Q&A on New Credit Card Law

(from Maine Townsman, October 2009)
By Susanne Pilgrim, Staff Attorney, MMA

Maine’s Legislature recently enacted a law allowing municipalities to pass some transaction fees associated with credit/debit card usage to the consumer. When did the law become effective?

The Legislature added a new section to Maine’s Consumer Credit Code (9-A M.R.S.A. § 8-303(2-A)) to allow some government entities to charge consumers a fee when accepting a payment via credit/debit card. The law, PL 2009, c.113, became effective September 12, 2009.

Can any municipality take advantage of the new law?

The law applies to “governmental entities,” which are defined to include counties, most quasi-municipal corporations, the state Judicial Department and “municipalities as defined in 30-A M.R.S.A. § 2001(8).” The law’s definition of “municipality” includes only cities and towns. Plantations are not “municipalities” under this law.

What were the major changes in the law and how do these changes affect a municipality’s ability to accept credit card payments?

Every credit card transaction involves transaction fees that are usually absorbed by the merchant. Before the new law was passed, Maine’s Consumer Credit Code arguably prevented government merchants from passing such fees along to consumers. Absorbing the transaction fees raised issues for governments because the costs can be substantial and absorbing the fees requires all taxpayers to bear the costs of the service. Existing law had been interpreted to allow municipalities that accepted payments electronically to impose a single “convenience fee” on all electronic payments (including credit, debit and ACH transactions) based on the added convenience to the consumer. However, a “convenience fee” could not apply to credit card payments made by non-electronic means (e.g. over the counter, by mail). The new law attempts to provide more flexibility to governments to accept credit/debit cards because it authorizes transaction fees to be charged to consumers for credit/debit card payments made via any payment channel.

However, municipalities that plan to begin accepting credit/debit card payments based on the new law should proceed cautiously. There are a number of practical and legal issues that to be carefully considered before implementing this new authority

Do municipalities have to accept credit/debit cards under the new law?

No. Nothing in the law requires a municipality to accept payments via credit or debit card.

If a municipality chooses to accept credit/debit card payments, must they be accepted as payment for all municipal services?

No. A municipality may choose to accept credit/debit cards for some types of payments and not others. Likewise, a municipality may choose to accept credit/debit cards through some payment channels and not others (e.g., via a website, by mail, etc.).

Are there limits on the fees that can be charged to the consumer?

Yes, there are important limits on any fee charged to the consumer. First, the law authorizes transaction fees only for payments made for taxes, fines, charges, utility fees, regulatory fees, license or permit fees or for specific services provided by the governmental entity.

Second, the fee may not exceed the costs associated with providing the credit/debit card service that are “directly incurred” by the municipality or are assessed by an “authorized 3rd-party payment service provider” for a credit/debit card transaction. If there is no cost imposed on the municipality for a debit card transaction, no fee may be charged in that transaction. What this language means in practice is one of the difficulties in applying the law. Based on our information, the transaction fee incurred by a municipality may not be the same in every customer transaction and may not be easily calculated in advance. As a result, it may be difficult to comply with the law’s disclosure requirements (see below). It is not clear whether the law would allow a municipality to charge a single transaction fee equal to the “average” fee it incurs. Because of this uncertainty, we recommend that unless a municipality is able to calculate individual transaction fees in advance, the municipality charge no more than the lowest fee that might apply in the transaction. See the Legal Services Information Packet on the subject for more information.

Does the law add any other requirements?

Yes. The amount of any fee must be disclosed clearly to the consumer prior to payment, and the municipality must disclose to the consumer that the fee may be avoided if the consumer makes payment by cash, check or other means not a credit card or debit card.

The new law identifies a “third party payment service provider.” What is it and how might a community use one of these companies to process credit card payments?

This term is not defined in the new law, although the industry generally seems to use the term “payment service provider” to mean a third party that offers merchants a range of online payment processing services. A municipality might contract with a third party to provide some or all processing services on its behalf. Some entities offer a complete package of services including collection of the transaction fee directly from the consumer. The new law appears to authorize such third parties to impose a fee directly on consumers as part of a government payment transaction. A municipality that chooses to engage a third party payment service provider should carefully examine the provider’s services and fees and should request clear assurance that the provider’s program complies in all respects with Maine law. A written agreement with the provider that specifically requires compliance with all applicable laws is recommended, as is a provision requiring the provider to indemnify the municipality and hold it harmless in the event of any legal violation.

What options does a municipality have under the new law for accepting credit/debit card payments?

Municipalities have a wide range of choices in this area, including whether to accept credit/debit cards at all, for which services to allow payment via credit/debit card, and via which payment channels cards would be accepted (e.g. over the counter, via website). There are several municipal options for financing the program, including absorbing some or all transaction fees in the municipal budget, passing some fees to the consumer, or use of a third party for some or all payment and processing functions.

Will town meeting or council approval be needed to implement a credit card program?

It may be. As noted above, there are many ways to structure credit card programs and there are several options regarding fees. The municipal legislative body (town meeting or council) may need to appropriate funds, authorize fees, establish policy and/or authorize the execution of third party contracts. A list of basic options and steps for implementation of each can be found in the Legal Services Information Packet on this subject.

Are there additional issues that municipalities should consider?

Credit card association and/or service provider agreements often impose additional restrictions and obligations on merchants. The terms of such agreements should be reviewed carefully, with particular attention to provisions dealing with liability/indemnification for legal violations, data loss, and security breaches. Additional factors to consider when structuring a credit card program include administrative costs/benefits, consumer convenience, equipment or security upgrades, coordination of financial software, the form and content of financial reports, timing of payment to the municipality and procedures relating to disputed charges.

Where can we find more information on acceptance of credit/debit card payments by governments, so we can evaluate whether or not it makes sense for our community?

A more detailed analysis of the new law, as well as links to additional resources may be found in a Legal Services Information Packet on Municipal Acceptance of Credit Cards, available on MMA’s website or by request.