Law and Suggestions with Respect to Charging and Disclosing Credit Card Fees by Restaurants and Hotels to Customers

Issues: 

1. Whether it is lawful for a Merchant to post on either a menu or customer receipt of a surcharge for payment with a credit card.  
2. Whether it is lawful for a Merchant to collect a surcharge fee from consumers when they pay with a credit card.  

Pennsylvania and Federal Law: 

Currently, Pennsylvania state law does not explicitly prohibit the practice of applying a surcharge for credit card use by a customer. However, the Commonwealth’s Unfair Trade Practices and Consumer Protect Law (“UTPCPL”) prohibits “unfair or deceptive acts or practices,” which includes any practice of deceptive conduct that creates a likelihood of confusion or misunderstanding. 73 P.S. section 201-1(4)(xxi). 

The Federal Truth in Lending Act (“TILA”) prohibits card issuers from contractually preventing Merchants from giving discounts to entice customers to pay in cash. See 12 CFR Part 1026.12(f) (Regulation Z). Under TILA, surcharges are allowed, depending on the state in which the market is located.  

Analysis: 

Both issues presented are addressed in this section.  

The new practice of applying a surcharge to credit card payments has begun in Pennsylvania. The purpose of this practice is to offset the surcharge fees Merchants must pay when a customer uses their credit card.  

Technically speaking, the practice of adding a surcharge on customer’s receipt for using a credit card is lawful in Pennsylvania as long as it is not deemed an unfair or deceptive act or practice. The issue of “unfair acts” that creates a likelihood of confusion or misunderstanding still exists. A business that assesses a surcharge for the use of a credit card but not debit cards – may constitute “unfair acts.” For example, when paying at a business and the Merchant asks, “debit or credit,” the consumer may not know that this is for the purpose of assessing a surcharge. Additionally, an issue for businesses when they assess a surcharge on credit card use, is whether the monies collected are taxable as income to the business. The practice of surcharging for use of a credit card increases taxable income for a Merchant which should be offset penny-for-penny with the amount collected and paid by the Merchant to the credit card Merchant Service Provider.  

Pennsylvania does not have a ban or restrictions on surcharge notice; nonetheless, a Merchant should take steps to reduce their liability when it comes to unfair or deceptive practices. A surcharge is different than a service fee because a service fee is specifically defined as “[a] charge for the administration of the banquet, special function or package deal.” 34 Pa. Code section 231.114. Clearly, a credit card surcharge is not for the administration of a banquet, special function or package deal. Thus, no explicit rule under Pennsylvania law exists to regulate the practice of surcharging.  

Alternatively, Merchants who administer banquets or special functions for customers, could input the credit card processing fee in the service charge. Again, this would apply only to customers paying with a credit card.  

The concern of TILA is similar to Pennsylvania’s Consumer Protection Law, which is to protect consumers from unfair or deceptive acts. Therefore, a Merchant that applies a surcharge through a flat percent charged, may be deceptive marketing. Since the practice could be deemed to be deceptive marketing, it would then be in violation of Pennsylvania’s Consumer Protection Laws. If a Merchant must apply a surcharge to credit card users as a percentage and the receipt must state, the dollars and cents of the highest possible price. A simpler solution to reduce processing fees would be for the Merchant to offer a reward or discount to cash paying customers so not to run afoul of Pennsylvania laws.  

Under the Federal law TILA, card issuers are banned from preventing Merchants from giving discounts to cash customers. An issuer in their Merchant Agreement with a Merchant cannot prevent the Merchant from offering rewards or discounts to cash paying customers. Previously, TILA did contain a prohibition on credit card surcharges, but that provision has expired. In response to the expiration of TILA credit card surcharge prohibition, New York legislature, along with nine other states, passed a law that was modeled after the expired TILA provision.  

Whether a New York’s surcharge prohibition law runs afoul of the First Amendment was subject to litigation in the United States Supreme Court. The justices ordered Second Circuit to analyze New York’s law as a regulation of speech under the First Amendment. The Second Circuit certified a question to the New York Court of Appeals: “whether a Merchant complies with [] the law if it posts the total dollars and cents price charged to credit card users.”  

