A few years ago, merchants knew not to charge a “surcharge” or extra fee for a customer who paid by credit card instead of fees because most major credit card agreements did not allow it. As a result of antitrust litigation, many credit card agreements no longer prohibit charging additional fees for credit card use. However New York law prohibits this practice. General Business Law § 518 provides that “[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means.” This law is currently being challenged in court so merchants should take caution in determining whether to charge different prices for customers paying with cash versus credit cards.

Current New York law

Section 518 only applies to a “surcharge,” which is defined as “an additional amount above the seller’s regular price.” The Second Circuit Court of Appeals (a federal appellate court) held that where the merchant posts a single sticker price and charges a credit card user more than that sticker price, this additional charge constitutes a “surcharge.” However, the law does not mandate that cash and credit card prices be the same. Therefore, merchants could conceivably charge 2 different prices or give a cash discount even though the economic result would be the same as if the merchant charged a surcharge.

Here’s an example of how the law operates:

• Store A sets a sticker price of $2 for an item, but charges an additional 5% if you pay by credit.
• Store B charges 2 sticker prices for each item – $2 for purchasing the item with cash; $2.10 if purchasing with credit.
• Store C sets a sticker price of $2.10, but offers a 5% discount on cash purchases.

Store A is in violation of New York law. However, Stores B and C do not charge a “surcharge,” as defined by the Second Circuit Court of Appeals, and based on the opinions of both the Court of Appeals and the Supreme Court of the United States of America, are likely not prohibited by Section 518.

Court Challenge

In Expressions Hair Design v. Schneiderman, 137 S.Ct. 1144 (2017), merchants challenged Section 518 as unconstitutional on the grounds that it regulates free speech in violation of the First Amendment by restricting how you can advertise price differences (a “surcharge” is prohibited, but a “discount” is fine). They argued that Section 518 regulates speech. The Court of Appeals rejected the argument that Section 518 regulates speech. However, the U.S. Supreme Court reversed, holding that Section 518 does regulate speech, and remanded the case to the Second Circuit Court of Appeals to determine whether it withstands First Amendment scrutiny.

No decision has yet been rendered, but the U.S. District Court (lower federal court) ruled that Section 518 was unconstitutional. The District Court held that the statute “draw[s a] line between prohibited ‘surcharges’ and permissible ‘discounts’ based on words and labels, rather than economic realities.”

It is not likely that Section 518 will survive a First Amendment analysis because it does not actually protect consumers by, for example, protecting consumers from deception and misleading speech. If anything, the actions of Store B and C in the example above are more misleading than just clearly charging a 5% surcharge for credit card use.

Recommendations for merchants

While awaiting a final decision by the Second Circuit Court of Appeals, merchants should take the following actions:

• Review your credit card agreements with an attorney. Although many credit card agreements no longer prohibit charging additional fees for credit card use, some still do. Accordingly, charging difference prices for cash and credit card may violate your credit card agreement (even if it does not violate New York law).
• Do not charge a surcharge for credit card purchases. Section 518 is still in effect and may or may not be held unconstitutional as regulating free speech.
• Consult with an attorney on the risks and benefits of charging different prices for cash and credit card payment (that are not surcharges).
• Explore other ways to recoup credit card fees. There may be other types of pricing mechanisms that have no direct nexus to credit versus cash payments that are both legal and will generate some revenue to recoup credit card fees.

Discuss your options with a qualified attorney to make sure you are in compliance with New York law.

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