Do you know the New York State law regarding credit card surcharges? If not, you’re not alone. Until October 2013, New York State law prohibited merchants from imposing surcharges on credit card transactions. N.Y. Gen. Bus. Law § 518 (McKinney) and N.Y. Gen. Bus. Law § 511(1) states, “No seller . . may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means…”
In October, a federal district court judge issued a preliminary injunction that effectively blocks enforcement of that law while a case about the surcharges is litigated. The case appears to be a matter of semantics—“surcharges” are prohibited by New York State law, but merchants can give “discounts” for cash transactions. Yet the law does not define “surcharge” or “discount” anywhere.
U.S. District Court Judge Jed S. Rakoff wrote, “Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 but charges $102 when a purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that it is adding a 2% surcharge because the credit card companies charge the vendor a 2% ‘swipe fee.’ But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with Section 518 is achieved.”
Each time a customer pays with a credit card, merchants incur “swipe fees.” The case stems from five plaintiffs that wanted to pass the swipe fee along to only customers that pay with a credit card. The judge determined that the law is unconstitutionally vague and violates First Amendment right to freedom of speech by restricting what merchants can communicate about pricing. More specifically, the law prohibits specific words– “surcharge” rather than “discount.” The case is Expressions Hair Design v. Schneiderman, 1:13-cv-03775, U.S. District Court, Southern District of New York (Manhattan).
What does this mean for merchants? In theory, they can charge a surcharge for using a credit card. However, because the judge only issued a preliminary injunction, merchants should wait to charge surcharges until there is a final determination. Even if Section 518 is determined to be unconstitutional, merchants should post signage telling customers if they are charging different prices between cash and credit card purchases.