7 Types of Surcharges, What They Mean, and How Much They Cost

As a business owner, you’d expect the cost of doing business to come down when supply chain bottlenecks are clear and demand has eased down, right? 

That’s far from the reality. 

If anything, it’s only getting more expensive. From taxes and wages to regulatory compliance fees and unexpected costs, the financial demands of running a business can place a significant burden on you. Not to mention, inflation.

It’s no wonder then that many merchants are opting to pass on (at least some of) the costs to customers so their business remains profitable. This is where surcharges come in.

In this guide, we’re going to look at 7 different types of surcharges, what they mean for your business, and how you can apply them.

TL;DR

• Despite easing supply chain issues and reduced demand, the cost of doing business continues to rise due to taxes, wages, regulatory fees, and inflation.
• Many businesses are using surcharges to pass on increased costs to customers, maintaining profitability.
• This guide covers seven types of surcharges, including fuel, credit card, peak season, shipping, foreign transaction, regulatory, and convenience fees, explaining their impact and application in business.

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Types of Surcharges

Surcharges come in different forms, based on different needs specific to your business. Here are the major ones:

Fuel surcharges

Many eCommerce businesses understand that fuel costs and fuel surcharges could significantly increase shipping costs.

A fuel surcharge is an extra cost charged by a shipping, trucking, or aviation company to help cover the constant rising and falling of the cost of fuel. Fuel surcharge rates are directly proportional to the cost of fuel—they increase when fuel costs increase and vice versa.

The main purpose of the fuel surcharge is to help these companies remain profitable. If there was no such fee, fuel prices would eat into their profits when they increase. Fuel surcharges don’t fully cover the fuel costs. They simply make the prices more manageable.

Also, some shipping companies apply the fuel surcharge, while others don’t. Companies that apply it include bigger shipping companies like DHL, FedEx, and UPS.

And every company has its own way and formula for charging the fuel surcharge. Some charge it as a percentage of the fuel base rate, while others like DHL have a flat fee.

However, most companies base their fuel surcharge on the Gasoline and Diesel Fuel Update report. The US Energy Information Administration releases new national and regional averages every week on Monday.

Once calculated, the fuel surcharge is added to the rest of the applicable load fees.

Factors affecting fuel surcharges

It’s important to understand the factors that influence the rate of fuel surcharges. Let’s explore some of these elements:

• Crude Oil Prices – Crude oil prices are the primary determinant of fuel surcharges. When crude oil prices increase, the price of diesel at the pump also increases, leading to higher operational expenses for shipping companies. As such, the fluctuation of crude oil prices typically leads to the adjustment of fuel surcharge rates to offset operational costs.
• Government Regulations – Government regulations around fuel pricing and taxation, fuel surcharge calculation, and general policies and legislation also affect fuel surcharge rates. For example, the implementation of emission regulation policies can increase fuel prices, which then translate to higher fuel surcharge rates. Compliance costs may also lead to higher fuel surcharges.
• Market Environment – Market conditions, such as geopolitical landscape, economic fluctuations, and supply and demand situation, also affect fuel surcharges. For example, when there’s a high demand for fuel but a low supply, the prices surge dramatically meaning they also affect the surcharge rate. Similarly, regional instability or economic downturns upset the fuel market.

How to calculate fuel surcharge fees

As we’ve said, most companies have their way of calculating their fuel surcharge rates. However, the fundamental principles used in their calculations are typically similar. 

The first principle is the per-mile fuel surcharge, which is the most common way of calculating fuel surcharge rates. Carriers who use this principle determine their fuel surcharge rate by calculating per mile. 

They get the difference between the current fuel price and the base fuel price and divide it by the miles per gallon to get the total cost per mile. The cost per mile is then multiplied by the total mileage covered.

