Credit card ‘convenience fee’ law has a big, fat loophole

UCLA can do it. But Anthem Blue Cross can’t.

Hit you with a fee for using a credit card, that is.

Every time I write about Anthem’s proposed $15 “convenience fee” for people to pay their premiums with plastic, and how this would violate state law, I get bombarded with calls and emails from readers asking why some places get away with the practice.

If such surcharges are illegal, they wonder, why is it that UCLA charges a 2.75% fee for students and parents to pay for tuition and other costs with credit cards?

Similarly, why can Orange County charge a 2.5% fee for homeowners to pay their property taxes online with plastic?

The answer, simply put, is that a big, fat loophole in state law allows public entities to charge extra for use of a credit card — and many exploit that loophole with “convenience fees” that are decidedly inconvenient for consumers. Private companies are prohibited from doing this.

The law in question is Section 1748.1 of the California Civil Code. It says that “no retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.”

So why would that apply to a health insurer like Anthem, which isn’t a retailer in any traditional sense?

Anthem and other service providers run head-on into the law through a remarkably broad definition of what a retailer is, as spelled out in Section 1747.02 of the civil code.

It says a retailer is “every person other than a card issuer who furnishes money, goods, services or anything else of value upon presentation of a credit card by a cardholder.”

Boom. In the eyes of the state attorney general’s office, there isn’t a private-sector company in California that escapes the reach of the law.

“Private businesses are prohibited from charging a credit card surcharge,” said Lynda Gledhill, a spokeswoman for Atty. Gen. Kamala Harris.

However, the law explicitly declares that this doesn’t include “the state, a county, city, city and county, or any other public agency.”

So UCLA was completely in the right, legally speaking, when it announced in June that its 2.75% fee for paying with credit cards would take effect Aug. 1, just in time for the new school year.

Marsha Lovell, the campus’ director of student financial services, said the change will save UCLA more than $6.5 million a year in processing fees charged by card companies. Put another way, though, that means students and parents are now covering that $6.5 million in costs if they choose to use plastic.

“UCLA has been a leader in providing students and parents with convenient options for making payments for tuition, room and board, and other charges,” Lovell said. “But the cost of credit card fees has grown.”

Anthem is facing the same costs. But the company’s plan for a $15 fee for card payments raised a red flag with the attorney general’s office. As a company that “furnishes money, goods, services or anything else of value,” Anthem qualifies as a retailer as far as the state is concerned.

An Anthem spokeswoman said the company’s fee is on hold for the time being. As of Aug. 1, members can no longer make automatic payments using credit cards, but they face no additional cost if they call a service rep each month to pay with plastic.

Utilities also enjoy a loophole under the law that allows them to charge fees for credit card payments, although they face separate requirements from the California Public Utilities Commission.

Section 755 of the California Public Utilities Code says that “an electrical, gas or water corporation that offers customers credit card or debit card payment options may recover the reasonable expenses incurred by the electrical, gas or water corporation for providing the customers the option of paying their bills by credit card or debit card.”

The catch is that the fee must be “reasonable” and it must reflect only the cost of processing the transaction, not any extra profit. The PUC must approve any such fees before they’re imposed.

I’ve also heard from dozens of readers who were quick to point out that many gas stations charge two prices — a higher price if you pay with a credit card and a lower price if you pay with cash. How do they get away with that?

They can thank yet another loophole in the law. This one allows businesses to “offer discounts for the purpose of inducing payment by cash, check or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers.”

In theory, all gas stations offering two prices are discounting for cash, not charging an extra fee for plastic.

A 2001 legal ruling specifically addressed this practice. In Thrifty Oil Co. vs. Superior Court of Los Angeles County, an appellate court ruled that two-tier gas prices are OK as long as they’re clearly posted and reflect the station’s actual costs to process credit card transactions.

While the Thrifty case focused solely on gas stations, the attorney general’s office said this is the only legal guidance that lawyers have to work with, so it’s generally understood that the same thinking regarding cash discounts applies to all other types of business.

So there it is. Discounts for cash are kosher across the board. Credit card surcharges are a no-go for private companies, but utilities and public entities can get away with them.

And it’s up to all of us to somehow keep track of it all.

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.