Illinois Can Block Interchange on Taxes and Tips, Judge Rules

A U.S. District Court Judge based in Chicago’s Northern District validated the key elements of a new law passed by Illinois that bans card networks and banks from charging swipe fees on the tax portion of transactions or on workers’ tips when customers pay with their credit cards.

A data usage section of the Illinois Interchange Fee Prohibition Act (IFPA) was struck down, but the section regarding interchange fees will remain intact. The law will become effective on July 1, 2026.

CardRates.com reported on an earlier delay in the Illinois law due to litigation. This ruling removes all barriers to the Interchange Fee Prohibition Act becoming effective as planned.

For the credit card industry, the decision will affect more than just Illinois merchants. It will help to determine how much authority each state has in establishing rules regarding interchange fees, which have long been set at the federal level.

Since June 2024, the IFPA has prohibited financial institutions from charging interchange fees on the taxes or tip portion of every electronic transaction. Merchants believe that they shouldn’t have to pay fees on monies collected on behalf of the government or passed on to employees.

“The judge has seen clearly that it’s Visa and Mastercard that run the swipe-fee system and that states can regulate these anti-competitive fees,” Doug Kantor, Merchants Payments Coalition Executive committee member, said Tuesday in a statement.

Banking groups challenged the law under the National Bank Act. In a joint statement, the American Bankers Association, Illinois Bankers Association, America’s Credit Unions, and Illinois Credit Union League said they were “deeply disappointed” and will appeal.

“The decision not to protect the payment system from this misguided state law is a serious error that will unleash chaos and confusion on Illinois consumers and businesses,” the groups said, urging Illinois “lawmakers to repeal this flawed law.”

The court did not agree. “The payment card networks built this ecosystem, and the payment card networks set these fees,” Judge Virginia Kendall wrote.

Interchange battles most often take place at the federal level. While the Durbin Amendment placed caps on certain debit fees charged by large banks, it did not address credit card interchange rates.

The Illinois bill is more targeted. Instead of placing caps on total interchange rates, Illinois eliminates interchange fees from specific parts of a transaction.

The ruling suggests that states can now regulate individual components of an interchange model when networks are the primary fee setters.

If this decision stands, it will create uncertainty for issuers that operate nationally.

The short-term effect of this new law on revenue is minimal. Since only a portion of the overall purchase price is comprised of taxes and tips, the interchange income provides the financial support for many of today’s reward structures. Therefore, limits placed on the interchange fees are scrutinized.

The interchange revenue generates many of today’s rewards structures for consumers. But the larger concern is the complexity of requirements from different states. Merchants in each state will have to separate tax and tip amounts in real time.

Large issuers may be able to absorb isolated changes. A broader adoption is going to create additional questions for pricing and product strategy.

Banking groups have signaled they will continue the fight and will appeal the decision.

Issuers cannot wait for a final court ruling. They will have to consider revenue exposure and system changes, as well as rewards strategies, if similar laws proliferate.