Illinois Interchange Ruling: No Swipe Fees on Taxes and Tips - What It Could Mean for Issers

Illinois is a small state-level story with a potentially big interchange policy template.

This is almost certainly headed for an appeal and a likely stay pending appeal, so I wouldn’t bet on the July 1, 2026 date holding.

Still, yesterday, a federal court in Illinois upheld the Illinois Interchange Fee Prohibition Act. As written, it would prohibit interchange from being charged on the sales tax and gratuity portion of transactions at Illinois merchants.

But the idea matters. If this framework spreads (other states, or federally), it has real implications for the entire ecosystem, including issuer economic impacts and the infrastructure investment needed to implement it.

The pitch - “No swipe fees on taxes and tips”:
- Tax goes to the state
- Tip goes to employees
- Merchants shouldn’t pay interchange on dollars they don’t keep

Why it’s operationally hard

To implement it cleanly, you need:
- Tax and tip captured reliably at the POS and carried through auth → clearing → settlement
- Tips added post-auth handled cleanly in hospitality edge cases
- A workable definition of an “Illinois transaction,” plus audit and liability rules

The issuer angle and copycat risk
In tip-heavy categories, tax plus tip can represent roughly 10% to 25% of the ticket. Excluding that portion means issuers earn interchange on a smaller base.

Illustrative math:
- If 20% of purchase volume is in tax and tip-present categories
- And the excluded portion averages 15%
- Then approximately 3% of purchase volume is removed from the interchange base

Illinois alone is unlikely to materially impact most national issuers. The bigger risk is diffusion.