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Kansas Merchants May Soon Impose Surcharges on Credit Card Transactions

ABSTRACT: Following a recent decision out of the United States District Court for the District of Kansas, a bill is expected to pass in Kansas that would eliminate a longstanding ban on credit card surcharges.

For the past 35 years, merchants in Kansas have been prohibited from charging a surcharge to customers on purchases made by credit card. With a recent court decision and pending legislation, that ban is almost surely to be lifted in the near future.

Passed in 1986, the Kansas “no-surcharge” statute provided that “no seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means.” K.S.A. 16-a-2-403.

In February 2021, the United States District Court for the District of Kansas granted summary judgment in favor of CardX, LLC against the State of Kansas, declaring the state’s ban on credit card surcharges to be unconstitutional. In CardX, LLC v. Schmidt, the Court held that the no-surcharge statute was a violation of the plaintiff’s First Amendment right to commercial speech. In so doing, the Court applied United States Supreme Court precedent from Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 561 (1980). In Hudson, the Supreme Court set forth a three-factor test to determine the constitutionality of a statute that restricts commercial speech: (1) Does the State have a substantial interest in restricting commercial speech? (2) Does the challenged statute advance those interests in a direct and material way, and (3) Is the restriction of reasonable proportion to the interests served? Applying the Hudson test, the Court for the District of Kansas found the Kansas no-surcharge statute failed on all three bases.

The Court also cited to the need for surcharges to protect businesses with small profit margins from bearing the cost and burden of transaction fees imposed by credit card providers. The Court further reasoned that the restriction on surcharges placed an undue burden on merchants in light of the heightened demand for credit card transactions in the era of COVID, where consumers have insisted on contact-free transactions.

The CardX decision was limited to the plaintiff and transactions at issue in that case. However, during the time the CardX opinion was written, HB 2316 was introduced, which would statutorily lift the surcharge ban. The bill swiftly passed in the Kansas House of Representatives and has been referred to committee in the Senate. In the unlikely event that the bill does not pass, additional challenges to the existing no-surcharge statute can be expected.