Can my business add a surcharge for card-paying customers?

Dear Your Business Credit, I am a merchant in California who has to pay merchant fees for the use of debit and credit cards in my restaurant. I have to somehow pass on these costs. I have a small statement posted. The statement reads: "CASH ONLY. All other forms of payment subject to a $0.35 fee." I am wondering if it is legal, so that I can collect more from debit and credit card payment customers.

Also, just wondering if you know of a very low interest rate merchant provider so that I can reduce my fees to credit and debit consumers. Thank you in advance for your time. -- Mary

Dear Mary, Many small business owners are in the same situation as you: If they don't pass along the cost of accepting debit and credit cards, it's hard, if not impossible, to turn a profit.

Merchants in any state who wonder if they can add surcharges to credit and debit card purchases should first review the contracts they've signed with the card networks, such as Visa and MasterCard. That's about as much fun as reading the phone book, but you really need to know what these documents say.

"Most of what retailers can and cannot do involving credit and debit cards is governed by their contracts with the card companies, not by state or federal law," wrote J. Craig Shearman, vice president of government affairs and public relations for the National Retail Federation in Washington, D.C., in an email. "So the question is not 'Is it legal?' but rather, 'Do the card companies allow it?'"

Under a court settlement that went into effect in January but remains under dispute by merchants, retailers in many states can add checkout fees to credit (but not debit) card payments made by Visa and MasterCard. Currently, merchants can pass along fees equal to what they pay to accept the card, up to 4 percent.

However, when merchants add a surcharge to Visa and MasterCard transactions, they must also add it to purchases on American Express cards. That leads to a dilemma: Doing this would put merchants in violation of American Express rules, which block such surcharges. (If you'd like more information on the subject, I discussed this in an earlier column, "Can a doctor's office charge a credit card surcharge?").

Now let's look at the situation in California. Your state is one of 10 that bans surcharges. The other no-surcharge states are Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

That doesn't mean you can't somehow recoup the costs of accepting credit cards. Robert Brennan, an attorney in La Crescenta, Calif., says that it is very common in California to charge customers who use cash less than those using credit or debit cards -- and it is legal. "You see this a lot at gas stations around California, where the cash prices are lower than the credit prices," he says.

However, be careful about how you structure the deal. The Office of the Attorney General in California says that while you are OK passing along a discount to customers who pay cash under a law known as California Civil Code section 1748.1, merchants can't impose a surcharge on those who use credit cards. Based on that information, it does not appear to be legal to say you are adding a surcharge to credit card purchases. You might consider changing your signs to say you are offering a 35-cent discount to those who pay with cash. If you are located in a shopping center where there is an ATM nearby, consider posting a sign telling readers where the cash machine is located. That may encourage some to make a withdrawal and pay you in cash.

The California law doesn't mention debit cards specifically, according to the Attorney General's office. However, the AG does point out that your state's laws ban merchants from using unfair or deceptive practices. "If the cash discount option is not fully disclosed prior to your committing yourself to the goods or services, or if it does not clearly explain the merchant's policies regarding debit cards, the merchant may be violating California law," the AG's website says. I would make sure your sign is prominently displayed. You may want to post it in more than one location.

For ideas on how to find a cheaper merchant account provider, take a look at our story "Is it time to negotiate a new merchant account?" As you may know, swipe fees aren't the only type of fees merchant account providers may charge, and you'll need to look at all of those fees to figure out which service is cheapest for you.

This is a case where the lowest price doesn't always mean you've gotten the best deal. If you ever have a problem with your merchant account, you will want to know that you can get a quick response, and not just a bargain basement price. Then again, it can't hurt to ask other merchants you know which provider they use and how happy they have been with their rates. Sometimes, shopping around can pay off.