For example, let’s say your carrier company has a base fuel rate of $3.00 and the current price of diesel is $3.50. The calculation for the difference will be:

$3.50 − $3.00 = $0.50

You can now calculate the cost per mile. If the truck has an average consumption of 5.5 mpg, you’ll calculate it as follows:

$0.50 / 5.5 mpg = $0.09

With the cost per mile ($0.09), you can now calculate the fuel surcharge by multiplying it by the total distance covered. For a 500-mile trip, the calculation would look like this:

$0.09 * 500 miles = $45

The total fuel surcharge for such a shipment would be $45.

You can get a similar result by charging $0.01 per mile for every $0.06 increase in fuel price above the baseline. Many carriers prefer this simpler method to the complex calculation method.

The second principle is the percentage of load price fuel surcharge, which is less common. This method is also based on the difference between base fuel prices and current fuel prices. Generally, carriers will have differing surcharge percentages based on load price. The percentage increases with fuel prices.

For example, a carrier might have a 10% fuel surcharge on the load price if the fuel costs remain within $0.10 of the base fuel price. If it goes beyond that cap, the surcharge increases to 10.25%.

Credit card surcharges

Some people refer to credit card surcharges as checkout fees and merchant surcharges, but the concept is all the same.

Generally, a credit card surcharge is a fee a business or merchant chooses to charge customers who prefer using credit cards over cash. Merchants levy this fee to cover the processing fees associated with credit card transaction processing.

Credit card surcharges came about in a 2013 class-action settlement between businesses and credit card companies like Visa and Mastercard. Until this point, credit card processing fees had been charged to businesses and merchants when a customer paid using a credit or debit card.

In the settlement, it was agreed that the processing fees may be passed to the customer. 

The surcharge structure allows businesses to charge as much as 4% to credit card payments. However, the amount varies from business to business and is based on the card type used to complete the transaction.

On average, credit card surcharges in 2024 vary between 1.15% to 3.15% in most US states.

Note that some US states and territories don’t allow credit card surcharging—namely Massachusetts, Connecticut, and Puerto Rico.

And speaking of laws and regulations

Legal regulations surrounding credit card surcharges

While many states allow businesses to charge surcharges on their credit card transactions, they also have legislation on surcharge implementation. Businesses have to abide by these laws and regulations to avoid legal issues.

Don’t forget that each credit card brand also has its own guidelines.

Some of these laws and regulations include:

• Full disclosure of surcharge before transaction – The merchant is required by law to fully disclose the surcharge to customers before the payment. The business is required to have surcharging signs stating that the business will levy X% on every credit card transaction at the time of sale.
• No debit and prepaid card surcharges – Businesses are prohibited from charging any surcharges on debit cards. Cards linked to a bank account are generally classified as debit cards but can be branded as credit cards. Either way, no fee should be charged to accept a payment from these cards.
• Surcharge listing on receipts – Similar to the full disclosure rule, surcharges must also be listed on the purchase or transaction receipt. Also, the receipt must state both the percentage of the surcharge and the surcharge dollar amount.
• 30-day prior notice – Any business that wishes to implement credit card surcharges must send the credit card network and payment processor a 30-day written notice before initiating the surcharge

Peak surcharges

There are peak and low seasons in business. The peak season is characterized by high customer demand, which leads to high shipping volumes.

A peak season surcharge (PSS) is a shipping cost charged on the regular shipping fees or base freight rate when there’s high activity in the shipping network. 

It’s a temporary freight rate only charged during peak seasons to help shipping companies balance the supply chain, manage capacity limitations, and meet the increased operational costs that come with surges in shipping demand.

Peak seasons when eCommerce shipping is higher can vary from region to region, based on the region’s holidays. They also vary based on industry. Here are some examples of common peak seasons:

• Holiday season (October to December) – This season experiences a high demand for consumer goods as people prepare for the Christmas and New Year holidays. Shipping companies get busier during this season.
• Retail sales events (Late November) – Retail stores have promotional sales traditions like Black Friday and Cyber Monday every year where they sell their products at highly discounted prices, leading to a surge in shipping activity. This season marks the beginning of the Christmas shopping season.
• Back-to-school season (Late July-September) – An increased demand for stationery, school supplies, and other items for universities, colleges, and schools also increases shipping activity.
• Seasonal agriculture (Depending on region and crop) – Planting, spraying, and harvesting seasons lead to increased demand for agricultural products. Agricultural seasons vary since different regions and different crops have different seasons. 

