What is a service charge, and when is it too high?
In many states, businesses can charge you more for paying with a credit card
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Dear Your Business Credit,
I live in Flint, Michigan. The other day I paid a 59-cent service charge on an approximately $8 purchase (two slices of pizza and a salad at Little Caesars). At the time, I calculated it to be a 7 percent service charge. Is this legal in Michigan? – Brady
If you’re on a tight budget, those extra charges can hurt.
You didn’t mention if you paid for your meal with a credit card, but I’m going to assume you did, given that you are writing to CreditCards.com.
It’s not entirely clear from the information you shared what the service charge was for. Sometimes restaurants say they have added a service charge when they impose a fee to cover tips for the servers.
Usually, this is done at restaurants where customers are likely to incur a large bill and there is a risk the diners will skimp on the tip. That type of charge seems less likely at a pizzeria than at a fancy restaurant or theme eatery that attracts big groups, so I’m also going to assume the franchisee imposed a surcharge because you paid by credit card.
In that case, it looks like the franchisee was allowed to pass along a surcharge. Under a court settlement that took effect in January 2013, merchants in most states are allowed to impose a surcharge on customers paying with a credit card. Michigan is not one of the states that has banned credit card surcharges. The states with bans are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.
Credit card companies each have their own rules about what surcharges can be imposed in the states where they are allowed. But even if you are in a state that allows surcharges, the roughly 7 percent surcharge the pizzeria imposed on your meal was too high. At present, merchants can pass along a charge equal to what they pay to accept the card, up to 4 percent. For more information, see our story “Convenience fees: When is it OK to charge extra to use a credit card?”
So what can you do?
In situations like this, where the overcharge was about 24 cents, I recommend a friendly conversation with the merchant. Bring a copy of this column or Visa’s frequently asked questions for merchants to educate the merchant. If the merchant doesn’t fix the situation within a few weeks, you can call the number on the back of your credit card to make a complaint. Or, if you love Little Caesars pizza and want to cut the merchant some slack, you can switch to paying in cash or using a debit card. (Merchants cannot add a surcharge to debit card purchases.)
I should point out that this is a tremendously confusing area for merchants. The issue of surcharges is still an active one in the courts. On March 29, 2017, a Supreme Court ruling found that New York’s anti-surcharge law affects merchants’ free speech. Small-business owners are responsible for keeping up with the latest requirements, but that’s a little like monitoring changes to the tax code. It’s not always easy to do on top of pressing tasks like making sure the pizza is hot when it is served.
It is very likely that many honest business owners will make mistakes – and your local pizza store owners will appreciate your empathy when you educate them about this.
See related: Credit card surcharges can be costly for business
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