Illinois judge rules in favor of swipe fee ban on sales tax and tips

• Key insight: A federal judge rejected the banking industry’s argument that the state law is preempted by the federal National Bank Act.
• What’s at stake: The ruling found that Swipe fees are set centrally by Visa and Mastercard, rather than by individual banks, thus undermining the banks’ argument for federal preemption.
• Forward look: Though the law is scheduled to take effect on July 1, banks are expected to appeal the decision and seek an emergency stay, arguing that there is no current system that exists to separate taxes and tips.

A federal judge has upheld a novel Illinois law that prevents banks and card networks from collecting swipe fees on the tax and tip portions of credit card transactions, dealing a major blow to the banking industry’s claims of federal preemption. 

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The law, which was passed last year by the Illinois legislature and signed into law by Gov. J.B. Pritzker, a Democrat, was originally set to take effect in July 2025. When banks sued over the law, the implementation deadline was pushed back by a year while the lawsuit was ongoing. Banks argued that the state law is preempted by the National Bank Act, which vests power over interchange fees with federal authorities. 

U.S. District Judge Virginia Kendall rejected that argument, finding that the National Bank Act does not preempt Illinois law because banks do not directly charge interchange fees but rather receive fees that are set by card networks. 

“This is a close case,” the judge wrote. “That is true in part because the law it addresses is novel. The Parties have indicated that no other State has an equivalent to the [Illinois Interchange Fee Prohibition Act,] and thus no precedent sits directly on point.”

The law is set to take effect on July 1. Banks are expected to appeal and likely seek an emergency stay from the U.S. Court of Appeals for the 7th Circuit.

The ruling by the Chicago judge is a win for retailers and consumers but a loss for banks, credit card issuers and networks. 

“This is a major victory for merchants, their customers and their employees,” said Doug Kantor, general counsel of the National Association of Convenience Stores and a member of the Merchants Payments Coalition’s executive committee. 

Retailers and merchants collect taxes and tips that are then turned over to the state and to employees. Kantor said “it’s unfair to punish them by charging them price-fixed swipe fees for doing that. These fees drive up prices for consumers at a time when affordability is the key issue facing our nation’s economy.”

The Illinois Bankers Association sued Illinois Attorney General Kwame Raoul in 2024 challenging Illinois Interchange Fee Prohibition Act. The lawsuit claimed that restricting fees on taxes and tips violates federal law and should be blocked. 

Richard Hunt, executive chairman of the Electronic Payments Coalition, called on the state legislature to repeal the law. Currently no system exists to create a carve out for separate portions of a consumer’s transaction and implement such a change, he said. 

“This reckless policy, which will make Illinois an outlier in the interconnected global payments system, must be fully and swiftly repealed by the Illinois General Assembly,” Hunt said in a press release. “The provisions in this law remain a threat to the safe and secure payment processing system that protects businesses and consumers every day.” 

Jaret Seiberg, managing director at TD Cowen, said that while he expects banks to eventually prevail in their litigation, the ruling could trigger a congressional response that could affect interchange pricing. 

“We view this law as unworkable and could disrupt the ability of most banks to process credit and debit transactions in the state,” Seiberg wrote in a research note. 

Because there is currently no way for data on taxes and tips to be transmitted along with the payment, banks will have a tough time retroactively assessing the accuracy of refund requests from merchants, he said. 

The Illinois Chamber of Commerce, Illinois State Black Chamber of Commerce and Illinois Hispanic Chamber of Commerce all opposed the law, but it was supported by merchants, particularly large megastores. In a study, the Electronic Payments Coalition found that 40 of the largest retailers will pocket up to 40% of an estimated $118 million in interchange fees. 

The Office of the Comptroller of the Currency, which charters and examines national banks, had filed an amicus brief in the litigation, calling the Illinois law “ill-conceived, highly unusual and largely unworkable.”

But the judge rejected that view, stating that swipe fees are set centrally by Visa and Mastercard regardless of which bank issues a card. 

“The payment card networks built this ecosystem, and the payment card networks set these fees,” Kendall wrote. “To claim that the [Illinois law] impermissibly interferes with the power set out in the NBA — which ‘should be arrived at by each bank on a competitive basis and not on the basis of any agreement’ — does not add up in the face of that reality.”