Today's Trends in Credit Regulation

Credit Card Surcharges and Cash Discounts - What's the Difference and Why Should Anyone Care?
By Elizabeth C. Yen

12 CFR Section 1026.9(d)(1) requires "[a]ny person, other than the card issuer, who imposes a finance charge at the time of honoring a consumer's credit card, [to] disclose the amount of that finance charge prior to its imposition." This is perhaps one of the more obscure Regulation Z provisions, in part because many if not most merchants who honor consumer credit cards for purchases may have attempted to structure their credit card pricing to fit within a finance charge exception. The Official Staff Commentary to 12 CFR Section 1026.4(b)(9) indicates that a merchant may clearly and conspicuously tag or post the "regular price" for a product, and also clearly disclose a lower (discounted) price that is (for example) limited to cash or non-credit card transactions. If the purpose of the "discount" is to encourage consumers to pay by means other than credit card or open-end credit, and the availability of the discount is clearly and conspicuously disclosed to all prospective buyers, the difference between the higher "regular price" and the lower "discounted" price is not a finance charge. (See also 15 USC Section 1666f(b).) In addition, several states have statutes that prohibit surcharging consumers who choose to pay by credit card.

Interestingly, if a merchant only discloses one single retail price on the price tag for a product, but routinely negotiates the actual purchase price downwards with individual consumers and "never makes that tag price the final price," the stated tag price may not be the "regular price" for purposes of 12 CFR Section 1026.4(b)(9). See, e.g., Carlson v. Raymour & Flanigan Furniture Co., 2011 WL 1793242 (W.D.N.Y. 2011). Consequently, car dealers and retail sellers at flea markets and bazaars who negotiate purchase prices with individual consumers may have difficulty demonstrating that they are offering so-called "cash discounts."

Some states with anti-surcharge statutes have enacted specific exceptions, allowing government agencies to impose card transaction fees sufficient to cover the added cost of accepting payments made with cards. This may cause some retailers to mistakenly conclude that they may also impose card transaction fees. The governmental agencies may be acting under specific statutory authority that does not extend to private sector transactions - moreover, in many instances the governmental agencies are not "selling" a good or a service. They are instead collecting taxes, fines, license or registration fees, or other payments that may have been set by statute, regulation or ordinance, all with the general intent of trying to cover governmental costs of providing legislatively- and constitutionally-mandated public services to residents. Card transaction fees, if absorbed by governmental agencies, would indirectly require increases to the taxes and other governmental fees required to be paid by everyone (not just individuals who choose to pay by card).

Federal district courts in New York and California have recently ruled that state statutes prohibiting retail sellers from surcharging credit card customers while permitting so-called "cash discounts" violate the First Amendment and are an unconstitutional restriction on freedom of speech, because the effect of these laws is to require sellers to describe their pricing differential in only one way (a cash discount from a higher regular price), even though economically there may be no practical difference if the pricing differential were instead described as a surcharge added to a lower regular price. See, e.g., Expressions Hair Design v. Schneiderman, 975 F.Supp.2d 430 (S.D.N.Y. 2013) (appeal pending) and Italian Colors Restaurant v. Harris, 2015 WL 1405507 (E.D. Cal. 2015) (appeal pending). The district court in the Italian Colors Restaurant case acknowledged that federal district courts in Florida and Texas have upheld similar state laws against First Amendment challenges. The constitutionality of state anti-surcharge statutes may therefore eventually need to be resolved by the U.S. Supreme Court.

Puerto Rico may be a jurisdiction that prohibits both credit card surcharges and cash discounts as means of encouraging buyers to pay by cash or check instead of by credit card. See, e.g., AsociaciĆ³n de Detallistas de Gasolina de Puerto Rico v. Commonwealth of Puerto Rico, 18 F.Supp.3d 99 (D. Puerto Rico 2014). A combined surcharge and discount prohibition could sidestep the First Amendment legal theories used to challenge other states' anti-surcharge statutes.

