Who devised the MCC system, and how is the decision made where to place merchants? I mean, some decisions seem obvious, like a florist would only be classified as a florist. But wouldn't some businesses fall into more than one category? For example, an auto body repair shop that also does auto painting could belong in both categories.
Gerald Harris, Merchant Level Salesperson
Thanks for this excellent question. The Internal Revenue Service implemented merchant category codes (MCCs) in 2004. The purpose was to help commercial enterprises distinguish between businesses selling goods and those selling services, because payments made for services must be reported on tax forms, but not payments for goods. Use of MCCs has since expanded to a number of applications outside of the IRS, including in the payments industry.
The four-digit codes are listed, along with background information, at www.irs.gov/irb/2004-31_IRB/ar17.html. MCCs should be assigned based on a company's primary business. Thus, if a business mainly does auto body repair, it would be classified as such, even if it does some auto painting. Ask your ISO if you are uncertain how to classify a particular business.
MCCs are extremely important in the payments industry because they affect the amount of interchange a business pays. Interchange fees vary based on such factors as whether the transaction is keyed, swiped or online; the type of payment card used; and the type of business receiving the payment. Businesses in categories identified as more risky in terms of chargebacks, business failures or other factors will pay more in interchange than those considered to be less risky. It's important to check that the MCCs assigned to your merchants are accurate, so you can confirm they are paying the appropriate interchange rate.
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