Illinois Swipe Fee Law Appeal: What Merchants Should Do Now
The Illinois Interchange Fee Prohibition Act appeal keeps tax-and-tip swipe fee relief on hold. Learn who is exempt and how to plan your pricing now.
Photo: Pixabay
On this page 8 sections
- What Happened in the Illinois Interchange Fee Prohibition Act Appeal
- Quick Recap: What the Law Says About Interchange on Sales Tax and Tips
- What the Illinois Swipe Fee Law Injunction Blocks Today
- Why Banks Want a Fast Illinois Attorney General Swipe Fee Appeal and What Could Happen Next
- What It Means for Tip-Heavy and High-Tax Businesses
- Questions to Ask Your Processor About Collecting Tax and Tip Data
- How to Plan Your Pricing While the Case Is Unresolved
- Next Steps for Illinois Merchants
Key takeaways
- Illinois has appealed the final judgment that shields national banks, out-of-state state banks, federal credit unions and card networks from the IFPA's interchange limit.
- The IFPA's effective date is now July 1, 2027, and the appeal may not be decided by then. Don't count on lower fees for tax and tips yet.
- Ask your processor now whether your POS and gateway can send tax and tip amounts as separate fields so you're ready if the law takes effect.
- Plan prices on today's costs. Treat any future relief on tax and tip fees as a bonus, not something your budget depends on.
Many Illinois restaurants, salons, hotels and retailers have been waiting for the state's ban on swipe fees charged on sales tax and tips. That wait just got longer. The Illinois Interchange Fee Prohibition Act appeal is now in front of the federal appeals court, and most of the relief merchants expected is blocked while it plays out. This article covers what changed in October 2026, who the injunction covers, what could happen next, and how to plan your pricing and payment data in the meantime.
Status as of October 21, 2026. This case changes often. This is general information, not legal advice. Check the current status with a qualified attorney before you make pricing or contract decisions.
What Happened in the Illinois Interchange Fee Prohibition Act Appeal
In October 2026, Illinois Attorney General Kwame Raoul said the state will appeal the ruling that keeps the Interchange Fee Prohibition Act (IFPA) from applying to national banks, state banks chartered outside Illinois, payment card networks and federal credit unions. Chief Judge Virginia M. Kendall of the U.S. District Court for the Northern District of Illinois signed a stipulated final judgment on September 22, 2026, which allowed the appeal to go forward.
The bank and credit union groups that sued the state (the Illinois Bankers Association, the American Bankers Association, America's Credit Unions and the Illinois Credit Union League) filed a cross-appeal. The case is now back at the U.S. Court of Appeals for the Seventh Circuit.
If you've been following our earlier coverage of the IFPA's delays, lawsuit and next steps, here's the short version: the appeal keeps the outcome uncertain for at least several more months.
Quick Recap: What the Law Says About Interchange on Sales Tax and Tips
Interchange is the fee the card-issuing bank receives on each card sale. It's set by the card networks and makes up the largest part of most merchants' processing costs. (For background, see our guide to how interchange fees are set.) Today, interchange is charged on the full transaction amount, including the sales tax and any tip.
The IFPA tries to change that. Based on published legal summaries:
- It bars interchange on the sales tax, excise tax and gratuity portions of a card transaction, as long as the merchant tells the acquiring bank the amounts of those taxes and tips.
- It also restricted how banks and networks could use transaction data. The district court found that part preempted by federal law, and the attorney general has asked the appeals court to reverse that finding.
- Legal analysts have noted possible civil penalties of up to $1,000 per transaction for covered entities that don't comply.
The effective date has been pushed back more than once. The General Assembly delayed it to July 1, 2027 to give the lawsuit time to play out.
What the Illinois Swipe Fee Law Injunction Blocks Today
The injunction grew in stages over 2026:
| Date (2026) | Development |
|---|---|
| February 10 | District court issues a mixed ruling: the interchange limit is not preempted, but the data usage limit is |
| April 24 | The OCC (the federal regulator for national banks) issues an interim final rule and interim final order preempting the IFPA for national banks |
| June 1 | Court permanently enjoins the interchange limit for national banks, federal savings associations, out-of-state state banks and payment card networks |
| September 22 | Court extends the injunction to federal credit unions, following an NCUA interim final rule |
| October | Attorney general files notice of appeal; plaintiffs cross-appeal |
Who the Banks and Credit Unions Exemption Covers
Right now, these groups are exempt from the IFPA's interchange limit:
- National banks and federal savings associations
- State-chartered banks based outside Illinois
- Federal credit unions
- Payment card networks
Illinois-chartered banks and state-chartered credit unions were not part of that relief. Credit union groups say they remain focused on protecting state-chartered credit unions.
What this means for merchants: the networks that set interchange are outside the law for now, and so are the large federally chartered issuers behind many cards. It's an open question how much relief the law would deliver in practice if it took effect under the current judgment. Ask your processor and your attorney how they read it.
Why Banks Want a Fast Illinois Attorney General Swipe Fee Appeal and What Could Happen Next
The banking and credit union groups want the appeal expedited. They say a quick decision would tell financial institutions whether they must take on potentially steep compliance costs. Their central argument is that today's card systems can't charge interchange on only part of a purchase, such as the tax or tip.
The Seventh Circuit has issued a briefing schedule. CU Today reports that the case is heading toward a February appeals court argument. Courts don't promise decision dates, though. Possible outcomes include:
- The appeals court affirms the injunction. The exemptions stay, and the law's practical reach stays narrow.
- The court reverses some or all of it. More institutions, possibly including the networks, could become subject to the law. Implementation questions would follow right away.
- The case goes back to the district court, or the rules change again. Both have already happened once this year after federal regulators acted.
