INDUSTRYPAYMENT PROCESSING
Illinois banned swipe fees on tax and tips. Here is why nothing has changed
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Payment Review Editorial Team
Payment Review Editorial Team
If you take cards in Illinois you were probably told at some point in the last two years that swipe fees on sales tax and tips were about to become illegal, and that your point-of-sale system would need to handle it. The date most people were given was 1 July 2026. That date has passed and nothing happened, which has left a lot of merchants unsure whether the law exists, whether it applies to them, and whether they were supposed to have done something.
The short version is that the law exists, has never taken effect, has been delayed twice by the legislature, and has now been permanently blocked against most of the institutions it was written to bind. It is worth understanding anyway, because it is the first law of its kind in the United States and the fight over it is the template for what happens to the next one.
The Interchange Fee Prohibition Act, codified at 815 ILCS 151, does something narrower than the phrase "swipe fee ban" suggests. It does not cap interchange. It removes two components of the ticket from the base on which interchange is calculated: the tax amount and the gratuity amount.
The prohibition runs against issuers, payment card networks, acquiring banks and processors — not against merchants, who are the intended beneficiaries. There is an anti-circumvention clause forbidding those parties from raising the rate on the remaining portion of the transaction to make up the difference. The civil penalty is 1,000 dollars per electronic payment transaction, plus a refund to the merchant of the interchange improperly charged. A separate provision restricting what transaction data may be used for, beyond processing the transaction itself, is enforced through the Illinois Consumer Fraud Act.
On the face of it, that is a meaningful amount of money. Interchange is charged on the full authorised amount, and on a Chicago restaurant ticket, where the combined sales tax rate is above 10 percent before the local restaurant taxes are added, the tax and the tip together can be a quarter of it.
The saving is not automatic at the till. Under the Act, the tax or gratuity amount is only excluded if the merchant transmits that amount as part of the authorisation or settlement process. That is a technical capability, not a policy decision, and it sits with your point-of-sale software, your gateway and your acquirer rather than with you.
There is a fallback for merchants who cannot send the data. You may submit tax documentation for the transaction to the acquiring bank or its designee within 180 days of the transaction, and the issuer then has 30 days to credit the interchange charged on the tax or gratuity amount. That is a rebate process, run per transaction, with a four-to-six-month lag. Whether it would ever have been worth operating for a business doing thousands of small tickets a week is a fair question, and one nobody has had to answer.
The build was always going to fall on the software. Tips and tax are already separate amounts inside a modern restaurant or retail point of sale — the Toast, SpotOn, Clover and Lightspeed end of the market all record them discretely — but recording an amount and transmitting it in the authorisation message for the acquirer to act on are different pieces of work, and on a tip that is adjusted after the card is authorised they are different pieces of work again.
The Illinois Bankers Association and several other trade bodies sued the state in 2024. The case is Illinois Bankers Association v. Raoul, before Judge Virginia M. Kendall in the Northern District of Illinois, and it has moved in both directions.
In December 2024 the court preliminarily enjoined the Act as applied to national banks and federal savings associations. On 10 February 2026 it ruled on cross-motions for summary judgment and largely upheld the interchange restriction — reasoning, notably, that interchange schedules are set by the payment card networks rather than by banks — while permanently enjoining the data-use restriction as applied to federally chartered institutions. For about ten weeks it looked as though the core of the law would survive.
On 24 April 2026 the Office of the Comptroller of the Currency issued an interim final rule on national banks' authority to charge non-interest fees, together with an interim final order concluding that federal law preempts the Interchange Fee Prohibition Act. Its position, published in OCC Bulletin 2026-17 and in the Federal Register on 29 April 2026, is that national banks, federal savings associations and federal branches and agencies are neither subject to the Illinois law nor required to comply with it.
The effect on the litigation was immediate. On 8 May 2026 the Seventh Circuit vacated the district court's judgment and remanded the case for reconsideration in light of the OCC's action. On 1 June 2026 Judge Kendall concluded that the new rule materially changed the preemption analysis and permanently enjoined enforcement of the interchange fee limitation against national banks, federal savings associations, certain out-of-state state-chartered banks governed by the Riegle-Neal Act, and the payment card networks.
The National Credit Union Administration followed with an interim final rule of its own, effective 30 June 2026, taking the same position for federally chartered credit unions. It does not reach state-chartered credit unions, which are supervised by their chartering states.
On 1 June 2026, the same day as the injunction, the General Assembly passed Senate Bill 3645, a sunset and effective-date omnibus that pushed the Act's operative article from 1 July 2026 to 1 July 2027. The governor signed it in late June as Public Act 104-0532, and the compiled statute now carries the 2027 date. It was the second delay; the first, in June 2025, had moved the original 1 July 2025 date back by a year.
So the position for an Illinois merchant is a law that is not in force until July 2027, and that on current rulings will not apply then to cards issued by national banks, federal savings associations or federal credit unions — which is most of the cards in most tills. Illinois-chartered state banks and state-chartered credit unions are outside the injunction and outside the federal preemption rules, so in principle the obligation still reaches them. The court itself described the result as a complicated legacy, and it is hard to improve on that. Card networks do not route by charter type, and a rule that applies to a minority of issuers is a rule the payments system has no obvious way to implement.
Very little, and cheaply.
That last point is the one worth taking seriously. A merchant on a bundled or tiered rate cannot see interchange at all, which means there was never any way to verify a saving under this law in the first place. Interchange only appears as its own line if you are on interchange-plus pricing — the model that Helcim and Stax are built around — and reading your own statement is the prerequisite for every other conversation about cost. We have a walkthrough of how to read a merchant processing statement that covers where interchange sits and what a markup actually looks like.
Illinois went first, and the two years since have produced a playbook for stopping a state interchange law: sue on National Bank Act preemption, and get the prudential regulator to say so by rule. It worked. Merchant advocates have spent a decade pursuing the same goal through federal antitrust litigation instead, with the long-running network settlement covering some of the same ground — we looked at what that settlement actually changes for merchants separately.
The lesson for a business owner is not about Illinois. It is that the cost of card acceptance is not going to be fixed for you by a statute in the near term, and that the levers you actually control — your pricing model, your effective rate, your dispute ratio, whether you surcharge — are the ones worth pulling.
