Illinois Delays Swipe Fee Ban on Taxes and Tips Amid Ongoing Court Challenge from Banks

Illinois has postponed for a second year the implementation of a controversial law that would prohibit credit card companies from charging processing fees on the sales tax and tip portions of customer transactions. The delay pushes the effective date of the Illinois Interchange Fee Prohibition Act (IFPA) to at least July 2026, as a legal battle over its validity continues to unfold in federal court.

The law, signed by Governor J.B. Pritzker, was initially set to take effect in July 2025. It targets what are commonly known as “swipe fees,” or interchange fees, which are percentage-based charges merchants pay to banks every time a customer uses a credit or debit card. Retailers have long argued that they should not have to pay these fees on money they are legally required to collect and pass on to the state government (sales tax) or to their employees (tips).

The delay was enacted by the state legislature to allow time for the resolution of a lawsuit filed by the Illinois Bankers Association and other financial groups. The lawsuit seeks to invalidate the IFPA, arguing that the state law is preempted by the federal National Bank Act, which gives federally chartered banks the authority to set their own fees for services.

However, in a significant development for merchants, U.S. District Judge Virginia Kendall recently denied the banking associations' request for a permanent injunction. In her ruling, Judge Kendall rejected the banks’ preemption argument, pointing to what she called “the core snag” in their case: the fact that interchange fees are not set by individual banks but are centrally established by payment card networks like Visa and Mastercard.

“The Payment Card Networks built this ecosystem, and the Payment Card Networks set these fees,” the ruling stated. The judge concluded that the Illinois law does not impermissibly interfere with a national bank’s federally protected powers because the fees in question are not determined “on a competitive basis” by the banks themselves.

Retail and merchant associations celebrated the court’s decision. “The court recognized that credit card networks setting the fees for banks so that those fees were not competitive is a problem that allowed the state to regulate them,” said Doug Kantor, general counsel for NACS, a trade association for convenience stores. Attorneys representing the Illinois Retail Merchants Association, the National Retail Federation, and FMI—the Food Industry Association—had joined Illinois Attorney General Kwame Raoul in arguing for the law to be upheld.

Proponents of the ban contend it is a commonsense measure to protect businesses operating on thin margins. “Retailers operate on razor thin margins and should not be forced to pay swipe fees on money that was never theirs to begin with,” said Monica Welt, president of the Retail Litigation Center, which filed a brief in support of the state. “Illinois took a modest, commonsense step to rein in a hidden and regressive cost that ultimately hits consumers.”

Conversely, critics of the law, including the National Taxpayers Union, have labeled it a “regulatory migraine” and technically unworkable, arguing that the complexity of isolating Illinois-specific tax and tip charges within a national payment network is immense. They contend that swipe fees are essential for funding the payment system’s infrastructure, including fraud protection and customer rewards programs. The International Center for Law & Economics characterized the IFPA as a direct cost transfer from merchants to card-issuing banks, which would be forced to either absorb the processing costs for those transaction portions or find ways to recoup them elsewhere, disrupting their established revenue models.

The fight in Illinois mirrors a larger national debate over credit card fees. According to the Merchants Payments Coalition, swipe fees reached a record $187.2 billion in 2024, costing the average American family nearly $1,200 annually. Congress is currently considering the Credit Card Competition Act (CCCA), which would require banks with over $100 billion in assets to enable credit cards to be processed over at least one unaffiliated network, aiming to inject competition into a market where Visa and Mastercard control an estimated 80%.

While the prospect of reducing overhead is always appealing to business owners, the reality of this law is far more complex than a simple fee reduction. In our experience, regulatory changes impacting payment processing are rarely seamless. The delay in Illinois is a temporary reprieve from what could become a significant operational and accounting headache for small and mid-sized companies. Even if the law is ultimately upheld, payment processors will need to reconfigure their systems to bifurcate every transaction, and merchants will need to ensure their own systems are compliant. This creates new administrative burdens and potential for error. Proactive financial management is critical to navigating such changes without disrupting cash flow or compliance. For businesses that need to prepare for this kind of complex regulatory shift, having expert guidance is invaluable. The team at C&S Finance Group LLC provides outsourced CFO services to help clients anticipate and manage the financial impact of new legislation. You can learn more at csfinancegroup.com.

The banking associations are appealing Judge Kendall’s decision to the U.S. Court of Appeals for the Seventh Circuit. For now, the ban remains on hold, and Illinois businesses must watch as the legal and legislative battles over the cost of credit card acceptance continue to play out on both the state and national stages.