Billing and Payments
Credit Card Surcharge Processing: What CPAs and Accountants Need to Know
CPAs and accountants are all too familiar with the fact that it costs money to move money within our financial systems. Credit cards are no exception to this rule—if you accept credit card payments from your clients, you’ll inevitably have to pay processing fees with each transaction. Of course, as a business owner, you’re also looking for ways to off-set your costs and operate more efficiently.
Many businesses that accept credit cards use surcharges to account for this, but you may be wondering how beneficial this practice is (or if it's even legal for you to do so in your neck of the woods).
Below, we’ll break down exactly what surcharging means, its legal status in the U.S. by each state, and how the practice might affect your clients.
In this article:
- What is a surcharge?
- Legal status of surcharging in U.S. (listed by state)
- Credit card surcharging rules
- Potential downsides of passing surcharging fees to clients
What is a surcharge?
In the context of credit cards, surcharging is defined as adding up to 4 percent on credit card transactions to recoup payment processing costs. The practice became permissible to merchants in 2013 in the wake of a class action lawsuit against Visa and MasterCard.
It’s important to note that a surcharge is distinct from a convenience fee, which is a relatively older but similar term in the credit card lexicon. A convenience fee is a flat rate that can be added to both debit and credit card transactions. It’s a cost passed to the customer to give them the option of paying in a way that’s convenient to them, hence the name.
The legal status of surcharging in the U.S. (by state)
Surcharging has been outlawed as an anti-consumer practice in certain states. However, these laws were challenged in such states as New York and California, and other states may follow suit as time goes on.
Below is a list of each state’s surcharging laws (last updated March 2020). If you have any questions about your state’s surcharging laws, please contact your state attorney general.
Alabama
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Alabama Attorney General
Alaska
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: State of Alaska Department of Law
Arizona
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Arizona Attorney General
Arkansas
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Arkansas Attorney General
California
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Cal. Civil Code §1748.1; Cal. Civil Code §1748
Colorado
- Surcharge Prohibited: Yes
- Credit/Debit Usage Discounts: Yes
- Resources: Colo. Rev. Stat. §5-2-212
Connecticut
- Surcharge Prohibited: Yes
- Credit/Debit Usage Discounts: Yes
- Resources: Conn. Gen. Stat. §42-133ff
Delaware
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Delaware Attorney General
Florida
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Fla. Stat. §501.0117
Georgia
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Ga. Code §13-1-15 (2015)
Hawaii
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Hawaii Attorney General
Idaho
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Idaho Attorney General
Illinois
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Illinois Attorney General
Indiana
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Indiana Attorney General
Iowa
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Iowa Attorney General
Kansas
- Surcharge Prohibited: Yes
- Credit/Debit Usage Discounts: No
- Resources: Kan. Stat. Ann. §16a-2-403
Kentucky
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Kentucky Attorney General
Louisiana
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Louisiana Attorney General
Maine
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Me. Rev. Stat. Ann. tit. 9-A, §8-509
Maryland
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: Yes
- Resources: Md. Commercial Law Code Ann. §12-509
Massachusetts
- Surcharge Prohibited: Yes
- Credit/Debit Usage Discounts: Yes
- Resources: Mass. Gen. Laws Ann. ch. 140D, §28A
Michigan
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Michigan Attorney General
Minnesota
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Minn. Stat. §325G.051
Mississippi
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Mississippi Attorney General
Missouri
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Missouri Attorney General
Montana
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Montana Attorney General
Nebraska
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Nebraska Attorney General
Nevada
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: Yes
- Resources: Nev. Rev. Stat. §97A.210
New Hampshire
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: New Hampshire Attorney General
New Jersey
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: New Jersey Attorney General
New Mexico
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: New Mexico Attorney General
New York
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: N.Y. General Business Law §518
North Carolina
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: North Carolina Attorney General
North Dakota
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: North Dakota Attorney General
Ohio
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Ohio Attorney General
Oklahoma
