Illinois Delays Tax & Tip Swipe Fee Ban

Illinois businesses that accept credit card payments have been closely watching developments surrounding the Interchange Fee Prohibition Act.

Recent legislation delays implementation of the law until July 1, 2027, giving businesses, payment processors, and financial institutions more time to prepare. 

While the delay provides temporary relief from implementation concerns, organizations should continue monitoring developments because the law could significantly change how interchange fees are applied to certain transactions. 

What Is the Interchange Fee Prohibition Act? 

Interchange fees are charges paid by merchants whenever customers make purchases using credit cards. These fees are typically assessed as a percentage of the total transaction amount. 

The Illinois Interchange Fee Prohibition Act prohibits payment card networks, issuers, and processors from charging interchange fees on the portions of a transaction attributable to: 

• State and local sales taxes 
• Excise taxes 
• Gratuities 

In other words, businesses would pay interchange fees only on the underlying purchase amount rather than on taxes and tips collected as part of a transaction. 

What Isn’t Changing? 

One point worth emphasizing is that the law does not change Illinois sales tax rates, sales tax rules, or a business’s obligation to collect and remit sales tax. 

Businesses will continue charging, collecting, and remitting sales tax just as they do today. 

The change is directed at payment card networks, issuers, and processors. If implemented, the law would prohibit interchange fees from being assessed on the portions of a transaction attributable to sales taxes, excise taxes, and gratuities. 

In practical terms, customers would see no difference in how sales tax is charged. The primary impact would be on how payment processing fees are calculated behind the scenes. 

Why Does This Matter? 

For businesses that process large transaction volumes, particularly retailers, restaurants, hospitality businesses, and entertainment venues, the law could reduce payment processing costs by preventing interchange fees from being applied to taxes and tips collected as part of customer transactions. 

At the same time, implementation has generated significant discussion among financial institutions, payment processors, and business groups because of the operational requirements associated with separating taxable and nontaxable portions of transactions. 

What Should Businesses Do Now? 

Although implementation remains more than a year away, businesses should not ignore the issue. 

Organizations may want to: 

• Monitor future legislative and regulatory developments 
• Discuss potential impacts with payment processors 
• Evaluate current processing costs 
• Review how taxes and gratuities are captured within point-of-sale systems 
• Assess whether internal systems can support any future reporting requirements 

Businesses that understand their transaction data today will be better positioned to respond if implementation proceeds as scheduled.  

The delay of the Interchange Fee Prohibition Act gives Illinois businesses additional time to prepare, but it does not eliminate the need for planning. 

As implementation guidance evolves, businesses should evaluate how the law could affect payment processing costs, operational procedures, and compliance requirements. 

If you have questions about how this legislation may affect your business, contact FGMK today. Our team can help you understand the potential financial and operational implications and prepare for future developments.