A merchant category code or MCC code is a four digit number assigned to classify a business when accepting credit cards, to determine whether payments are reportable to the IRS, and they also impact merchant fees.
The MCC code determines which interchange rates a business qualifies for. For example, only certain MCC codes can qualify for level III processing, which offers lower fees for corporate, business and purchasing cards, and the same applies to non-profits. Merchants can be incorrectly classified and never know it, until someone recognizes that specific interchange rates are missing from a merchant statement and then investigates to learn why.
Here’s a related IRS bulletin: http://www.irs.gov/irb/2004-31_IRB/ar17.html
“In general, this revenue procedure classifies businesses by Merchant Category Codes (MCCs) according to whether they predominantly furnish services (for which payments are reportable) or predominantly provide goods (for which payments are not reportable). A payment card organization may assign MCCs, or equivalent Industry Codes, to merchant/payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent Industry Code assigned to a merchant/payee. A cardholder/payor may then rely on the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with that merchant/payee is subject to reporting under section 6041 or section 6041A.”