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In public law, i.e. under federal and, as far as I know, state law, there is no affirmative duty to accept credit card payments. Thus it would follow that merchants are free to not accept credit cards for small transactions. The reason many merchants do not accept credit cards for small dollar amount transactions is because the credit card company charges (1-3%) significantly eat into their profits on these transactions where the margins are much lower than on big-ticket items.
In private law, i.e. contracts, it can be "illegal" for merchants to refuse credit card payments for small transactions. Often credit card companies will stipulate that merchants must accept credit cards for all transactions. Thus if a merchant does not accept credit card transactions for small transactions, he could be violating his private law (contractual) obligation to the credit card company. Customers, however, have little legal recourse here, as the issue is between the merchant and the credit card company, not the merchant and the consumer. Your only recourse would be to contact your credit card company and ask that they use their clout to pressure a retailer into accepting credit cards for all transactions. Beware, though, as merchants usually just pass the cost of credit card transactions on to consumers - thus you could see a slight bump in the price of small items.
One option for merchants is to do what Apple does with their online iTunes store (99 cents per song) and aggregate all transactions over a given period (hour, day, week, etc) and treat it as one large transaction. This has an advantage because credit card companies charge a lower percentage of the total transaction for higher dollar transactions. This sort of aggregation agreement may, however, be hard for a small merchant to get because he doesn’t have the leverage that Apple has.
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