Card fees on the tip and the tax: what's left of Illinois's ban

A table of four runs up a $180 check. The tax is $16 and the tip is $36. When the card is charged, the interchange fee is figured on the whole $232, not the $180 of food. The tax goes to the state and the tip goes to your server, but you pay a card fee on both.

Illinois tried to change that. Last week a federal judge made the change smaller again.

What the Illinois law says

The Interchange Fee Prohibition Act bars card issuers, networks, acquirers and processors from charging a merchant interchange on “the tax amount or gratuity” of a card sale. There is a catch. The merchant has to send the tax or tip amount as part of the authorization or settlement. A merchant who doesn’t can send the paperwork within 180 days, and the issuer then has 30 days to credit the fee back.

It was due to start in 2025. Lawmakers have delayed it twice, and it now takes effect July 1, 2027.

Who it no longer covers

Banks sued. In June, Judge Virginia Kendall of the Northern District of Illinois blocked the fee ban from being enforced against national banks, federal savings associations, out-of-state state-chartered banks and the card networks.

On September 22 she added federal credit unions to that list. The ruling leans on a rule the National Credit Union Administration issued this summer. That leaves, in the words of the American Bankers Association, “only certain state-chartered institutions, and especially those chartered in Illinois” still covered.

So if the law starts on schedule, the savings apply only when your customer’s card comes from one of the state-chartered banks or credit unions still covered. A card from a national bank or a federal credit union is outside it.

It isn’t settled. The case remains open to further proceedings in the Seventh Circuit, and the Merchants Payments Coalition has said it expects the court to be overruled in an appeal or a later case.

What to do about it now

Outside Illinois: nothing changes. But if a law like this ever reaches your state, it will turn on the same question: can your system tell the bank how much of the sale was tax and how much was tip?

In Illinois: you have until July 2027, and the answer to that same question decides whether you see any of the savings.

Either way, it’s worth five minutes to check. Ask whoever runs your payments:

• Does our terminal send the tax amount as its own field, or just the total?
• Does it send the tip separately, including tips added after the card is swiped?
• If the law survives, who files the paperwork for the sales where it didn’t?

If the answers take a week and three phone calls, that’s the problem to fix. It’s the same problem as a clerk keying the amount by hand: the numbers live in one system and the payment lives in another. When your POS and your payments are one system instead of five, the sale and the payment write to the same record, so nobody has to piece the tax and the tip back together.

The Seventh Circuit gets the next word. If you want to know what your terminal sends today, talk to an expert at 770-766-1060.