Removing credit card swipe fees on taxes, tips will save Illinoisans money

Every time an Illinois consumer pays with a credit or debit card, a portion of that transaction is routed to credit card companies through swipe fees. Most people assume those fees apply only to the price of what they’re buying. In reality, for decades, card networks have also imposed those fees on sales taxes collected for the government and tips left for workers.

At a time when businesses and families across Illinois are managing tight budgets and facing increasing financial pressures, the Interchange Fee Prohibition Act makes a common-sense change that will save Illinois residents hundreds of millions of dollars annually: It stops credit card companies from charging swipe fees on sales taxes and tips in Illinois. The law becomes effective July 1.

This reform is grounded in basic fairness. Illinois retailers act as sales tax collectors on behalf of state and local governments, administering one of the most complex sales tax systems in the nation. They also pass tips directly to workers. Yet, as it stands today, they pay fees on both, even though that money never belonged to the businesses in the first place. Those costs do not disappear. They are built into prices and ultimately paid by families at the register.

Importantly, this new law does not require any change in how consumers pay. Electronic transactions already distinguish between purchase price, tax and tip, and credit card companies routinely separate tax from purchase price in transactions today. Applying that same longstanding capability to consumer purchases is straightforward and already underway. Even now, for example, a restaurant check is authorized once, a tip is added, and the final amount is settled without a second swipe or separate payment. The new law leaves that familiar process intact and only changes how the credit card processor calculates its fee internally.

Banks, credit card companies can adapt

Banks, credit card companies and credit card processors are experts at adapting to different standards across the nation and world, with several states not even charging a sales tax, and versions of this law already exist in other countries. Illinois’ approach to consumer relief through the Interchange Fee Prohibition Act is a simple standard that these institutions can easily adapt to.

In fact, credit card companies can still charge fees on the product or service. They will simply be prohibited from charging extra fees on money that isn’t theirs. Despite this, banks continue to challenge the implementation of the law, recently filing a motion to appeal a ruling by a federal judge that upheld the Interchange Fee Prohibition Act.

So, to be clear, any chaos created in implementing this law in Illinois will be the banks’, credit card companies’ and credit card processors’ own doing. Concerns about credit card rewards programs similarly miss the mark. This law does not regulate or restrict rewards in any way. Any reward decisions remain entirely with card companies, and unless card companies coordinate in an anti-competitive way, they have strong incentives not to make such changes. Card companies remain free to structure rewards however they choose, just as they do today and have done through many policy changes worldwide.

The impact of this reform extends well beyond any single sector. Any business that accepts electronic payments, from retailers to restaurants to health care providers, now pays swipe fees on taxes and tips. Removing those fees will reduce operating costs, helping businesses in their effort to maintain reasonable prices and support jobs in the communities they serve.

For small businesses, even modest cost reductions can make a meaningful difference, and this law is the largest small-business relief Illinois has seen in decades. Lower structural costs give businesses more flexibility to offer more competitive pricing and remain viable in challenging economic conditions. That stability ultimately benefits communities and customers.

At its core, the Interchange Fee Prohibition Act corrects a long-standing imbalance in the payments ecosystem. Credit card companies and credit card processors should not profit from taxes consumers pay to support public services or from tips employees earn. By ending that practice, Illinois is reducing unnecessary costs and delivering historic relief to consumers and the Main Street businesses they rely on.

Rob Karr is president and CEO of the Illinois Retail Merchants Association.