One of the questions that remains uncertain among looming federal and state “junk fee” and “drip pricing” bans in 2024 concerns the impact these rules will have on credit card surcharges. Surcharges are added to sale transactions by some retailers when the buyer uses a credit card to make a purchase. Is this a mandatory fee that must be incorporated in the total price under the new laws? Or does the consumer’s choice to use a credit card to pay make the convenience of paying by credit card an optional service or feature that need not be included in the advertised price?

We may need to wait for further clarification from regulators or a lawsuit to know how junk fee bans impact surcharging, but understanding the possible arguments and pitfalls may help you decide how you will address this question in the short-term. 

Credit Card Surcharging

A surcharge is generally defined to mean any increase in the price or cost of goods or services that is imposed on a customer paying by credit card that is not imposed on a customer paying by cash, check, debit card or other means. Where permitted, some retailers use surcharges to help defray the transaction processing costs for accepting payment by credit card. Visa and Mastercard have strict rules for surcharging. For example, the card networks require surcharges to be disclosed at the point of entry, along with the exact amount or percentage of surcharge. Currently, the maximum allowable surcharge under the Visa rules is three percent, whereas Mastercard’s limit is four percent.

Federal law does not prohibit surcharging, and only a handful of states have enforceable laws that prohibit surcharging in their states. However, surcharging is tricky in some states unless done in accordance with the state or the prevailing court’s interpretation of what is permissible.

A recent trend in state law is to impose more restrictions on surcharging in consumer transactions. For example, in February 2024, New York enacted a new law requiring that, if a surcharge is imposed, the seller must, “clearly and conspicuously post the total price for using a credit card inclusive of [the] surcharge[.]” A reference guide published by the New York Department of State shows examples of what is legal and not legal, including dual pricing (legal) and bare notice of the surcharge (not legal).

Junk Fees and Drip Pricing

More broadly, the California “Honest Pricing Law” or “Hidden Fees Statute” (SB 478) takes effect on July 1, 2024, and prohibits businesses from, “[a]dvertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges,” except for government imposed taxes or fees or, “postage or carriage charges that will be reasonably and actually incurred to ship the physical good to the consumer” (emphasis added).

FAQs recently released by the California Office of the Attorney General, discussed in a previous post, make it clear that the law is not intended to limit how much a business can charge for a good or service, or the types of fees a business may want to charge, but the price listed to the consumer must be the full price that the consumer is required to pay. Businesses cannot wait to reveal additional required charges later as the consumer goes through the buying process (a practice known as drip pricing). The FAQ also makes clear that the law is broad and sweeping in its application, applying to the sale or lease of most goods and services that are for a consumer’s personal use, such as restaurants, hotels, event tickets and food delivery, just to name a few.

At the federal level, the Federal Trade Commission’s forthcoming “Junk Fee Rule” also aims to require that mandatory charges and fees be included in the advertised price of goods or services (referred to as a “Total Price” disclosure) and would prohibit businesses from misrepresenting the nature and purpose of any charges or fees. Similar to California law, shipping charges and government charges may be excluded from Total Price. The FTC has collected comments on the proposed rule and held a hearing on the rulemaking last month, but the rule has not yet been finalized.

Must Surcharges Be Included in Total Price Disclosures?

The California law and the proposed FTC Junk Fee ban beg the question: Is a surcharge a mandatory fee or charge that must be disclosed in the Total Price under broad consumer protection laws banning junk fees and drip pricing? On the one hand, surcharge fees are arguably not mandatory, as they would only be assessed in circumstances where the customer pays with a credit card, and customers have the option of paying by cash, debit card, ACH or other means to avoid the surcharge. However, for many customers, paying by credit card may be their only option to complete a purchase. Does that effectively make the surcharge a mandatory charge?

If the view is that a surcharge must be disclosed in Total Price — which is the view that New York’s surcharge law takes — then how a retailer should incorporate the surcharge into Total Price is also a challenging compliance question. One solution may be to increase the sticker price of all goods or services sold by the amount of the surcharge and then offer a discount to those paying by cash or other means. In effect, this turns the surcharge into a cash-discount applying to all non-credit payment methods. The New York Department of State gives this practice the green light.

The problem with the New York cash discounting solution is that the allowable surcharge percentage may vary across the payment card networks and even across the states. Perhaps equally unhelpful, the California FAQ states that if businesses do not know how much it will charge a customer at the beginning of a transaction, they, “should wait to display a price until they know how much they will charge.” But is that really feasible in practice?

Potential Legal Challenges to Total Price Laws?

Many businesses are struggling to comply with Total Price laws while retaining their ability to advertise price and maintain flexibility on charging additional fees that may vary based on details about the sale learned later in the transaction — such as the customer’s location, the weight of an order or the level of customer support needed to fulfill an order. For surcharging, where the surcharge fee is generally charged to recoup with payment processing costs, interchange and other costs to process the transaction may not be known until the consumer swipes (or inputs) a card, and cards associated loyalty programs, for example, incur higher interchange.

In the past few years, surcharge prohibitions in California, Florida, Kansas, New York and Texas were challenged on the basis that the prohibitions unconstitutionally restrict merchants’ freedom to choose how to communicate their prices. For example, in Italian Colors Rest. v. Becerra, 878 F.3d 1165 (9th Cir. 2018), the Ninth Circuit held that California’s surcharge law violated the merchant plaintiffs’ First Amendment rights by prohibiting single-sticker pricing, which is the practice of listing the price of a good or service and an additional charge for using a credit card (as either an amount or percentage), for example, listing a price as $10, with a three percent credit card surcharge or $10 plus $0.30 for credit. The court found that the law restricted non-misleading commercial speech in a manner that did not directly advance the state’s interest. Could there be a similar argument here with California’s Honest Pricing Law or the FTC’s proposed Total Price rules? In other words, if informing a consumer that a surcharge, service fee, handling fee, processing fee or any other additional fee amounting to three percent of the purchase price will be added to their purchase is not misleading, then how can the government mandate that this three percent be included in the upfront advertised Total Price — especially given the challenges many retailers face in knowing how much they will add on to the charge? We will be watching to see if any challenges develop and are prepared to engage in these complex issues.