp declines in profits, and businesses could see an increase in tax audits. Additionally, dividing transactions before authorization would take extra time during the transaction process, resulting in unhappy customers.

The second option of modifying the settlement process is more feasible than the first, but not by much. The logistics of creating an accurate and efficient system would likely raise costs and could place unnecessary restrictions on businesses.

The Case Before The Competition Tribunal

Credit Card Merchant Fees

The Competition Tribunal “is a strictly adjudicative body that operates independently of any government department” that hears cases dealing with economic and business matters such as mergers, misleading advertising and restrictive trade practices .

The argument before the Competition Tribunal was that Visa and MasterCard were engaging in anti-competitive behavior and their restrictive contracts allowed the two credit card companies to essentially dictate terms to merchants .

These terms allowed Visa and MasterCard to charge transaction fees of over three percent in some cases, fees that, according to the Competition Bureau, were among the highest in the world and rake in $5 billion for the credit card industry each year.

Wile the Competition Tribunal doesnt have the power to levy a monetary judgment against the two credit card giants it could force them to change their operating methods. The Competition Bureau wanted retailers to be able to do two things they were not allowed to do:

  • refuse to accept high-cost credit cards but still accept others from the same brand name.
  • add surcharges to counteract the higher transaction fees charged for premium credit cards.

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Card Network Rules For Convenience Fees

Merchants that accept credit cards are bound by the agreements they have with the like Visa, Mastercard, American Express, and Discover. These agreements outline the various things merchants can and can’t do when accepting credit card payments. Networks have varying rules about whether merchants are allowed to can charge a convenience fee.

Are Businesses Required To Disclose A Credit Card Surcharge

Yes. Credit card surcharges must be disclosed before purchase. Most credit card companies require merchants to disclose credit card surcharges in online transactions, on a sign at the stores point of entry and point of sale, and on the receipt. Additionally, any undisclosed fees may constitute an unfair or deceptive trade practice prohibited by Florida law.

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It’s Illegal To Charge Fees In These States

In some states, retailers can’t add surcharges or convenience fees. Here are the five states where it’s illegal: Colorado, Connecticut, Kansas, Maine and Massachusetts.

While it’s illegal for businesses to charge credit card surcharge fees in these states, there are two things to note. In Maine, government entities can impose credit card surcharges. Additionally, all states are allowed to offer cash discounts to avoid these fees. That includes the above five states. Offering a cash discount may encourage more customers to pay with cash, and it can help both the business and the customer avoid additional fees.

Can A Business Charge A Fee For Using A Credit Card Or A Debit Card Instead Of Cash

Can A Business Charge A Credit Card Processing Fee?

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With certain exceptions, surcharges for using a credit card or a debit card are prohibited by Chapter 604A of the Texas Business and Commerce Code:

Sec. 604A.002. IMPOSITION OF SURCHARGE FOR USE OF DEBIT OR STORED VALUE CARD. In a sale of goods or services, a merchant may not impose a surcharge on a buyer who uses a debit or stored value card instead of cash, a check, credit card, or a similar means of payment.

Sec. 604A.0021. IMPOSITION OF SURCHARGE FOR USE OF CREDIT CARD. 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.

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Choose The Right Payment Processor For Your Business

Evaluate your options before selecting a payment processor, and choose one that minimizes your costs for the services you need. For example, if you dont need an online store, you dont need to pay the monthly fee to use Shopify you could use Stripe or PayPal for free. Also, consider the size and volume of your sales to choose the most economical fee structure.

States On Credit Card Surcharges

While its legal under federal law to add a surcharge to credit card transactions, some states prohibit the practice. Some of these states had addressed this issue even before the 2013 law addressed it on a national level.

As of Sept. 14, 2020, 10 states and Puerto Rico have laws prohibiting merchants from charging these fees. These states are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. Minnesota prohibits merchants from imposing surcharges on credit cards they themselves issue to customers .