If you run an import and export business, you should know about peak season surcharges since they can significantly affect your typical shipping costs, budget, and logistics planning.

Peak season surcharges aren’t fixed. They change every week depending on shipping volumes.

Besides, shipping companies have “Calculation Week” to calculate the shipping volume and “Application Week” to apply the peak season surcharge based on the calculation week results. There may be a two-week gap between the calculation and application weeks.

Examples of peak surcharges

For example, the United States Postal Service (USPS) has peak season surcharges during the holiday season. They announce their PSS in August, implement them in October, and use them until late December.

The PSS rate is applied to domestic competitive parcels, which include Priority Mail, Parcel Select, First-Class Package Service, Priority Mail Express, and USPS Retail Ground. 

In some seasons the peak surcharge is applied to commercial parcels only, and in other seasons both retail parcels are also affected.

FedEx also applies peak season surcharges. They also announce their rates in August, implement them in October, but run them until mid-January. 

Unlike the USPS, FedEx applies the PSS to its international services, such as FedEx International Ground. FedEx may also apply the surcharge during other peak seasons apart from the Christmas and New Year holidays.

The United Parcel Service (UPS) applies its PSS rates depending on the package’s origin and destination. For example, packages originating from Asia during the Chinese New Year period will be charged peak surcharges.

Strategies for avoiding peak surcharges

The most obvious pointer to avoid peak season surcharges is to avoid shipping during the peak season. But that’s not really a choice when you’re in the eCommerce or shipping business, is it?

Here are some tips to help you minimize the impacts of peak surcharges on your supply chain costs:

• Early shipping – You can plan ahead and ship early in anticipation of the peak season to avoid peak surcharges. This also helps you ensure timely delivery while enjoying low shipping rates.
• Consolidate product volumes – When shipping eCommerce goods, you can stock up on your products and let them accumulate based on smart prediction strategies, such as observing customer shopping history and behaviors. Consolidation also lets you maximize container space which can lower your shipping costs.
• Transport mode optimization – Using alternative modes of transport, such as rail and intermodal transportation solutions, instead of trucking can also help you minimize peak season surcharges. Alternative modes of transport often have stable rates that can save costs during peak seasons.
• Negotiate shipping contracts – Negotiate contracts with shipping companies to include clauses that give you discounts during peak seasons or limit the PSS amount. Also, seek to build long-term relationships with carriers to enjoy more favorable rates.
• Improve forecasts – Accurate forecasting helps you plan better and mitigate surcharges in preparation for the peak season. You can use data analytics and market trends to predict demand shifts and spikes to prepare well and avoid last-minute shipping.

Shipping surcharges

Shipping surcharges are additional fees charged on top of the base shipping charges. They are also called accessorial fees or accessorials, and shipping and logistics companies charge them as “handling fees” or “service charges”.

Shipping companies have different shipping surcharges to compensate for different factors and services that go beyond the shipping services. These factors include expedited delivery, weekend delivery, oversized packages, fuel price fluctuations, delivery to remote locations, and seasonal demands.

Note that there’s a difference between a shipping fee and a shipping surcharge. A shipping fee is the base fee that a carrier charges to ship goods from one location to another. On the other hand, a shipping surcharge is charged on top of the shipping fee to meet factors or services beyond the basics.

For example, let’s say your eCommerce business wants to ship a Bluetooth speaker to a customer in a remote location outside the standard United Parcel Service (UPS) routes. 

UPS will charge a typical shipping fee plus a shipping surcharge called the “Delivery Outside Service Area” fee. They might even have an additional surcharge to cover the cost of additional fuel.

Shipping fees vary based on package size, weight, and destination. On the other hand, shipping surcharges are fixed rates.

