Anyone who has registered their car online is likely familiar with credit card surcharges. If an owner pays with a credit card, the Colorado DMV collects an extra fee to cover merchant processing costs. Starting on July 2, 2022, all businesses in the state—not just government agencies—are allowed to charge their customers surcharges to offset the costs of credit card transactions.
Whenever a customer pays with a credit card, the business often pays an average of 1.3% to 3.5% of the payment to the banks and other providers who process the transaction, along with an additional sum of ten to twenty cents per sale. Thus, a merchant who sells a widget for $100 might only receive $98 of the customer’s payment. This creates an incentive for businesses to encourage their customers to pay by cash or check, or to find ways to pass the credit card costs along on to the customer. Since 2000, however, Colorado has prohibited private businesses from imposing surcharges on credit card transactions; in the preceding example, this meant that the business could not add a $2 fee to the $100 sales price to offset its processing costs.
The old law only had two exceptions. First, it included an exemption for state or local governmental entities, such as the DMV or county clerk, so long as the surcharge did not exceed the actual processing charge. Second, it allowed businesses to offer cash discounts, notwithstanding the prohibition on surcharges. Thus, in the example of the $100 widget, the business could not charge credit card customers an extra $2, but the business could advertise a price of $102 with $2 off for cash buyers. Even though the end result was the same, this was permissible under the often puzzling logic that pervades politics and government.
In addition, although it was not technically an exception, some merchants sought to avoid the old prohibition by charging a “convenience fee” or equivalent on all online sales, even for customers who paid by electronic check, debit card, or other means that did not involve credit card processing charges. While such convenience fees may have violated the spirit of the law insofar as they targeted credit card costs, it is unclear if they were technically illegal.
Going forward, such maneuvers are no longer necessary. Senate Bill 21-091, which quietly passed last summer but did not take effect for twelve months, has now lifted the prohibition on credit card surcharges for all businesses. Under the amended version of C.R.S. § 5-2-212, Businesses may now charge credit card customers a surcharge up to either (i) 2% of the transaction price, or (ii) the actual costs the business pays for processing. The surcharge must be disclosed and billed separately. With the amendment, Colorado joins all but a small handful of states in allowing such surcharges.
To take advantage of the new law in Colorado, a business must include specific text on its website or in its storefront. Those charging 2% should post the following:
- To cover the cost of processing a credit or charge card transaction, and pursuant to section 5-2-212, Colorado Revised Statutes, a seller or lessor may impose a processing surcharge in an amount not to exceed 2% of the total payment made for goods or services purchased or leased by use of a credit or charge card. A seller or lessor shall not impose a processing surcharge on payments made by use of cash, a check, or a debit card or redemption of a gift card.
Those charging actual costs should use this language instead:
- To cover the cost of processing a credit or charge card transaction, and pursuant to section 5-2-212, Colorado Revised Statutes, a seller or lessor may impose a processing surcharge in an amount not to exceed the merchant discount fee that the seller or lessor incurs in processing the sales or lease transaction. A seller or lessor shall not impose a processing surcharge on payments made by use of cash, a check, or a debit card or redemption of a gift card.
Businesses seeking to impose a surcharge should also review their own processing and merchant agreements before making any changes. Visa, for example, permits its merchants to impose surcharges on Visa transactions, but Visa requires that the merchant provide it with thirty-days advance notice. Visa also requires that its merchants limit any surcharge to the amount actually paid for processing, and that merchants disclose the charge to customers—requirements that mostly track the new Colorado statute. More details are available on Visa’s website.
How customers may react to surcharges for credit cards remains to be seen. Our society is moving to a cashless economy, and most credit card companies offer to rebate at least 1% of transaction amounts back to their customers in the form of airline miles, cashback, or other rewards. Many customers have thus become accustomed to using credit cards for all transactions, and the notion of paying a separate surcharge may feel anachronistic. Some business may therefore prefer to treat credit card processing as part of their overhead and set their prices high enough to absorb those costs, rather than risk customers complaining of nickel-and-dime charges. Other businesses with tighter margins may prefer to advertise a lower price and give customers the option to save with cash or pay the surcharge to use a card. Likewise, if a customer is getting a 3% rebate from his or her card, then paying the merchant 2% may not seem so bad.
The new statute leaves intact the option for a cash discount. Although the math is often more cumbersome to provide a discount versus a surcharge, this may still be a desirable choice for some businesses, especially those that sell bulk products at an advertised unit price, such as gas stations.
Whether the aforementioned convenience fee loophole permits a business to surcharge customers more than its actual processing costs remains unclear. As with the prior version of the statute, a business could argue that a convenience fee for all online transactions is not a credit card surcharge per se, but a court might take a dim view of that theory in light of the recent statutory changes, which expressly prohibit surcharges in excess of 2% or what a merchant actually pays for processing. Notably, the new statutory text includes a separate provision stating that the credit card surcharge may not be imposed on customers paying by cash, check, debit card, or gift card, which makes this much less of a gray area that it was before 2022. Trying to overcharge customers with hidden fees is never a good look, so businesses should tread carefully (and speak with legal counsel) before imposing any charges that might be deemed illegal.
In conclusion, Colorado has aligned itself with the majority of states that permit businesses to impose surcharges on customers who use credit cards. Whether this new option makes sense will depend on the specific nature of a given business and its relationship with its customers, but the law no longer prohibits a business from making the decision that best fits its industry. As for those pesky DMV fees? Don’t expect them to go away any time soon.
For questions about this article, please contact Jesse Howard Witt.