California Credit Card Surcharge Ban and the First Amendment

For decades, businesses in California faced a unique constraint: a statutory ban on imposing credit card surcharges on consumers who chose to pay with plastic rather than cash, check, or similar means. Over time, this rule did not merely raise practical questions about how merchants could recoup processing costs; it also sparked constitutional debate over whether the state was regulating economic conduct or the way prices are communicated to customers.

This article explains the legal background of California’s surcharge ban, the First Amendment challenge that ultimately undermined it, and how more recent transparency-focused laws have reshaped the way businesses disclose card-related fees. Although the core statutory ban remains in the Civil Code, federal court decisions and new pricing rules mean merchants must now focus less on bans and more on clear, upfront price disclosure.

Understanding Credit Card Surcharges

A credit card surcharge is an additional fee that a merchant adds to a customer’s bill when the customer pays using a credit card, typically to offset the cost of interchange and processing fees charged by card networks and payment processors. Instead of building these costs into overall prices, surcharging passes some of the expense directly to card-using customers.

At the federal level, surcharging is permitted under the antitrust settlement between merchants and card networks, but it is subject to limits and disclosure obligations set by card brands and state law. Importantly, federal law and card network rules draw a sharp line between credit card and debit or prepaid card transactions. Merchants may not apply surcharges to debit or prepaid cards, even when those cards are run in a way that appears similar to credit.

• Permitted targets: Only true credit card transactions can bear surcharges, subject to state law.
• Prohibited targets: Surcharges cannot be applied to debit or prepaid cards, regardless of how they are processed.
• Typical caps: Where surcharges are allowed, many states and card brand rules limit them to a percentage that reflects actual processing cost, often around 2–3%.

California’s Surcharge Ban: Civil Code Section 1748.1

California introduced a formal ban on credit card surcharges in 1985 by enacting Civil Code section 1748.1. The statute declared that retailers could not impose a surcharge on cardholders who chose to use a credit card instead of cash, check, or similar payment methods.

However, the law allowed a different form of price differentiation: merchants could offer a discount for cash, check, or debit card payments, so long as that discount was available to all customers on equal terms. This distinction created a linguistic and economic puzzle—businesses were barred from saying “extra fee for credit cards,” yet were allowed to say “discount for cash.”

Key Features of Civil Code Section 1748.1

This statutory structure became a test case for whether the government can control not just the economics of what merchants charge, but also the language they use to describe their pricing choices.

Free Speech Concerns: Surcharges as Commercial Speech

The constitutional debate around surcharge bans sharpened after a series of challenges in multiple states, including California and New York. Merchants argued that bans on surcharges did not change the underlying economics—they could charge the same total amount—but restricted how they communicated price differences to consumers.

In the landmark case Expressions Hair Design v. Schneiderman, the U.S. Supreme Court examined New York’s anti-surcharge law and held that the statute regulated commercial speech, not just economic conduct. The Court reasoned that the law affected how merchants could describe a single price, such as framing it as a higher price for credit or a lower price for cash.

Although that decision did not strike New York’s law down outright, it signaled that similar rules in other states were subject to First Amendment scrutiny. California’s surcharge ban, built around the distinction between surcharges and cash discounts, fit squarely within this evolving constitutional framework.

Why Surcharge Bans Raise First Amendment Issues

• Same economic outcome, different words – Merchants can charge one price for credit and another for cash. Calling the difference a “surcharge” versus a “discount” is primarily a matter of language.
• Regulation of price expression – Laws that dictate which pricing labels may be used regulate commercial speech about price rather than the underlying transaction itself.
• Heightened scrutiny – Once classified as commercial speech regulation, such laws must withstand First Amendment scrutiny by showing a substantial governmental interest and a tight fit between means and ends.

The Ninth Circuit’s Unconstitutionality Ruling

California’s ban faced a direct challenge in federal court. In the case known as Italian Colors Restaurant et al. v. Harris/Becerra, merchants argued that Civil Code section 1748.1 restricted the way they communicated prices rather than prohibiting a particular economic practice.

Federal courts agreed that the law’s enforcement raised serious constitutional problems. The Ninth Circuit ultimately held that California’s surcharge ban was unconstitutional as applied to the challenging businesses because it impermissibly regulated commercial speech. As a result, the state could not enforce the law against those particular merchant plaintiffs.

Although the statute remains printed in the Civil Code, its practical force has been significantly weakened. Official summaries by legislative and policy organizations now describe California’s surcharge ban as effectively declared unconstitutional, indicating that enforcement is constrained and subject to ongoing judicial guidance.

Implications of the Ninth Circuit Decision

• Limit on enforcement – California cannot enforce the surcharge ban against the merchants who successfully challenged it, and similar enforcement efforts face significant constitutional hurdles.
• Signaling effect – Policy summaries list California’s Civil Code section 1748.1 as unconstitutional, shaping the expectations of businesses and attorneys statewide.
• Focus on disclosure – The decision nudged lawmakers toward regulating how prices are disclosed rather than banning particular pricing practices outright.