Assuming no state law and no card association prohibition, if a merchant wants to disclose the lower discounted price as the merchant's "regular price" and prefers to disclose a credit card surcharge that the merchant adds to the "regular price" to recover credit card transaction fees, the merchant would be required to "disclose the amount of that finance charge prior to its imposition" to a consumer who wants to purchase with a credit card. Official Staff Comment 1 to 12 CFR Section 1026.9(d) includes the following examples: "For example, disclosure must be given before the consumer has dinner at a restaurant, stays overnight at a hotel, or makes a deposit guaranteeing the purchase of property or services." Notably, to fall within the cash discount finance charge exception, the merchant must disclose a higher "regular price" and a lower "cash discount" price, and does not have to disclose the amount of the discount itself (consumers may be required to do that subtraction on their own). If a merchant wants to impose a credit card surcharge, on the other hand, Regulation Z requires the merchant to disclose the amount of that surcharge to a consumer or explain how the amount of the charge will be determined (if, in the case of a restaurant or hotel charge, the exact dollar amount of the charge is unknown because it will be based on the amount of the final bill). Read literally, the regulation requires the merchant to explain to the consumer how much extra (above the regular cash price) the consumer will be required to pay in return for being allowed to charge the purchase to a credit card. Simply posting a lower "regular" or cash price and a higher credit card price may not suffice.

Since Regulation Z does not apply to business or commercial transactions, imposing a mutually agreed-upon credit card surcharge on business or commercial customers should not create finance charge-related issues, unless and to the extent applicable state law regulates business or commercial sales transactions that are payable in one single lump sum (not in installments) at the time of sale that include a charge to cover the merchant's credit card transaction costs. (Any such state law likely would also apply to consumer retail sales.)

Some merchants may be confused by gasoline station signage showing a "Credit Price" (this is effectively shorthand for "Regular/Credit Card Price" - see Official Staff Comment 3.ii. to 12 CFR Section 1026.4(b)(9)) and a "Cash Price" (effectively shorthand for "Discounted Price for Consumers Paying With Cash" - see Official Staff Comment 2.i. to 12 CFR Section 1026.4(b)(9)). Some merchants who offer their own retail installment sales financing may incorrectly deduce that they can impose a higher "Credit Price" on their retail installment sales customers, and may disqualify such customers from so-called "cash discounts" (or a so-called "cash price") that would otherwise be available if the customers paid in a lump sum instead of in installments. The special rules concerning the posting of "credit card" and "cash discount" prices only apply to merchants trying to discourage consumers from paying with a credit card or open-end credit. Regulation Z makes it clear that increasing the purchase price for a customer who enters into a retail installment contract (or disqualifying that customer from a lower "cash price" that would have otherwise applied) constitutes the charging of an upfront (prepaid) finance charge to customers who elect to pay the merchant in installments. Official Staff Comment 1 to 12 CFR Section 1026.4(b)(9) includes the following example of a prepaid finance charge: "If the purchaser pays cash, the price is $9,000, but if the purchaser finances ... with the seller the price is $10,000. The $1,000 difference is a finance charge for those who buy ... on credit."

In this prepaid finance charge scenario, the merchant is arguably trying to discourage consumers from entering into retail installment contracts (by charging them a higher purchase price) - the purpose of the so-called "cash discount" in this prepaid finance charge scenario is not to dissuade consumers from charging their purchases to credit cards. The discount forfeited by a consumer as a condition of being allowed to enter into a retail installment contract also raises potential state law issues concerning whether the maximum permitted annual percentage rate for a retail installment transaction has been exceeded and/or whether a portion of the forfeited discount should be rebated if the retail installment contract is prepaid in full.

Retail sellers should therefore pay careful attention to the federal and state law distinctions made between credit card surcharges, cash discounts, and mark-ups or lost discounts associated with retail installment credit sales.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP. Elizabeth can be reached at 203-776-1911 or by email at

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