Is credit card surcharging legal in CT and some options
This topic has come up many times by our clients and after consultation with the Dept of Revenue Services Division Chief, it is determined that ‘surcharging’ is illegal by Statute. Do not rely on the credit card processor to provide this information to you, if they offer you this service as they may be unaware of CT law. Furthermore any ‘surcharge’ differential, if applied is a taxable event and must be reported on the Ct Sales tax form.
Surcharging- What is it?
Surcharging occurs when an amount or percent is applied to a transaction after it is recorded in the POS, typically when paid by a credit card. This is to offset the fee’s charged by the credit card companies and have them paid directly by the customer. While understandable due to the higher usage of credit card payments in all businesses it is not legal to do this in CT. There are certain business where this is exempt (govt agencies, gas stations, etc), but for this discussion we speak mostly about food retailers (Restaurant, donut shop, sandwich shop, etc.).
There are many specific rules pertaining to implementation of a ‘surcharge’ by the credit card industry, however these rules do not apply in the State of Connecticut, since by law ‘surcharging’ is illegal.
Furthermore all prices advertised must be highest priced charged for these items regardless of payment type and NOT the lower non surcharged price.
If a business does Surcharge and are subsequently audited, they will be subject to fines for every transaction.
Additionally, the surcharge amount is a TAXABLE event. The business must collect and pay the 7.35% on this fee. The POS may or may not calculate this surcharge as taxable since many times it is applied on the credit card device, after being recorded in the POS system.
How to offset these credit card fees?
Since the business owner wants to offset the cost of credit card processing onto their customers, it is recommended to raise their base prices(by ~4%) and then offer a DISCOUNT for CASH payments. This is a perfectly legitimate way to increase income for credit card transactions and offer a benefit to customers when paying by CASH.
In summary Surcharging in CT is illegal. The business owner must always show the highest price for each item on their menu. The Surcharged amount if implemented is taxable. The business is susceptible to fines by the State. Cash discounting is a great way to offset the credit card fee’s.
Listed below is a summary from the State concerning Surcharging.
Connecticut law prohibits a business from charging a customer a surcharge for using one payment type (usually credit card) over another payment type (usually cash). However, the law does allow a business to offer a discount if a customer chooses to use one type of payment (e.g., cash) over another type of payment (e.g., credit card). Receiving the discount is not the same as adding a surcharge. As long as the discount policy is clearly written and presented to the customer and the final receipt shows a discount, it complies with Connecticut law.
A business cannot list the discounted price for using a preferred payment type in an advertisement (e.g. menu or price sticker) and then add a fee during the sale if another payment type is used. For example, a menu cannot list the “cash price” for an item, but then charge you a fee if you pay by credit card. If the listed price does not match the price on your receipt because an additional fee has been added based on the payment type you used, you should remind the business that a surcharge cannot be charged based on your type of payment and seek a refund of the fee. It may be helpful to show this webpage to the business. Businesses can be penalized $500 per violation under Connecticut law for charging surcharges.
Any amount added by a retailer to the cost of a meal would be includable in the sales price and subjected to the 7.35% sales tax. Such additional amount when added by the retailer to the purchase of a taxable good or service other than a meal would be subjected to a 6.35%.
There are a few important exceptions to the surcharge law. Municipalities, government agencies, and courts are permitted to use surcharges. For example, you might be charged a surcharge if you pay a registration fee, or fine with your town, a state agency, or a court.