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Effects Of Passing Fees

Whenever you adjust your pricing model its important to track the effects such changes have on your cash flow. Passing a portion of processing fees to your customers may hurt your income more than it helps, especially if sales decrease because of customer dissatisfaction with your new policy. If you do decide to pass a portion of processing fees to your customers, be sure to track customer behavior carefully and be prepared to eliminate your new pricing policies quickly if they prove detrimental.

Shifting fees to customers can be a complex process as youll need to ensure your policies are in line with changing laws. You can avoid the issue all together and still not lose the processing fees you paid on sales tax by working with a tax professional. If youre properly handling sales tax and processing fee deductions come tax time, youll save yourself time and money without risking alienating or upsetting your customers.

The Following Is A Formula To Calculate Credit Card Fees:

How to Reduce QuickBooks Credit Card Processing Fees

If you want to earn $100 from a credit card payment, work backwards from that amount, which is y:

x = the amount you're going to chargey = the amount of the invoice 
x =/.971x =/.971x =~103.30

In order to receive 100.00 from this credit card payment, you need to add a convenience fee of $3.30.

In some cases, you’ll need to double check the total for a missing $0.01 rounding error.

This method also works for American Express payments and bank payments . Because bank payments are a minimum $1 fee, this method will only apply to invoices over $100.

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Mastercard Convenience Fee Program

MasterCard allows pre-certified municipal and educational entities to charge convenience fees in certain circumstances. MasterCards main stipulation regarding convenience fees charged by educational and municipal institutions is that any fee must be applied equally to all card brands.

This is the reason that many colleges and universities have stopped accepting Visa branded credit and debit cards. MasterCard requires any fee on their cards to be applied equally to all card brands, and Visa forbids convenience fee on anything except tax payments. So, colleges and universities cant accept Visa if they want to charge a fee for MasterCard, Discover and American Express.

Since its not readily available online, Ive included The MasterCard Convenience Fee Program guide below. At the time of this writing the guide is current, but be sure to check with MasterCard for or your merchant service provider for the latest information on this program before making any decisions about convenience fees within your organization or business.

States That Prohibit Credit Card Surcharges And Convenience Fees

Ten states prohibit credit card surcharges and convenience fees: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. It is illegal for merchants to add any surcharges to credit card transactions or charge convenience fees to nontraditional payment methods in these states.

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Paying Fees On Sales Tax

When you process a credit card transaction, your customers credit card is charged for the total amount of the sale including sales tax. Transactions arent divided into sale amount and taxes. Since the transaction amount is the sum of the total sale and the sales tax, you pay your processing fees on that amount. In a retail environment where sales tax is paid on almost every transaction, the increased processing fees can amount to a substantial yearly expense.

For example, if a retail store has a monthly processing volume of $15,000, pays an average rate of 1.9%, and their states sales tax is 6%, $205.20 of their yearly credit card processing fees were paid on sales tax.

15000 x 12 months = 180,000 x .06 = 10800 x .019 = $205.20

If the business in this example improperly deducts their sales tax processing costs, or isnt aware of the deduction, theyre essentially losing $205.20.

Litigation And Current Status Of The Law

How Do Credit Card Processing Fees Work?

On August 16, 2018, Judge Lee Yeakel of the U.S. District Court for the Western District of Texas issued an order that permanently enjoined the State of Texas from enforcing the law prohibiting credit card surcharges against certain merchants that had sued the Attorney General. In his final judgment, Judge Yeakel wrote:

IT IS ORDERED that Defendant Ken Paxton, Attorney General of Texas as well as his employees, agents, and successors in office, are hereby ENJOINED from enforcing Texas Business and Commerce Code section 604A.0021 against .

This provides some context and background on the litigation.

In June of 2019, the Texas Attorney General issued an opinion in response to a county auditor’s request Opinion No. KP-0257 . In this opinion, the Attorney General describes the 2018 litigation and mentions that there are still situations where the law could be enforceable:

When a court determines that a statute is unconstitutional as applied, it normally invalidates the statute only as applied to the litigant in question and does not render the statute unenforceable with regard to other litigants or different factual circumstances. Thus, circumstances may still exist where, as applied, section 604A.0021 operates to prohibit a credit card surcharge fee.

