CareersOn October 11, 2023, the Federal Trade Commission (the “FTC”) proposed a new rule to prohibit junk fees. “Junk fees” are understood to mean any (a) hidden fees that are otherwise mandatory but not disclosed to customers upfront before a transaction, typically used in the nature of bait-and-switch tactic or to convey an artificial lower price; and (b) bogus fees charged by merchants, the purpose of which is either misrepresented or not disclosed to customers.
The proposed rule regarding junk fees will affect all business owners that (i) typically charge customers amounts in addition to the cost for goods purchased or services provided or (ii) do not disclose fees that merchants are legally obligated to charge until the time of payment or (iii) do not disclose the true intent of charging additional costs to any transaction amount. This article briefly touches upon the practice of charging amounts in addition to the total transaction amount, the legality of such a practice, and how such practices will be affected by the FTC’s proposed bank on junk fees.
Costs incurred while buying goods or services, from a customer’s point of view, typically involve only two components, first, the amounts paid for the goods or services purchased and second, the tax paid on the total transaction amount. This changed in 2013 after it became legal nationally for merchants to charge transaction fees, subject to certain rules and disclosures, and further subject to any state law to the contrary. The term “transaction fee” refers to an additional fee charged by a merchant to its customers, with the intention of offsetting the cost of interchange fees paid by the merchant to the financial institution issuing the credit card, whenever a customer pays the merchant using a credit card. Major card companies formally refer to transaction fees as a “credit card surcharge”. Consequently, many businesses such as restaurants and small shop owners started charging transaction fees ranging from 2% to 4 % of the total transaction amount to the customers that paid using a credit card. While different states have different laws concerning transaction fees, Ohio law does not prevent business owners from charging transaction fees. However, merchants must still abide by the prevailing rules adopted by the major card companies regarding such transaction fees.
While each card company has its own set of rules regarding a merchant’s ability to charge transaction fees to its customers, all card companies generally require merchants to adhere to the following: (i) notify the card company in writing about the merchants’ intention to charge transaction fees at least 30 days before the merchant commences charging transaction fees; (ii) disclose the transaction fees to the customers prior to a sale in plain language that is readily visible, for example, disclosing transaction fees at the store entrance where the accepted card brands are indicated and additionally notify about transaction fees at the point of sale, such as menus; (iii) charge transaction fees as a percentage of the total transaction amount (as opposed to a fixed dollar amount) and clearly identify the percentage charge on the customer’s receipt; (iv) charge transaction fee to the customers in a percentage not higher than the percentage imposed on the merchant by the financial institutions for processing the credit card payments, i.e., the transaction fees charged by a merchant for accepting credit card payment cannot exceed 2.5% if the financial institution charges 2.5% to the merchant for processing such credit card payments; (v) treat all card companies equally while charging transaction fees to the customers, for example, if Visa credit cards are charged 3% of the total amount as transaction fees, then the transaction fees for paying with a MasterCard credit card should also be no more than 3% of the total amount; (vi) if the transaction amounts are refunded for any reason, the transaction fees charges must be included in such refund; and (vii) transaction fees cannot be charged on payments made using debit cards or prepaid cards, even if the payment is processed as a credit card swipe or using a credit card payment terminal.
While subject to state law and rules established by the card companies, charging transaction fees by businesses is legal. In recent times, many businesses have commenced charging service fees instead of or in addition to any transaction fees. The term “service fees” refers to any generic fee charged by a business owner in addition to the total transaction amount. Examples of such service fees include: restaurants adding an extra fee to offset inflation, fees charged by a host to clean a vacation rental accommodation, fees charged by a ticketing vendor when tickets to any live event are purchased online, fees charged by a third party travel ticket vendor as a commission, etc. No federal law or Ohio law currently regulates or prohibits merchants from charging service fees.
While not prohibited under the federal law and Ohio law, merchants should be cautious while charging generic service fees, especially if the service fee charge cannot be attributed to a specific purpose or listed as a line item in the merchant’s accounts. In addition to any business considerations arising out of charging such service fees, merchants must also consider whether such service fees would be subject to any scrutiny by the FTC under its proposed rule to ban all junk fees. The FTC is particularly concerned about fees charged by merchants that misrepresent the purpose behind charging said fees or are disclosed much later in the process of a purchase when it is too late for a customer to back out of the transaction. The FTC will focus on such practices by the merchants to safeguard consumer interests in its review of the proposed rule for a ban on junk fees. The proposed rule will not be finalized by the FTC until sometime next year and the merchants should review their practices for compliance with the proposed rule when such rule is finalized.
In conclusion, it is legal for merchants to charge transaction fees to customers paying with credit cards, so long as the merchant complies with the disclosure requirements and other rules established by the card brands. Merchants may charge service fees to customers at merchant’s discretion so long as such service fee can be attributed to a specific reason and are disclosed upfront to the customers. The FTC’s proposed rule to prohibit junk fees will likely regulate the instances and manner in which merchants may charge service fees, and such charges would be further subject to the FTC’s review and action that would be specified when the rule is formally adopted.
Alicia E. Zambelli is a partner at Walter Haverfield and has extensive experience working with businesses in the hospitality industry. She can be reached at azambelli@walterhav.com or at 614-246-2280.
Aditya A. Ghatpande is an associate at Walter Haverfield who focuses his practice on on a range of real estate and corporate matters. He can be reached at aghatpande@walterhav.com or at 216-916-2512.