Types of shipping surcharges

Shipping surcharges may seem insignificant for customers shipping only a handful of products. But it’s a whole different ball game when it comes to eCommerce stores that ship their products in bulk. The shipping surcharges could accumulate and dent your business’s bottom line.

Some shipping carriers revise their shipping surcharges yearly, while others do so every week.

It’s important to be aware of the types of shipping surcharges to understand how they can impact your shipping fees and also see how you can avoid them. Here’s a breakdown of some shipping surcharges you’re likely to see:

• Residential delivery surcharges – These are extra fees charged when products are delivered to a home address, including businesses operating from home or any other area that the carrier may consider a residential.
• Oversize package surcharges – These are surcharges charged for packages that go beyond the shipping carrier’s dimension or weight limits. For example, FedEx charges an oversize package surcharge for products that are beyond 90 lbs in weight, 96 inches in length, or 130 inches in girth.
• Address correction surcharges – This is an additional fee for shipments that are incorrectly addressed.  The address correction surcharge for FedEx’s Ground and Express is $22.50 per correction, while UPS’s Ground and Air charges $21 per correction.
• Saturday surcharges – These are charged for shipments that happen outside the ordinary work week. Saturday surcharges are types of expedited delivery surcharges, including overnight shipping surcharges.
• Delivery area surcharge – These are extra fees for shipments being delivered in less populated or remote areas. Carriers charge this fee to meet the extra cost of labor and transportation needed to cover the extra distance for the delivery.

Foreign transaction surcharges

Have you ever made a credit card transaction to a business outside the US and noticed that the bill was a bit higher than usual? Foreign transaction surcharges were probably the reason why you had to pay more.

Foreign transaction surcharges, or FX fees, are fees charged by credit card companies for transfers or purchases made outside the U.S. or in another currency apart from the U.S. dollar (USD). 

These fees help credit card providers and banks cover the cost of converting one currency to another. The currency conversion process involves a series of various financial processes, such as currency exchange and cross-border transaction processing. These processes incur costs.

These fees vary depending on the credit card company or bank’s terms and conditions. They’re charged as a percentage of the transfer amount and typically fall between 1% and 5%. The average foreign transaction surcharge rate in America is 3%.

The fee is usually split into two- network fee and issuing bank fee

• Network fee – Also referred to as the currency conversion fee, this fee is charged by the credit card provider (Visa or Mastercard) and is usually 1% of the amount. This fee applies to all foreign transactions regardless of the type of credit card.
• Issuing bank fee – This fee goes to the credit card issuing bank, such as Bank of America, Chase Bank, Citi, or Barclays. Some banks charge a fee of around 2%, while others don’t have a fee at all.

For example, if you’re buying a product worth $3,500 from a foreign supplier and there’s a 3% foreign transaction surcharge, you’ll have to pay an extra $105. This brings the total cost of the transaction to $3,605.

Impact on international travelers and online shoppers

It’s easy to look down upon foreign transaction surcharges, especially when making small one-off transfers. The percentage might not appear significant. 

For example, an additional $0.45 on a $15 purchase doesn’t look like an amount that would break your budget.

However, foreign transaction surcharges may quickly rack up when you’re making large purchases. Tourists and online shoppers bear the brunt of FX fees. These fees can throw your budget off balance if you’re traveling over an extended period or shopping in bulk from an international business.

You can incorporate foreign transaction fees into your traveling or shopping budget by adding an extra 5% of your expected expenses to avoid any disruption. 

How to avoid foreign transaction surcharges

You can follow some simple strategies to avoid foreign transaction fees when traveling or shopping abroad. They include:

