Which government? If you're talking about something like paying for an abortion or marijuana, you're likely to get very different answers if you ask the US federal government versus certain state governments.

I see two answers to this:

1) if something is legal wherever the purchase was made, then the credit card companies, as basic utilities, should be compelled to process the purchase.

which would be the easiest for me to understand, but possibly more complicated to enforce than

2) if something is legal wherever the credit card company is incorporated in, then the credit card companies, as basic utilities, should be compelled to process the purchase.

If laws or enforcement are unclear about the legality of a thing, handle it like it would be handled in case of a cash sale or have the credit card company be cautious and enforce the strictest rule.

You have to define legal. In the case of pot, it's not actually legal - the feds simply choose not to enforce the law in states that have legalized it at the state level. There is substantial risk there as a payment processor. If it were actually up to the states, then it could be more like you describe.

To expand your point, the impact can be international.

Weed is legal in Uruguay (restrictions apply, but you can do some paperwork and you'll then be able to buy it) yet the Central Bank suggested pharmacies to only sell it in cash, out of fear that it would have negative consequences for other CC transactions in the country, or for the country as a whole I suppose.

I can understand CC companies not wanting to accept payment for weed in another country if the card was issued in the US, but for local cards, that's basically enforcing one country's laws over another. And you could have local CC companies, which we do, but then those are only accepted here. So if someone local wants to have a CC that can be used abroad, they need to accept the fact that the CC company will enforce the laws of the US even if they do a transaction outside of that country.

And yet here in Québec, we pay for weed with credit cards all the time. What’s up with that dichotomy?

The SQDC is a government entity, not a private one. It would be much harder for Visa and MC to refuse to process payments for them.

My guess is guess Canada is less afraid than Uruguay about the potential implications, the asymmetry between the US and Canada is a lot less than that between the US and Uruguay.

The real irony is that SQDC doesn't accept cash for payment!

Yeah, subsidiarity or lack thereof can get messy, but it’s not that unusual to get different answers from different levels of government. It’s a totally different situation when a private duopoly or oligopoly supersedes democratic control.

so which side are you arguing here - credit card companies can decide who they want to provide services for even if they decide not to service legal companies or that they should be forced to service legal companies?

Most specific law applies then. Not hard.