There could also be further review after the Seventh Circuit rules, or new action by the legislature or regulators. Plan for any of these.
What It Means for Tip-Heavy and High-Tax Businesses
The businesses that stood to gain the most are the ones where tax and tips make up a large share of each card sale:
- Restaurants and bars: Many Illinois checks combine food and beverage tax with a tip added after authorization, and Friday nights, weekend brunch and event crowds put a lot of tipped volume through the system at once.
- Salons and spas: Services often get generous tips, and taxability depends on the service. Our guide on whether salon and spa services are taxable explains how to check.
- Hotels: Room folios can carry several layers of state and local lodging taxes, plus gratuities on room service or banquets.
- Retail stores: Tips are rare, but sales tax is on nearly every ticket, so the savings would come from the tax portion alone.
Illustrative example (hypothetical numbers): A restaurant check has $80 in food, $8 in tax and a $16 tip, for a $104 total. At an assumed 2.5% interchange rate, the interchange on the $24 of tax and tip is $0.60. Across 2,000 card checks a month, that's about $1,200. Your numbers will depend on your card mix, tax rate, tipping patterns and pricing model.
The important point: if your 2027 budget assumes savings like these, the appeal makes them uncertain. Even if the law takes effect, whether savings reach your statement depends on how your processor prices your account (more on that below).
A related caution: don't try to recover card costs from staff tips while you wait. The rules on this are strict and vary. See our explainer on deducting credit card fees from employee tips, and check with an employment attorney.
Questions to Ask Your Processor About Collecting Tax and Tip Data
The law depends on merchants reporting their tax and tip amounts, so your data setup matters whatever the court decides. Ask your processor:
- Does my POS send the sales tax amount as a separate field in each authorization or settlement, or only the total?
- Is the tip captured as its own field? This matters for tip-adjust workflows (signing after the card is run), tip-at-terminal prompts and tips added on pay-at-table devices.
- Are service charges kept separate from gratuities? How a mandatory service charge is classified may matter under the law. Get legal guidance on how to treat yours.
- Can you give me a transaction-level report of tax and tip amounts by card, so I can check any future adjustments?
- If the law takes effect for some issuers, how will you handle reporting to the acquirer, and will any interchange reduction show up on my statement?
- Will savings pass through under my pricing model? On interchange-plus, lower interchange usually shows up directly. On flat-rate or tiered pricing, it may not. Our comparison of interchange-plus vs. flat-rate pricing explains why.
- What happens if I need to switch equipment or providers to get this capability? Check your contract terms, including any early termination fees.
If your current setup can't separate tax and tip, compare POS system options and confirm in writing with the provider that the equipment and software can send tax and tip as separate fields. Do this well before any deadline arrives.
How to Plan Your Pricing While the Case Is Unresolved
- Budget on today's costs. Assume interchange on tax and tips continues through 2027 unless the courts say otherwise. Treat any relief as a bonus.
- Run two scenarios. Estimate your monthly tax and tip card volume from POS reports, then compare costs with and without the IFPA so you know how much is at stake.
- Clean up your data now. Confirm tax rates are set up correctly in your POS, and make sure tips are recorded as tips and not lumped into item sales. Monthly credit card reconciliation will catch mismatches.
- Review your pricing model. If you're on flat-rate pricing, ask whether interchange-plus would cost less for your mix of sales and how it would handle any future reductions.
- Weigh compliant cost programs carefully. Dual pricing, cash discount and surcharging (where permitted) are all options. Each has its own disclosure, card network and state requirements. Our guide to cash discount vs. surcharging vs. dual pricing covers the differences. Confirm current Illinois rules and card brand rules before you launch anything.
- Set a check-in date. Look at the case again when the Seventh Circuit hears argument or rules, and again before July 1, 2027.
Next Steps for Illinois Merchants
The appeal doesn't change what you pay today. It does push back, again, the point when Illinois merchants will know whether interchange on sales tax and tips goes away. For now, budget on current costs, make sure your systems can report tax and tips separately, and know exactly how your pricing would pass through any savings.
MannyPay works with restaurants, salons, hotels and retailers on payment processing, POS hardware and compliant cost programs. To have a specialist review your current setup and statement, request a free quote. A MannyPay specialist responds within one business day.
Sources
- Illinois Swipe Fee Case Enters the Appeals Phase (American Banker)
- Illinois to Appeal Order Blocking State 'Swipe Fee' Restrictions (Bloomberg Law)
- Illinois AG Appeals Ruling Shielding Federal Credit Unions From Interchange Law (CU Today)
- Illinois Interchange Battle Heads Toward February Appeals Court Showdown (CU Today)
- Illinois AG Files Appeal in IFPA Litigation (America's Credit Unions)
- Judge Adds Credit Unions to Illinois Swipe Fee Injunction (American Banker)
- Illinois Court Extends Preemption of IFPA to Federal Credit Unions (Consumer Finance Monitor)
- Illinois Interchange Fee Law Maxes Out After Permanent Injunction and Legislative Postponement (Global Fintech & Digital Assets Blog)
- Illinois Swipe Fee Injunction Extended to Cover Out-of-State Banks, but Not Federal Credit Unions (Consumer Finance Monitor)
- OCC Responds to the District Court's Decision in Illinois Bankers Association v. Raoul (Moore & Van Allen)
- Illinois AG Defends State's Interchange Fees Prohibition and Data Usage Limitation on Appeal (Regulatory Oversight)
- OCC Preempts Illinois Interchange Fee Law, Clarifies Bank Authority to Charge Non-Interest Fees (Orrick InfoBytes)
This article is for general educational purposes and is not legal, tax or financial advice. Card network rules and state laws change; confirm current requirements for your business.
