On May 29, 2024, Illinois lawmakers passed an omnibus budget bill (HB4951) that includes the Interchange Fee Prohibition Act (the “Act”). The Act prohibits the collection of debit and credit card interchange fees for sales taxes, excise taxes and gratuities if the merchant informs the acquiring bank of the amount of these taxes and gratuities. The merchant can either submit the amount of taxes and gratuities at the time of the transaction authorization or settlement or seek reimbursement within 180 days of the transaction date. Issuers, payment card networks, acquiring banks and processes cannot increase the rate or amount of fees on the portion of the transaction subject to interchange to circumvent the effect of the law. Violations of the foregoing subject the entity to a civil penalty of $1,000 per transaction and the issuer must refund the merchant any interchange fee collected on taxes or gratuities. The Act also states that for any entity involved in the electronic payment (other than the merchant) that distributes, exchanges, transfers, disseminates or uses electronic payment transaction data except to process the electronic payment transaction or as required by law violates Consumer Fraud and Deceptive Business Practices Act.

As shown by merchant exclusion from the data protection provision and reduction of interchange fees, we suspect the merchants lobbied for this interchange ban to offset the losses merchants will incur in increased sales taxes once the new cap on sales tax discount goes into effect. In a later section of the bill, state law (35 ILCS 105/9) is revised to cap the 1.75% discount on the sales taxes collected to $1,000 per month.

On June 7, 2024, the bill was sent to Illinois Democratic Governor J.B. Pritzker for his signature. We expect Governor Pritzker to sign the bill into law with the interchange ban becoming effective on July 1, 2025. As we have previously explained, programming for these one-off state laws can be a very cumbersome process for retailers and their merchant processors and significantly increase compliance costs. Fortunately, here, impacted merchants, merchant acquirer, issuers, and payment networks will have at least a year to reprogram and test systems to comply with the Act. You can expect to see other states attempt to follow suit as attempts to pass the Credit Card Competition Act to lower credit card interchange have stalled and the Federal Reserve has not issued its final rule to lower debit card interchange.