In a victory for banks and credit card companies, Illinois’ law aimed at ending credit card swipe fees on sales tax and tips has been delayed for another year.
The Interchange Fee Prohibition Act, which was passed in 2024, has been scheduled to take effect on July 1, 2026. Under legislation approved by lawmakers this spring, implementation has now been pushed back to July 1, 2027.
The act would make Illinois the first state to prohibit banks, credit unions and credit card companies from collecting interchange fees on the sales tax and tipped portion of transactions made with either debit or credit cards.
Time to Make a Strategy?
Key details around the implementation still have not been worked out. Separating taxes and tips from the rest of a retail transaction is not a simple exercise from a technical standpoint. Merchants could encourage customers to leave tips in cash, or require consumers to swipe their cards a second time to cover taxes and tips.
The next question is whether the relevant stakeholders will use the additional year to address some of the law’s major technological challenges, or whether opponents are simply hoping the measure never takes effect. Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, believes it’s the latter.
“Nobody’s figuring out anything,” Apgar said. “The reason is that if the card brands change the settlement system to accommodate this law, there’s no guarantee that the next state law won’t say something different and require even more changes.”
Pressure on the Processors
Payment processors are caught in the middle, tasked with creating policies and systems to comply with the law. Among other provisions, the act prohibits processors from raising fees to offset revenue lost from taxes and tips.
“What the Illinois law fails to account for is that something like 85% of the fees that a merchant pays go back to the card issuers, so it’s not like the processors have a lot of control over the settlement process,” said Apgar.
However, they still have some leeway in how they distribute the compliance burden among other participants in the payments ecosystem.
“If this law goes into effect at some point, it’s entirely possible that processors will update their merchant agreements with language like: Merchant represents that any transactions submitted for processing do not include any tax or tip amounts as required by Illinois state law,” Apgar said. “Now the processor is off the hook by shifting responsibility for compliance back to the merchant, at the same time forcing merchants to collect taxes and tips on restaurant checks in cash.”
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