Illinois Interchange Fee Prohibition Act: State Defends Limits on Taxes and Tips
Illinois’s ban on assessing swipe charges to the portions of a purchase that are sales tax or gratuities does not intrude on banks’ or card networks’ authority to set pricing, the state attorney general argued Friday while defending the measure before an appeals court. The Illinois Interchange Fee Prohibition Act is a state law that prohibits charging interchange fees, network fees, or other per-transaction “swipe” charges on the tax and tip portions of an electronic payment, requiring those portions to be excluded from the fee calculation.
Interchange fees are charges tied to card transactions that flow through the payment chain: a merchant’s payment processor routes a card purchase through a network, and the merchant’s bank (the “acquirer”) pays the cardholder’s bank (the “issuer”) an interchange amount that is typically passed back to the merchant as part of overall processing costs.
Preemption Dispute Over Interchange Fees
In a brief to the 7th United States Circuit Court of Appeals, Attorney General Kwame Raoul’s office said the law is not preempted by the National Bank Act because the state rule does not restrict national banks’ ability to establish or collect interchange fees from their own customers. The state also pointed to continued federal regulation of payment fees—such as the Durbin Amendment’s framework for regulating certain debit-card interchange and routing—as consistent with the idea that fee rules can coexist with bank powers, while lenders argue that Congress set specific federal boundaries that states cannot extend.
Preemption disputes like this often turn on whether a state rule merely increases costs or whether it meaningfully prevents a bank from exercising a federally granted power.
The state’s filing answered an appeal by a coalition of banks and credit unions challenging the statute. Four trade associations for those institutions sued Illinois in August 2024 over the first state law of its kind.
Federal Court Ruling and Expedited Appeal
In February, United States District Judge Virginia Kendall in Chicago declined to issue a preliminary injunction blocking the state law, but she invalidated a provision that restricted how banks, networks, and other entities could use transaction data.
Last month, the 7th Circuit granted lenders an accelerated schedule, and on Tuesday the court set oral arguments for May 13. Unless further court action intervenes, the case is expected to proceed through argument and a later merits decision while the parties continue to dispute whether any part of the law should be paused.
Effective Date and One-Year Delay
The statute is slated to take effect July 1, following lawmakers’ vote last year to postpone implementation by one year. For merchants, supporters say the change could reduce processing costs on transactions where sales tax and tips make up a meaningful share of the total, while also pushing businesses and their vendors to ensure receipts and transaction records can reliably identify and separate those amounts for fee calculations and reconciliation.
Industry Opposition and Amicus Briefs
Banks and their allies submitting amicus briefs contend the Illinois measure will harm the United States payment system by encouraging other states to adopt similar fee limits, and they argue it is unlawful on multiple theories, including federal preemption and claims that it impermissibly interferes with federally conferred banking powers. They also warn that the rule effectively reaches beyond Illinois because card transactions are cleared through nationwide networks and issuer systems, meaning compliance could require changes to pricing, settlement, and reporting practices that are not easily confined to in-state activity.
Amici backing the lenders include:
- Office of the Comptroller of the Currency
- Ten former Office of the Comptroller of the Currency officials
- Electronic Transactions Association
- Electronic Payments Coalition
In a March 16 brief, amici described payment card networks as essential to credit card lending and deposit services and said the Illinois measure substantially interferes with those powers. Banks also contend that operational compliance would require reconfiguring payment systems to identify taxable and gratuity components with sufficient accuracy, updating merchant and processor data formats, managing exceptions (such as returns and adjustments), and absorbing added monitoring and dispute-resolution costs when transaction details do not cleanly separate those amounts.
State’s View Under the National Bank Act
The attorney general also asserted that when Congress enacted the National Bank Act, it anticipated continued state regulation of national banks so long as such rules do not impair the exercise of federally conferred powers.
States may regulate banks even-handedly, including in ways that affect or add costs for financial institutions. At bottom, plaintiffs’ preemption claim amounts to an objection that complying with the interchange-fee limitation is expensive.