MAG Insights

In recent years, multiple state legislatures have begun looking at how interchange is calculated and charged to merchants.  One issue gaining attention is interchange fees being applied to the sales tax portion of transactions. Since most interchange fees are percentage-based, the total fee increases with the sales tax—despite merchants only collecting this tax to remit it to the government.

Bill proposals have been seen in a few states, including Florida and Tennessee, but Illinois was the first to pass legislation that specifically targets the issue.

What does Illinois’ law cover?

At the highest level, the law, entitled the “Interchange Fee Prohibition Act” (IIFPA), bars the charging of interchange fees on the tax and tip portions of credit and debit card transactions, effective July 1, 2025.

More specifically, it establishes four key adjustments to payments card acceptance in the state.

• An issuer, network, acquirer, or processor may not receive or charge a merchant any interchange on the tax amount or gratuity of an electronic payments transaction.
• If a merchant does not provide sufficient data on the tax and gratuity amounts during the transaction, they can submit tax documentation within 180 days to receive a credit for any interchange fees charged.
• Liability for the accuracy of tax and gratuity data remains with the merchant of record.
• An issuer, network, acquirer, or processor cannot circumvent this law by increasing the fee amount or number of fees to the non-tax/gratuity portion of transactions.

Furthermore, the law includes a civil penalty of $1,000 per transaction for violating the rules stated above.

Litigious Aftermath

After IFPA was signed into law in June 2024, a coalition of the members from the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and the Illinois Credit Union League filed a lawsuit challenging the law. In their complaint, the main argument is that the enactment of the state law violates the National Bank Act and Federal Credit Union Act by superseding them with state legislation. The complaint further contends that the law conflicts with the Electronic Fund Transfer Act and its provisions regarding the permissible amount of interchange fees for debit cards. 

These organizations are seeking an injunction, and if successful, their challenge could lead to the repeal of the nation’s first law prohibiting interchange fees on sales tax and tips.

With significant implications at stake, the law and the ensuing lawsuit have garnered considerable interest within the payments community, prompting many parties to file amicus briefs ahead of the preliminary hearing on October 30. An amicus brief, also known as a friend-of-the-court brief, is a legal document filed by an individual or organization that is not a party to a case but has an interest in the outcome. Retail groups such as the National Retail Federation (NRF), National Association of Convenience Stores (NACS), and the Food Industry Association (FMI)  have all filed briefs in support of the law.

Conversely,  the Electronic Payments Coalition (EPC) and the Electronic Transactions Association (ETA) have both filed briefs in support of the lawsuit and injunction. Most recently, the Office of the Comptroller of the Currency (OCC) also filed a brief in support of the lawsuit, drawing further national attention to the matter.

How should merchants be preparing?

The passage of the IIFPA could mark a watershed moment for merchants nationwide. With billions of dollars in sales tax paid annually, eliminating interchange fees would lead to a significant reduction in the fees merchants incur. On October 30, a preliminary hearing will determine whether the request for an injunction will be granted by the court,  shaping the next 12 months for merchants in Illinois and beyond.

It is nonetheless important for payments managers in Illinois to prepare in the meantime by understanding how their transaction data is presented and processed, enabling them to take full advantage of a future where the law comes into effect.

To keep up with the IIFPA, and other payments topics such as the Credit Card Competition Act (CCCA) , please reach out to Josh Pynn, Leslie Crisp, or Beth Provenzano to join our Advocacy and Communications Committee.