A code that a credit card company designates that is 4 digits long. The code lists the service, line of business, or product of the merchant. Within the United States, the merchant category code can be used to detect whether or not a sale has been reported for tax purposes. Merchant category codes were developed by the IRS in 2004 as a way to streamline 1099 reporting for commercial card holders.
The merchant will be designated the four-digit code once he starts to accept payments by credit card. The number will be designated by Visa, MasterCard, or by any other credit card provider that the merchant has chosen to work with. From the code given, the tax office can see the nature of the products that are being sold as the code will be specific to a certain class of goods.
Merchant category codes are now used by a variety of organizations and for several purposes. You can see card networks, merchants, consumers and payment service providers all using the merchant category codes for their own specific purposes. Here are some reasons why each party uses MCCs:
- Acquirers use merchant category codes to identify prohibited business types. They also measure the risk before working with a merchant.
- Visa, MasterCard, American Express, and Discover use merchant category codes to determine the interchange fees merchants are charged.
- Merchants with certain merchant category codes will be denied services from some payment service providers.
- A merchant’s ability to charge convenience fees and other similar options is based on their merchant category code.
- Only merchants classified with healthcare merchant category codes are allowed to accept HSA and FSA cards.
- Credit card rewards or points accumulated by consumers on specific category purchases are typically calculated using merchant category codes.