From Bans to Transparency: California’s New Pricing Rules

As litigation narrowed the practical scope of the surcharge ban, California shifted toward a broader approach to consumer protection: pricing transparency. The state enacted a law commonly referred to as a “hidden fees” statute, designed to curb a wide range of add-on charges, including card-related surcharges.

Under this newer transparency law, any mandatory fee must be included in the upfront advertised or listed price, rather than added later at checkout. This approach does not forbid surcharges outright, but it effectively prevents merchants from surprising customers with unexpected fees attached to the use of credit cards.

Core Requirements of California’s Transparency Law

• Total price disclosure – Merchants must advertise or display the full price a consumer will pay, including any credit card-related fee, before the transaction is completed.
• No hidden add-ons – Sellers may not quote a lower base price and then tack on mandatory surcharges at the point of payment.
• Broad coverage – The law applies beyond credit card surcharges to many forms of ancillary fees, reflecting a wider push against hidden charges.

In effect, California has moved from a narrow surcharge ban to a comprehensive no-hidden-fees regime. Merchants can incorporate card processing costs into their prices, but they must be transparent and upfront about the total amount.

How California Compares to Other States

California is not alone in regulating surcharging. Several states have historically banned credit card surcharges, while many others permit them subject to limits and disclosure obligations. Over time, court decisions and legislative reforms have shifted the focus from categorical bans toward transparency and caps on surcharge levels.

This broader national context underscores that California’s experience is part of a wider trend: states are reevaluating surcharge bans through the lens of free speech and consumer protection, often landing on a compromise that allows surcharges with strict transparency requirements.

Practical Guidance for Merchants in California

In light of the Ninth Circuit’s ruling and California’s updated pricing transparency rules, merchants must pay careful attention to both how they structure card-related fees and how they communicate those fees to customers.

Best Practices for Compliance

• Incorporate card costs into base prices – Instead of adding separate surcharges at checkout, consider building expected processing costs into the advertised price so the total amount is clear from the outset.
• Use clear, customer-friendly language – When differentiating between cash and credit prices, avoid confusing or misleading terms. Make it obvious what a customer will pay with each method.
• Avoid surcharges on debit and prepaid cards – Ensure no extra fee is tied specifically to the use of debit or prepaid cards, consistent with federal and state restrictions.
• Document fee structures – Maintain written policies explaining your pricing and fee practices, and train staff to accurately describe them to customers.
• Seek legal counsel – Because enforcement and case law continue to evolve, consult an attorney before rolling out any surcharge program.

Businesses that operate across multiple states face additional complexity. Each jurisdiction may have different caps, disclosure rules, or residual statutory bans, and some states—like California and Texas—combine older statute language with modern court decisions that limit enforcement.

Frequently Asked Questions

Is California’s credit card surcharge ban still in force?

California’s Civil Code section 1748.1 formally remains on the books and states that retailers may not impose credit card surcharges. However, federal courts have held the statute unconstitutional as applied to specific merchants, and authoritative summaries now treat the ban as effectively invalidated for enforcement purposes. In practice, the focus has shifted to complying with broader pricing transparency laws rather than relying on the old surcharge ban.

Can California merchants charge different prices for cash and credit?

Yes. Merchants may structure pricing so that cash-paying customers receive a lower price than those who pay by credit, provided applicable laws are followed. The key today is not whether different prices exist, but how clearly those prices are disclosed: the total amount a customer will pay with a given payment method must be presented upfront without hidden add-on fees.

Are surcharges allowed on debit card transactions?

No. Regardless of state law, surcharges cannot be applied to debit or prepaid card transactions, even if processed in a way that resembles credit. Merchants must treat debit and prepaid cards separately from credit cards when designing fee policies.

What changed after the Supreme Court’s decision in Expressions Hair Design?

In Expressions Hair Design v. Schneiderman, the Supreme Court held that New York’s surcharge ban regulated commercial speech rather than purely economic conduct. That ruling opened the door for challenges in other states, including California, by framing surcharge laws as restrictions on how merchants describe prices to consumers. It helped set the stage for the Ninth Circuit’s finding that California’s surcharge ban was unconstitutional as applied to certain merchants.

How should merchants approach surcharging in multi-state operations?

Merchants operating in multiple jurisdictions must treat surcharging as a state-by-state compliance issue. Some states still enforce outright bans; others permit surcharges subject to caps and detailed disclosure rules. Legal counsel familiar with payment law should review any surcharge program to ensure it complies with the highest standard among the states where the business operates, and that card network rules are also met.

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Author

medha deb

 

Medha Deb is an editor with a master's degree in Applied Linguistics from the University of Hyderabad. She believes that her qualification has helped her develop a deep understanding of language and its application in various contexts.

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