Gov't Relations Newsletter: Vol 12 Iss 3 "Firearms Merchant Category Code Legislative Update"

Government Relations Newsletter: Vol 12, Issue 3 
"Firearms Merchant Category Code Legislative Update"

By: Robyn Mitchell, member of the APP Government Relations Strategic Interest Group (SIG)

 
The legislative landscape for firearms-related retailers is changing and expanding quickly – from 10 state laws and bills in 2023 to a total of 30 in 2024, prompted by efforts to more accurately identify these retailers through card acceptance as a form of payment. 

In 2022, a unique Merchant Category Code (“MCC) for firearms and ammunition merchants was approved by the International Organization for Standardization (“ISO”), an independent, non-governmental organization made up of members from the national standards bodies of 170 countries.  Major card brand networks, Visa, Mastercard, American Express, and Discover, paused implementation of the new ISO MCC due to political debate centered around second amendment, privacy and financial information protections, threatened litigation, and state legislative actions to prohibit or require use of the MCC. 
 

States with current laws, or bills pending, that prohibit the ISO MCC and more

Since ISO approval of the firearms-related MCC, 11 states have enacted laws to prohibit use of the ISO code both generally or specifically – seven laws are currently in effect, four will be effective later in 2024, and one will be effective in 2025.

Additionally, in efforts to foresee other implications of the firearm-related MCC, these laws are not limited to the specific use of an MCC but extends to other activity perceived as adverse to firearms retailers and their customers. These enacted laws generally prohibit the following (with some variation):

Use of any MCC that separates or distinguishes firearms-related merchants from general merchandise or sporting goods merchants.

Laws provide that either the code assigned must not distinguish the retailer from general merchandise or sporting goods retailers or that the code used is the same as the code used for general merchandise or sporting goods retailers.  For example, Mississippi HB 1110, Sec.4.(2) prohibit usage of the firearms code “in a way that distinguishes a firearms retailer ... from general merchandise retailers or sporting goods retailers.”  Texas HB 2837, Sec. 610.002.(b) states that retailers “may only use or be assigned a merchant category code for general merchandise retailers or sporting goods retailers.”  Violations void agreements or contractual provisions.

Tracking and disclosure of merchant and customer information derived from use of MCC or identifier that distinguishes the merchant as a firearms-related business or merchant’s customer.

Laws restrict or prohibit disclosure (except as otherwise required by law) and use of information to track or surveille merchants and customers. Information protected from disclosure includes record of a sale, purchase, return, or refund involving a payment card that is retrieved, characterized, generated, labeled, sorted, or grouped based on the assignment of a firearms code.  See, for example, Mississippi HB 1110, Illinois HB 3840, Georgia HB 1018, North Dakota HB 1487, Texas HB 2837, and Wyoming SF0105.

Discrimination against merchants or their customers resulting from distinguishing a firearms-related merchant or customer.

Discrimination relating to assigning or not an assigning a firearm-related code includes declining card transactions, limiting or declining to do business with a merchant, and charging higher transaction or interchange fees to a merchant, as specified in West Virginia and Utah laws.  

Sixteen states have pending legislation aligning closely to enacted laws on the use of MCCs to identify firearm-related merchants, including Georgia bill HB 1018 that is pending the state governor’s signature as of April 2, 2024.

Although there are similarities among enacted laws and pending legislation, there are also nuances that can materially impact applicability and business risks. Examples of these nuances include the following:

1. each law and bill use definitions that are not the same, e.g., firearms may or may not include accessories (see, for example, Illinois HB 3840, Louisiana SB 301, New Jersey S 1866);
2. obligations may vary by party – issuers, acquirers, payment card networks, merchant services entities;
3. firearms retailers sometimes defined as merchants physically in the state and sometimes defined only as lawfully selling in the state (see, for example, Texas HB 2837); and
4. state action in some states includes cease and desist orders, injunctive relief, and imposing fines of $10,000 - $25,000 per card transaction or assignment of identifying code, and include prosecutions as felonies with fines and imprisonment in other states.  

Injunctive relief and civil penalties are a common thread through enactments and pending legislation both for states prohibiting use of a specific code and states requiring use of a specific code. A read of the current laws and pending bills shows that some opposition states have gone much further by criminalizing use of the MCC by banks, payment processors and others in the payment processing stream as felonies.

In view of the above, analysis is warranted where firearms-related merchants and their customers are in scope of your business model. 

States that require use of ISO MCC

With 27 states taking action to prohibit the use of firearms-related identification codes,  three states either require use of the ISO approved MCC or have pending legislation to require use of the MCC – California, New York, and Colorado.

California’s law, AB 1587, effective as of January, 2024, gives payment card networks until July 1, 2024 to have the ISO MCC in place for use by merchant acquirers, and until May 1, 2025 for merchant acquirers to begin assigning the MCC to firearms businesses.  California law defines “firearms merchant” to mean “a business licensed in California as a firearms dealer or ammunition vendor for which the highest sales value is, or is expected to be, from the combined sale in California of firearms, firearm accessories, or ammunition, as stated by the business to its merchant acquirer in the ordinary course of business.” See AB 1587.

The definition of “firearms merchant” under California’s law includes any merchant licensed to sell in the state – physically or online. Thus, while card networks have paused rollout of the ISO MCC, the networks as well as merchant acquirers must nevertheless adhere to California law even though there may be the potential for conflicts of law arising where merchant acquirers are obligated to assign the ISO MCC to a merchant selling online in California yet physically located in a state that prohibits assigning the ISO MCC or other distinguishing code.

New York’s bill, S 8479, was introduced in February 2024 and is very similar to California’s law. It obligates issuers to make the firearms MCC available to processors by July 1, 2024, and until May 1, 2025 for processors to begin assigning the MCC to dealers of ammunition and dealers of firearms and is not limited to physical locations in the state. New York’s bill defines “dealer of firearms“ to mean “a  gunsmith or dealers in firearms licensed” pursuant to NY laws, and “dealer of ammunition” to mean “any person who engages in  the  business of purchasing, selling or keeping ammunition.” See S 8479.  Likewise, it applies to sales from physical locations as well as online.

Unlike NY and California, Colorado’s bill, SB24-066, limits the scope to merchants physically located in Colorado. Colorado’s bill defines "firearms merchant" to mean “a business that is physically located in Colorado, acquires and sells firearms, firearm accessories, and firearm ammunition with the intention of making a profit; and has its highest gross revenue or expected gross revenue from the combined sale in Colorado of firearms, firearm accessories, or firearm ammunition, as stated by the business to its merchant acquirer in the ordinary course of business.” See SB24-066.  The bill passed in the Senate and House in February and April, respectively. 

In summary

Laws in effect and pending legislation will continue to shape payments industry obligations regarding firearms merchants and their customers. Pending legislation referenced in this update have all moved beyond introduction and links provided correspond to legislative pages that will enable continued monitoring.