• Use credit cards without foreign transaction fees – If you’re a frequent traveler or your business relies on international suppliers, it makes sense to get no-foreign-transaction-surcharge cards. Most of these cards have annual fees, instead of foreign transaction surcharges. But they require you to have a high credit score to qualify. Besides, some of them aren’t widely accepted so you might be limited on how you use them when you travel.
• Use a checking account or debit card without foreign transaction fees – Pairing a debit card without foreign transaction fees with a similar credit card is an unbeatable combo for frequent travelers. This allows you to withdraw money from a foreign ATM in a different currency without extra charges. However, such debit cards offer a lower level of protection against fraud.
• Use an ATM card that refunds ATM fees – You’ll probably need to withdraw and carry around cash when traveling in a foreign country. Withdrawing cash via ATM outside the U.S. will attract international transaction fees and out-of-network ATM fees. Ensure you get an ATM card that reimburses these fees.
• Convert the currency before leaving the U.S. – If you don’t have a credit or debit card that doesn’t charge foreign transaction fees and you don’t want to apply for one, it would be best to exchange currency before starting your trip. This might be the best option since it doesn’t attract ATM fees and you might get the best exchange rate. You might still carry your credit card, but having some local currency is always a good idea.

Regulatory surcharges

Regulatory surcharges, or government-imposed surcharges, are additional fees that businesses pass on to their customers to cover costs associated with regulatory compliance, law enforcement, and funding of public programs.

Businesses use regulatory surcharges to fund the cost of complying with different regulations, such as safety regulations, public health, environmental protection, and infrastructure maintenance. The surcharges prevent these costs from eating into business profits.

Here are some examples of regulatory surcharges that businesses in different sectors charge:

• Telecommunications – The Universal Service Fund (USF) is a surcharge on phone bills to support universal access to telecommunication services. The 911 Emergency Service Fee is used to fund emergency response systems. Businesses in the telecommunications sector may pass on these costs to their customers.
• Environmental – Businesses in the environmental sector have to pay Recycling Fees on products like tires, batteries, and electronics to fund property waste disposal methods and recycling programs.
• Transportation – Airlines may impose Airport Improvement Fees on tickets to fund airport development, improvement, and maintenance projects. Trucking companies may have Toll Fees, which are levied for highway maintenance and improvement. 
• Utility – Businesses in the energy sector pay Energy Efficiency Surcharges, which are charged to fund renewable energy programs and energy efficiency projects. There are also Water Infrastructure Fees levied on water bills to ensure a safe and reliable water supply.

How regulatory surcharges are calculated

There are a few ways to calculate regulatory surcharges. They include:

• Fixed flat fee – Some regulatory surcharges are charged as a flat fee regardless of the base price. For example, the recycling fee charged on electronic sales is fixed.
• Percentage of the base price – The regulatory surcharge can also be charged as a percentage of the cost of the product or service. For example, the USF surcharge is charged between 15.5% to 33% of the telecommunications service cost.
• Usage-based – Regulatory surcharges can based on consumption or usage, such as per-kilowatt-hour surcharges on electricity bills to cater to energy efficiency programs.

Regulatory surcharges are charged transparently. Once calculated, they are itemized separately on the customer invoice or bill. The customer can clearly tell how much of the regulatory surcharge is passed on to them.

Convenience fees

Any business operating in this age has to accept credit card payments due to their popularity. But accepting them can be expensive. This is where convenience fees come in.

A convenience fee is a charge that a business passes on to its customers who pay using a payment method that’s outside the standard form or the typically accepted methods by the business. Most standard payment methods for businesses include cash, check, and Automated Clearing House (ACH) transfer.

In short, a convenience fee allows your business to accept nonstandard payments without having to pay for the processing costs from its profits.

For example, let’s say you run an HVAC maintenance business where you generally accept cash and check payments. If a customer chooses to pay or the phone or via an online credit card transfer, you can choose to charge a convenience fee to cover the payment processing fees.

The most common industries that apply convenience fees include:

• Entertainment industry – Entertainment venues, such as movie theaters, are likely to charge a convenience fee for tickets bought through online booking. The fees help the venues invest and maintain an efficient e-ticketing platform and ensure a seamless online ticketing experience.
• Travel industry – Convenience fees in the travel industry apply to services like online booking, baggage handling, and seat selection. Travel agencies, hotels, and airlines charge this fee to cover the expenses that come with providing convenience options to the customers.
• Financial sector – Financial institutions, such as banks and credit unions, may have convenience fees to deliver efficient services, like secure funds transfers, swift wire transfers, and after-hours assistance.