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: Yes
- Resources: Okla. Stat. tit. 14A, §2-211 (1982)
Oregon
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Oregon Attorney General
Pennsylvania
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Pennsylvania Attorney General
Rhode Island
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Rhode Island Attorney General
South Carolina
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: South Carolina Attorney General
South Dakota
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: South Dakota Attorney General
Tennessee
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Tennessee Attorney General
Texas
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Tex. Business & Commerce Code Ann. §604A.001 et seq. (2015 Chapter 113)
Utah
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Utah Attorney General
Vermont
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Vermont Attorney General
Virginia
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: Virginia Attorney General
Washington
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: Yes
- Resources: Wash. Rev. Code §19.52.130
West Virginia
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: No
- Resources: West Virginia Attorney General
Wisconsin
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: Yes
- Resources: Wis. Stat. 422.422
Wyoming
- Surcharge Prohibited: No
- Credit/Debit Usage Discounts: Yes
- Resources: Wyo. Stat. §40-14-209
Credit card surcharging rules
If you choose to surcharge, you’re required to follow rules put in place by each credit card brand. We’ll discuss the most common rules below:
Notify the card brand of your intent to surcharge
Almost every major card brand requires you to notify them of your intention to surcharge. Most brands have a form you can fill out available on their website. Otherwise, you must provide a written letter to your account representative. More importantly, once notified, you must wait no less than 30 days before you start implementing surcharging.
Notify your clients of your intention to surcharge
You are also required to notify your customers or clients of your intention to surcharge (as soon as you are eligible to do so). For example, if using an online payments solution, you would have to include language on your payment page that clearly states your intentions to do so.
Do not surcharge more than the cost of your processing fee
This rule essentially means that you can only surcharge to recoup the losses sustained from processing fees—you cannot use surcharging as a means to profit. If, for example, your all-in rate is only 3 percent, you cannot apply a 4 percent surcharge.
Surcharges must be listed as separate line items
You cannot simply loop your surcharges into each transaction. Whenever a surcharge occurs, it must be listed separately on each invoice.
Potential downsides of passing processing fees directly to clients
Now that we’ve covered the basics, let’s explore some of the drawbacks if you’re thinking about surcharging. On one hand, the allure is clear: you want to recoup the costs of accepting credit card payments by transparently passing them on to your clients. After all, they’re the ones who want to pay with a credit card, right?
But the truth is, this approach can have unforeseen consequences.
Offering clients online payment processing is easy, convenient, and fast. If you add a surcharge that’s too high it can create a hurdle that makes clients stop and reevaluate how they’re paying you. They may decide to abandon the online payment process and opt to pay you by a slower method, like a paper check. Some clients could be so turned off by surcharges that they take their business elsewhere.
“It is very easy to shop around for almost anything these days, and if a merchant raises prices via an added fee, customers may be tempted to look for a better deal,” says Elaine Pofeldt of creditcards.com.
There’s also the deeper psychology of billing to consider. Even though some clients will pay the added cost, you risk building resentment within them over time if they feel like you’re nickel-and-diming them each time they see a surcharge as an additional line item on their receipt. The reality is, not many businesses pass on the cost of credit card processing to customers these days—it’s just not the norm, which makes it all the more jarring to your clients.
Another option for recouping these costs is to build them into your rates with a minor price increase across the board. A small rate increase of 1 or 2 percent isn’t likely to be felt by your clients and can help make the cost of accepting online payments more manageable for your firm. Of course, you’ll still have to ensure that your pricing is competitive compared with other CPAs in your area—if you end up charging more, you may scare off potential clients.
Because of these factors, many businesses avoid surcharging altogether, and accept payment processing as one of the costs of doing business in today’s economy. Instead of passing the costs to clients, these professionals absorb them into their businesses, taking them out of profit margins. In fact, they often find that the increase in cash flow from accepting online payments outweighs the cost of processing fees. The bottom line is, your clients will appreciate being able to pay with a more convenient payment option without being penalized for it.