Illinois’ ‘swipe fee’ law on the brink after another delay, adverse court ruling

An Illinois law banning “swipe fees” on taxes and tips — already delayed twice by lawmakers — appears to be on life support after a federal judge that once permitted it issued a permanent injunction against the measure this week.

U.S. District Judge Virginia Kendall handed down the injunction just hours after the General Assembly approved a one-year delay to the Interchange Fee Prohibition Act — subject of the ongoing “Credit Card Chaos” advertising campaign — before adjourning its spring session.

It’s the latest development in a yearslong fight between retailers and financial institutions about a fee that’s levied on every credit and debit card transaction.

Each time a shopper swipes their credit or debit card, it sets off a complicated string of payments between banks. The retailer’s bank pays an “interchange fee,” typically around 1-2% of the transaction cost, to the consumer’s bank. The fees include both a set amount and a percentage of the transaction, but the credit card companies, namely Visa and Mastercard, control how they’re calculated.

The Illinois law would have prohibited financial institutions from applying the fee to the tax and tip portion of bills. Banks and retailers have estimated it would affect $120 million to $200 million in revenue or more each year — to the benefit of retailers and chagrin of banks. Illinois would be the only place where such a law was implemented.

The law was slated to take effect July 1, after already being postponed from its 2025 effective date. If Gov. JB Pritzker signs the latest delay, its effective date would be July 1, 2027.

But it’s Kendall’s Monday ruling that casts the measure into further doubt.

Judicial history

Kendall in February ruled that the law could take effect, based largely on her interpretation of administrative rules written by the federal Office of the Comptroller of the Currency, an independent subsection of the U.S. Treasury.

But the OCC, in a pair of April filings, rewrote the language at question and issued an order specifically preempting Illinois’ law.

Addressing that change, Kendall wrote this week: “It is obvious from the face of the new rule that the modified language tees up an express conflict with the IFPA.”

Ultimately, Kendall decided Illinois’ law is now preempted by the federal rules, at least as it pertains to national banks, federal savings associations, payment networks and out-of-state banks.

The Electronic Payments Coalition — the bank-backed entity that’s been running the “Credit Card Chaos” ads — welcomed the ruling. But they warned of an uneven playing field.

“Even with this decision, credit unions and Illinois-chartered banks remain subject to IFPA, creating ongoing uncertainty and the risk of inconsistent treatment for parties in the same transaction,” the group said in a statement.

What happens next isn’t immediately clear, but further judicial review is almost guaranteed, with both sides weighing their legal options.

Legislative history, debate

The law was enacted two years ago at the behest of the Illinois Retail Merchants Association.

Pritzker and lawmakers in 2024 agreed to raise about $101 million in revenue to plug a budget hole by putting a $1,000 monthly cap on the “retailer’s exemption,” a tax break retailers claim for being the state’s de facto sales tax collectors.

Late in the legislative process, IRMA successfully lobbied for the long-sought tax and tip exemption to alleviate the financial impact of the exemption cap.

The financial institutions argue the electronic payment system as it exists today can’t segregate the tax and tip portion of a transaction, which could result in “credit card chaos” in Illinois if the law was to become effective.

Instead of complying, according to the coalition’s literature, the card companies could just stop processing cards altogether in Illinois. They could also stop processing tax and tip portions or require two separate swipes for the subtotal and the tax and tip portion of bills.

But Rob Karr, president and CEO of IRMA, has forcefully disputed the “chaos” claim.

“This industry has had two years to figure this out. Instead of using their vast resources to solve problems, they're doing all they can to distract, distort, delay and demonize,” Karr testified in a House committee over the weekend.

While Kendall said Illinois’ law is indeed preempted for certain institutions, she also faulted the OCC for using emergency authority to implement new rules. And she criticized the order specifically preempting Illinois’ law, writing that much of the logic contained in it “perches atop the catch-all justification of this is how things are done around here.”