Convenience fees can be charged as a percentage of the transaction amount (usually 2% to 3%) or as a fixed flat fee.

Convenience fee vs. surcharge

Some people use convenience fees and credit card surcharges interchangeably. The two are similar in that they’re additional fees added to a credit card transaction. However, the two are charged for different reasons.

Convenience fees are charged by the merchant to cover credit card payment processing costs, while credit card surcharges are charged by the credit card issuer just for the benefit of using credit cards.

Convenience fees rules

Whether convenience fees are legal or not depends on the state where your business is based. Generally, convenience fees are legal. However, there are specific guidelines that you must observe to avoid running into legal trouble.

For example, you must disclose the convenience fee amount to your customer at the time of purchase. You must make it clear that the extra charge is a convenience fee for accepting a non-standard payment method. Incorrect labeling can land you in trouble.

Also, you’re not allowed to charge a convenience fee for in-person transactions or if your business only makes sales online.

Rules and guidelines also vary when it comes to the credit card company. Here’s a breakdown of convenience fee policies based on credit card issuers:

• Visa – Businesses are allowed to charge a convenience fee, but must be a flat fee (not a percentage of the transaction). Also, the convenience fee must be clearly disclosed to the customer.
• Mastercard – Mastercard only allows government institutions, educational agencies, and their third-party agents to charge a convenience fee. The fee can apply whether the cardholder pays in-person, online, over the phone, or by mail.
• Discover – A merchant shouldn’t charge a convenience fee to a Discover cardholder unless they charge the same fee to a Visa, Mastercard, or American Express cardholder. Also, the fee shouldn’t exceed the cost of acceptance.
• American Express – American Express doesn’t provide any specific guidelines to merchants who’d like to charge a convenience fee. However, businesses can provide incentives for non-credit card payments as long as they’re clearly disclosed, don’t discriminate based on credit card company, and offered to all customers.

Factors influencing convenience fee rates

On one hand, businesses want to cover the costs that come with delivering convenient services to their customers. On the other hand, they want the convenience fee to be reasonable to avoid pushing their customers away.

This is why you need to strike the right balance by setting reasonable convenience fee rates. 

Here are some factors to consider when setting convenience fees:

• Cost recovery – Cost recovery is the primary consideration when calculating convenience fee rates. A business should seek to cover the costs associated with swift processing, and maintaining online payment platforms and mobile applications. A business can set the convenience fee in a way that ensures it’s not operating at a loss and doesn’t discourage customers from using the service.
• Market demand – If customers are willing to pay higher for convenience, then a business can raise its convenience fee rates. However, make sure you conduct in-depth market research and competitor analysis. If your competitors are offering the same services at lower convenience fees, you might consider lowering yours as well.
• Customer preference – It’s important to understand your customers’ perception and sensitivity towards convenience fees. Some customers may be willing to pay more for more convenience, while others will simply run to your competitors. 
• Unique value proposition – What makes you stand out from your competitors? Why should your customers pay a higher fee for convenience? Your unique value proposition can justify higher convenience fees. For example, a plumbing service offering shorter wait times can charge higher convenience fees for the added benefits.

Alternatives to convenience fees

Some customers aren’t happy with convenience fees and believe the cost of processing nonstandard methods of payment should be covered by the business. 

You can encourage them to continue purchasing from you by introducing promotions and coupons for customers who pay through cash or check. You can also choose to simply raise your prices to offset processing costs, and then have discounts for customers who pay through cash.

And since every credit card processor has its own pricing structure, you can also shop around for a cheaper processor to help you save costs or avoid charging convenience fees altogether.

Conclusion

Understanding the various types of surcharges and their implications is crucial for business owners navigating today’s economic landscape.

Be sure to familiarize yourself with these charges, so you can strategically manage costs and maintain profitability. Whether it’s fuel surcharges, peak season fees, or regulatory charges, being informed allows you to make better decisions for your business and effectively pass on or absorb these costs as needed.

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