The New York Court of Appeals answered that it does. The court relied heavily on the purpose of the former TILA provision citing that “it was intended to ensure ‘that consumers will be seeing at least the highest possible price they will have to pay when they see a tagged or posed price.’ . . . The concern of Congress was the prohibition of deceptive marketing.” Which in our opinion, TILA purpose of consumer protection is similar to Pennsylvania’s Consumer Protection Law.  

As a matter of contract, Merchants in their Merchant Agreement with card issuers cannot assess a surcharge greater than 4%. This 4% surcharge cap is the result of a complex litigation settlement agreement between card issuers (Visa, Mastercard, American Express) and a class action group of Merchants. This creates another legal gray area with the practice of applying a surcharge, the issue of different processing fees across different Marketing Agreements. For example, a Merchant accepts forms of payment from Card Issuer A and Card Issuer B. Card Issuer A has a processing fee of 2% and Card Issue B has a processing fee of 3%. The Merchant cannot assess a 5% surcharge fee due to the settlement agreement. If the Merchant applies a 3% surcharge fee to all credit card users. Now the issue exists with consumers who have a credit card from Card Issuer B being charged a higher rate than that is required under Card Issuer B Merchant Agreement.  

Additionally, Merchants cannot profit from the surcharge they apply to consumers who use a credit card. For example, a Merchant accepts forms of payment from Card Issuer A. Card Issuer A has a processing fee of 2.7%. The Merchant enters into a transaction with a consumer for $10.00 plus a processing fee of 3% totaling $10.30. The Merchant owes Card Issuer A .27 cents for processing that transaction, and the Merchant pockets the remaining .03 cents. In this example, the Merchant is profiting from the surcharge which is unlawful practice.  

Conclusion: 

The practice of applying a surcharge to credit card customers when disclosed in the manner described in this memo is most likely legal in Pennsylvania. That does not mean that the Commonwealth could never deem that practice as unlawful. Merchants must be specific, clear and concise on how they are notifying their customers about a surcharge fee.  

If a Merchant is thinking about adopting the practice of applying a surcharge to credit card customers two steps should be taken as a safeguard. First posted notice on the premises stating that the business applies a surcharge fee, including the surcharge percentage, to all customers that use a credit card.  Second, there should be a notice on the receipt in the form of dollars and cents indicating the amount of the surcharge. 

Summary of Suggested Policies: 

Based upon the above discussion and current law, it is our opinion that Merchants in the Hospitality Industry should consider the following guidance:  

1. One possible approach is to provide a discount for transactions paid in cash rather than charging a credit card service fee for reimbursement of the fee assessed against the Merchant. Current Pennsylvania and Federal law allows this process. 
2. If a Merchant accepts a credit card and wants to reimburse itself for the Merchant’s fee, the following guidelines should be followed:
   1. The Merchant’s fee cannot currently exceed four percent (4%) under Federal law.
   2. Regardless of whether the Merchant uses more than one Merchant Service Provider for different credit cards with different surcharge fees, the Merchant must treat each card-assessed service fee in accordance with the fee charged to the Merchant. It is illegal to charge a higher surcharge to a consumer than the amount of the service fee the Merchant actually incurs. In other words, Merchants cannot profit from the surcharge they assess to consumers who use a credit card. See examples above.
   3. A Merchant that assesses a surcharge for the use of a credit card by a consumer must charge the same for the use of a debit card and vice versa. Otherwise, the Merchant may be accused of use of an “unfair act” under Pennsylvania law.
   4. Merchants should report the amount received as reimbursement for the surcharge as “business income”. When the Merchant pays that service charge to the Merchant Service Provider, it should result in a “wash” on its balance of their Profit and Loss Statement.
   5. The Merchant should post a prominent notice on the premises stating that the business assesses a surcharge fee, including the surcharge percentage, to all customers that use a credit card. If Merchant accepts multiple credit cards, the fees are different on different types of credit cards, you should state those separately. We highly recommend that this notice should also be placed on menus, if applicable, and listed as a line-item on each customer receipt, indicating the amount of the surcharge in the form of dollars and cents for clarification. 

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.