New Law Could Upend Credit Card Payments for Tips and Taxes, Banks Fight Back in Court
A new Illinois law that will take effect on July 1 is poised to reshape how credit card payments are processed, particularly for tips and sales taxes. Known as the Interchange Fee Prohibition Act (IFPA), the legislation bars financial institutions from charging interchange, or “swipe,” fees on the tax and tip portions of transactions.
Interchange fees typically range from 1% to 3% of a purchase and are paid by merchants to banks each time a customer uses a card. Under the new law, those fees would only apply to the pre-tax cost of goods and services, a change designed to reduce expenses for retailers and restaurants.
The measure, passed as part of a broader state budget package, is the first of its kind in the United States. Supporters say it corrects what they view as an unfair practice—charging fees on money that businesses do not keep, such as taxes and tips.
Banks Warn of ‘Chaos’ and Mount Legal Challenge
Financial institutions, however, have mounted an aggressive campaign against the law, warning it could disrupt payment systems and confuse consumers. Industry groups including the American Bankers Association and America’s Credit Unions have challenged the law in court and pledged to appeal after a federal judge allowed most of it to stand.
Banking advocates argue that the global payments infrastructure is not designed to separate tax and tip amounts from total transactions. According to statements made at a Capitol news conference, implementing the law would require significant system overhauls involving banks, card networks, and point-of-sale providers.
Some industry-backed advertising campaigns have gone further, warning that “credit cards may not work for sales tax or tips” if the law takes effect. These claims reflect concerns that companies might alter services, impose new processes, or even limit operations in Illinois rather than absorb compliance costs.
Retailers Push Back, Call Concerns Overstated
Retailers and restaurant groups strongly dispute those warnings, arguing that the necessary data to separate taxes and tips already exists in transaction records. Industry representatives say implementing the change would require relatively minor adjustments rather than a complete overhaul of payment systems.
The Illinois Retail Merchants Association, which backed the law, frames it as long-overdue relief for businesses burdened by interchange fees. Its leaders argue that removing fees on taxes and tips could save retailers hundreds of millions of dollars annually, easing pressure on small businesses in particular.
Supporters also contend that the warnings of widespread disruption are exaggerated and part of a broader effort by financial institutions to protect a lucrative revenue stream. They argue that similar technological adjustments have been made in other contexts and that payment systems can adapt.
Legal Uncertainty and What It Means for Consumers
The law’s future remains uncertain as legal challenges continue. A federal judge upheld much of the legislation earlier this year, but appeals are ongoing, and higher courts could still intervene before or after the July implementation date.
If the law proceeds as planned, both consumers and businesses could see changes at checkout. Banks warn of potential complications, including new payment processes or limits on how cards are used for certain portions of a bill. Retailers, on the other hand, suggest the changes could eventually lead to lower costs and more transparent pricing.
For now, the outcome hinges on the courts and possible legislative action. As Illinois moves forward with a policy that could influence other states, the clash between banks and retailers highlights a broader debate over who should bear the costs of modern payment systems.