Alabama limits surcharging as Australia moves to end it

Card surcharge rules are shifting on two continents, with Alabama changing how surcharges are treated for sales tax purposes and Australia moving to eliminate card surcharging altogether.

A new Alabama law that became effective Sept. 1 requires sales tax to be calculated on the purchase amount before a credit card surcharge or convenience fee is added. Gov. Kay Ivey signed Senate Bill 221 into law in April. Payments industry leaders said the change could have significant implications for merchants and the ISOs and agents that support surcharge programs.

“What the Alabama law does is clarify that a credit card surcharge is not part of the sales tax ‘base,’” said Jonathan Razi, founder and CEO of Findustry AI and former founder and CEO of surcharge technology provider CardX. “In other words, if a merchant adds a surcharge or convenience fee to a card transaction, the sales tax is now computed on the pre-fee amount only.”

Razi added that the Alabama law “deviates from the approach of the majority of states where sales tax is collected on top of the credit card surcharge.”

James Shepherd, president of Full Stack Payments and host of the Merchant Sales Podcast, suggested Alabama merchants that surcharge and the ISOs and agents that support them may not welcome the change.

“In my opinion this is a big body blow for surcharging,” he said.

No surcharge ‘down under’

Meanwhile, card surcharges will be off the table “Down Under” beginning Oct. 1. The Payment Systems Board of the Reserve Bank of Australia, the country’s central bank, announced the elimination of surcharges as part its merchant card payment costs review released earlier this year.

The RBA estimates that Australian consumers pay between AUD $1.6 billion and $1.8 billion in surcharges each year. The board had toyed with the idea of just banning surcharges on debit cards but opted instead to allow payment networks across the board to write surcharge prohibitions into their rules.

“The PSB has decided that it would be in the public interest to remove surcharging by lifting the prohibition on ‘no-surcharge’ rules” by Visa, Mastercard and EFT/POS networks, the board explained in a report detailing changes in its regulations.

“One of the RBA’s key objectives when allowing surcharging was to provide price signals to consumers regarding the costs of payments and so incentivize them to choose lower cost payment methods,” the PSB wrote, adding that the prohibition, introduced more than 20 years ago, is no longer achieving its intended purpose.

The PSB also noted that most consumers would prefer payment costs to be included in the advertised prices of goods and services and encouraged merchants to “review their payments plans and shop around for better deals so they can offer their customers the most competitive prices.”

Australia slashes interchange, too

The PSB proposed that it would be in “the public interest” to lower the mandated cap on interchange for domestically-issued consumer credit cards, while introducing a cap on interchange fees paid for foreign-issued card transactions acquired in Australia.

Allowable interchange on consumer cards will drop from 80 basis points to 30 basis points. Fees on cards issued by foreign banks will be capped at 1 percent. The regulator also has lowered the existing cap on debit card interchange from 10 cents to 8 cents.

“The PSB’s view is that surcharging and merchant card payment costs are interconnected issues,” the board wrote. “Removing the ability of merchants to surcharge without introducing corresponding regulatory actions to lower their card payment costs would simply redistribute costs in the payments system onto merchants while allowing inefficiencies in card payment costs to remain.”

The board said it expects small merchants to benefit most from lower interchange on consumer cards.

Rule changes being ushered in Down Under also include increased transparency around card processing costs, through for example, reducing the complexity of published fees. This, the board said, would make it easier for merchants to “shop around for better payment deals.”

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