I've dealt with this issue firsthand. Here's what the Mastercard Merchant Rules Manual says:
9.11.2 Cardholder Identification
A merchant must not refuse to complete a MasterCard card transaction solely because a cardholder who has complied with the conditions for presentment of a card at the POI refuses to provide additional identification information, except as specifically permitted or required by the Standards.
A merchant may require additional identification from the cardholder if the information is required to complete the transaction, such as for shipping purposes.
A merchant in a country or region that supports use of the MasterCard Address Verification Service (AVS) may require the cardholder’s ZIP or postal code to complete a cardholder-activated terminal (CAT) transaction, or the cardholder’s address and ZIP or postal code to complete a mail order, phone order, or ecommerce transaction.
- Mastercard Merchant Rules Manual, March 2005
The other exceptions seem to be:
- an unsigned card
- a card where someone has (stupidly) written "Ask for ID" instead of his or her signature
- suspicious behavior or a suspect card
- a request for a return or credit
However, the manual is very vague on these points.
The problems seems to be prevalent enough, that there's a complaint form for it on MasterCard's web site:
http://www.mastercard.com/contactus/contactus_mv.html
MasterCard is very weak in enforcing this, as well as any sort of "minimum purchase" requirement that some merchants insist upon.
At Toys R Us the other day, I was asked for an ID, which wasn't even looked at. Ten minutes later at Office Depot, I doubt the cashier even knew which card I used, as I ran it through the card reader myself and signed the screen.
Here's some additional information.
http://www.in.gov/dfi/education/credit_card_ID.htm
Interestingly, several months ago, I asked Diners Club what its policy is on merchants who demand IDs, and they couldn't tell me! Nor did they seem to care that their cardmembers were being hassled by merchants this way.