Also note that it is possible the agreement or contract between a merchant and a credit card or payment processing company may prohibit surcharges or fees.

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Types Of Credit Card Processing Fees

There are a lot of different types of fees to keep track of when you’re accepting credit cards. The main cost that you should consider when you’re shopping for a payment processor is the rate it charges for each transaction. The rate is made up of three parts:

  • Interchange fees. The credit card networks set these fees, which your bank pays to your customers bank for each purchase to offsets the risks of the transaction, such as card fraud, and other handling costs. Your processor passes this charge along to you as part of your rate. This fee varies, depending on your industry, the type of card your customer uses, the acceptance method, and the amount of the sale. Since these fees are set by the card networks, everyone pays the same rates and they are non-negotiable.
  • Assessment fees. The card brands charge this fee so they can afford to allow customers to use their card brand. This fee also covers the costs of processing transactions on the card providers payment network. These fees are usually lower than interchange fees, but they’re also non-negotiable.
  • Payment processor markup fees. This fee is the credit card processor’s margin on each transaction. It covers its operating expenses and is where the processor makes its money. This is the only negotiable part of the processing rate.
  • In addition to transaction fees, you may also encounter incidental and account service fees.

    Incidental fees are triggered by certain actions. Here are some examples:

    States Where Surcharging Is Prohibited

    Initially, when surcharging became permissible by the card brands, there were 10 states that prohibited it by law. However, several of those states have lost court battles brought by businesses that wanted to surcharge. Now, the list is down to seve states, and its likely that surcharging may become legal in all states in the future.

    At the time of writing, the seven states that prohibit surcharging are:

    • Colorado
    • Massachusetts
    • Oklahoma

    If youre in one of those states, you cannot surcharge credit card transactions. However, you can offer a cash discount, provided youre offering a true cash discount.

    If youre unsure if your state laws have changed, you can contact your state attorney generals office for the most up to date information.

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    Are You Charging The Correct Amount

    To determine how to accurately implement convenience fees and surcharges, merchants need to review the different policies of each card brand they accept and their specific state regulations.

    Each card brand and state will have different rules and regulations on how to apply convenience and surcharge fees.

    For example, Visa requires convenience fees to be a flat price instead of a percentage of the sale, while Mastercard allows either option. For a surcharge, the fee cant be higher than your effective rate for credit card processing, and it cant be more than 4%. This cap prevents merchants from making a profit off surcharging.

    The Rules Regarding Discover

    How Credit Card Processing Fees Work: The Ultimate Guide

    Discover rules regarding what they refer to as surcharging are less strict than Visa and MasterCards, but like Visa and MasterCard, Discover forbids convenience from being imposed on their cards if the same fees arent also applied to all other brands. Discovers rules regarding surcharging can be found on page six of their Merchant Operating Regulations.

    Ive provided this document below because Discover does not publically post it on their Web site. The latest copy at the time of this writing is April 2011, going forward you will want to check with Discover to verify the latest information.

    Discover rules for surcharging are as follows:

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    Can Gas Stations Charge For Using A Credit Card

    Gas stations fall under the category of businesses that can charge convenience fees and surcharges. However, the reason you are paying more with a credit card at the pump may come down to a game of semantics.

    In states where it is legal to impose credit card surcharges, you can be charged more for using your credit card to pay. However, just because a state doesnt allow surcharges doesnt mean you wont pay more in some cases.

    Depending on the state, a business can offer discounts to customers for using payment methods other than credit cards. For example, a gas station may charge you less for paying with cash or check rather than a credit card.

    Just like convenience fees and surcharges, discounts have to be clearly communicated at the pump, register and on your receipt. In most states, there is a limit to how much a gas station can offer as a discount .

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