State Surcharging Rules Fragment, ISVs Handle Compliance Maze

Compliance with surcharging, previously governed solely by the card networks, now resembles a mosaic of state rules that pressurizes software firms and their payment collaborators. The matter is largely unrelated to the networks, which in 2013 revised their policies to permit merchants to add surcharges on credit-card sales, according to Tyler Kattre, president of Wind River Payments, a Madison, Wis.-based payments company.

State Regulations Fragment Compliance

The complexity stems from varying state rules that create a compliance matrix difficult to handle. Tyler Kattre, president of Wind River Payments, notes that between 30% and 40% of its clients surcharge on credit card transactions, with simpler programs for businesses ranging from a bait shop to an e-commerce site operating across state lines. He likens the regulatory maze to obtaining money-transmitter licenses, with each state having its own compliance stipulations.

Kattre explains that independent software vendors (ISVs) often find themselves caught between software development and the merchant, who bears ultimate compliance responsibility. Tracking regulatory changes has become a growing compliance function, though it’s a non-product task that’s easily deprioritized. Software developers’ limited resources can shift the burden to companies like Wind River, which employs staff to monitor changes, though the challenge remains significant. Their role as intermediaries means they must relay updates to merchants without bearing legal liability, creating operational strain.

ISVs Straddle Development and Merchant Responsibility

According to Peter Michaud, chief payments officer at TSG, merchants must stay updated on both state laws and card network rules, which are revised every six months with advance notice. This dual responsibility creates friction for ISVs, who act as intermediaries. “Compliance is ultimately the merchant’s responsibility, but there are two separate areas to consider: applicable laws and card network rules,” Michaud says.

Enforcement Ambiguity Lingers

The absence of a unified directory of state surcharging regulations adds to the uncertainty. While most states abide by the card-brand rules alone, enforcement actions remain sporadic, leaving unclear who would face penalties for violations—merchants, processors, or payment facilitators. Surcharging is prohibited in Connecticut, Maine, Massachusetts, and Puerto Rico, according to a Stripe post.

Michaud compares the situation to driving: exceeding the speed limit is illegal, but penalties depend on being pulled over and judicial discretion. Until enforcement patterns emerge, the industry lacks visibility into potential risks. Kattre advises merchants to proactively inquire about compliance to avoid fines, warning, “the fines are going to hit you.”