By Lexi Wentworth
City leaders often have questions about the legal requirements of using and accepting credit card payments. Leaders commonly ask:
- Can cities use credit and/or debit cards?
- In what manner may cities use credit cards?
- What policies should cities adopt to regulate city credit card use?
While cities can use credit cards to make purchases and accept credit card payments from customers, there are legal considerations of which leaders should be aware. These were expanded this year when the Legislature created additional notice requirements for accepting these types of payments.
City authority to purchase using credit cards
A city council may authorize the use of credit cards to make purchases, but cities are not allowed to carry debt. Therefore, cities should adopt a policy of paying the entire credit card balance each month.
Also, state law requires that claims presented to the city for payment must be in writing and itemized. Bills from credit card companies might not be detailed enough to meet this requirement. As such, cities must keep all invoices and receipts for all purchases made using a city credit card.
The city council must approve all purchases. If city officers make or direct a credit card purchase that is not approved by the council, they may be held personally liable for the amount of the purchase. In order to prevent any misuse, cities should have a credit card policy. The policy should include provisions that:
- Remind city officers that if they make unapproved credit card purchases, they may be held personally liable.
- Identify officers and employees who have authority to make purchases on behalf of the city.
- Identify the particular purchases that will be made with credit cards.
- Set up a review process for all purchases.
- Prohibit the use of city credit cards for personal purchases.
- Require supporting documentation.
- Limit the total amount of charges that can be made on city credit cards.
- Require paying the entire credit card balance each month.
- Ensure incentives such as rewards or gifts earned with a purchase on a city credit card may only go to the city’s account or program, and not benefit an individual employee.
Credit card rewards
Cities may accept a credit card incentive or reward. However, employees that are authorized to use city credit cards may not collect any credit card incentive or reward. To avoid any misappropriation of funds, the city should choose either the cash back option or statement credit option.
The city should include a provision in its policy that states any incentive such as rewards or gifts earned with a purchase on a city credit card may only go to the city’s account or program, and not benefit an individual employee for personal use or benefit.
While cities have authority to collect payments from either a credit card or debit card, they do not have the same authority to make purchases using debit cards. Unlike credit cards, debit cards allow funds to be immediately withdrawn from an account and provide fewer protections against theft. As such, the state auditor recommends that cities use credit cards rather than debit cards.
New requirements for cities accepting payments by credit card
Cities have authority to accept a payment by credit card and to charge “convenience fees” or “service charges” when a customer elects to use the credit card. State statute limits these fees on credit card payments to 5% of the purchase price.
There are new notice requirements that cities should be aware of when accepting credit card payments and adding a surcharge, including:
- When the customer is paying in person, the city staff must inform the customer of the surcharge both verbally at the time of the sale and by a sign noticeably posted at the point of sale.
- When the customer is paying by computer or mobile device, the city must inform the customer of the surcharge by clearly posting a surcharge notice during the sale, at the point of sale, on the customer order summary, or on the checkout page of the website or mobile application.
- When the customer is paying over the phone, the city staff must inform the customer of the surcharge verbally.
The merchant services agreement the city has with the credit card service provider may prohibit surcharges altogether. Cities should review their agreement with the credit card servicer because such an agreement may not allow convenience fees or service charges.
Lexi Wentworth is a staff attorney with the League of Minnesota Cities. Contact: email@example.com.