Illinois Banned Interchange on Tax and Gratuity (Mostly)
Illinois Says You Should Not Pay Interchange on Tax and Gratuity: But the Start Date Just Moved Again
Here is the version an Illinois restaurant owner has probably heard: the card companies can no longer charge interchange fees on the sales tax and the tip portion of a card transaction — only on the actual food and drink. The pitch sounds like found money. Every time a customer leaves a 20 percent tip and pays 10.25 percent Chicago sales tax on a $200 check, the interchange on roughly $60 of that bill is supposed to disappear.
The interchange on tax and gratuity is real as a law. Illinois passed it, and a federal judge upheld the core of the tax and gratuity carve-out in February 2026. But the start date keeps moving: it was first scheduled for July 1, 2025, then pushed to July 1, 2026, and in late May 2026 Illinois lawmakers delayed it a second time — to July 1, 2027 — in the state budget and now signed into law as Public Act 104-0532. And the clean “you stop paying” story collapses the moment you look at how it actually works — and at what a federal regulator, and then a federal court, did to it in the meantime. This post walks through what the rule says, why the savings are far less automatic than the headline implies, and what an Illinois merchant should actually do about it.
The Interchange on Tax and Gratuity Is Banned: If the Merchant Does the Work
The Illinois Interchange Fee Prohibition Act (IFPA) prohibits issuers, card networks, acquiring banks, and processors from charging or receiving interchange fees on the tax and gratuity portions of an electronic payment transaction. That is the first law of its kind in the country. Historically, interchange is calculated on the entire transaction — food, tax, and tip all lumped together. The IFPA carves the tax and tip out of that fee base.
The critical detail is who has to make it happen. The savings are not automatic at the point of sale. The merchant has to transmit the exact tax and gratuity amounts to the acquiring bank or issuer, either in real time during authorization or after the fact. If the merchant does nothing, nothing changes. And the reimbursement path is slow: a merchant has up to 180 days from the transaction to submit the tax and tip data, and once submitted, the issuer has 30 days to reimburse the interchange collected on those amounts. So even in the best case, this is a data-transmission-and-rebate process, not a lower line on your statement the next morning.
The IFPA only works if the tax and gratuity amounts are transmitted with the transaction. Most current restaurant point-of-sale setups do not break the tax and gratuity amounts out in the data they send. Whether you ever see a dollar of this depends entirely on whether your POS and processor can transmit that detail — and most can’t, yet.
A Federal Court Has Now Blocked the Carve-Out for Most Cards
The trouble started with the federal regulator for national banks. In late April 2026, the Office of the Comptroller of the Currency rewrote the rule at the center of the case to state explicitly that national banks may charge fees set by a third party such as a card network, and issued an order concluding that federal law preempts the IFPA. The National Credit Union Administration took a parallel position for federally chartered credit unions.
Then the courts acted. The same federal judge who in February 2026 had ruled the law could take effect reversed course on June 1, 2026, after the case was sent back to her to account for the OCC’s rewritten rule. She issued a permanent injunction finding the IFPA preempted as it applies to national banks, federal savings associations, the card networks, and out-of-state banks. The injunction does not reach state-chartered institutions, so Illinois-chartered banks and state credit unions would still be subject to the law if it ever takes effect.
For a restaurant, that ordering is what matters. A large share of the credit and debit cards in your customers’ wallets are issued by national banks and run on the major networks — exactly the cards a court has now walled off from the tax and gratuity carve-out. What is left is the narrower set of cards from state-chartered issuers, and only if the law survives to its rescheduled July 1, 2027 start. Between a second legislative delay and a permanent injunction landing in the same week, the law sits in both legislative and judicial limbo, and more appeals are expected. The repeated delays are themselves a signal: a law this hard to implement keeps getting pushed because the machinery to actually comply does not yet exist.
If a sales rep is pitching you the IFPA as a guaranteed cost reduction, treat that with heavy skepticism — the law will not take effect until July 1, 2027 at the earliest, and that date has already moved twice. Between a federal court injunction now blocking the carve-out for national-bank and network cards, the second delay pushing the start to July 2027, and the data-transmission requirement most systems can’t meet, the realistic near-term savings for a typical Illinois restaurant are uncertain and likely small. Plan as if the number is zero until your processor proves otherwise.
What the Carve-Out Looks Like on a Real Check
The idea behind the law is simple even if the execution is not. Interchange has always been charged on the full transaction. The IFPA says it should only apply to the goods-and-services subtotal, with the tax and gratuity lines excluded from the fee base. Here is a $200 dinner check in Chicago, showing which portions the law intends to protect from interchange:
On this check, the tax and tip together are about $48 of a $208 total. If every dollar of that carve-out actually took effect, the interchange savings on $48 at a typical effective rate is on the order of a dollar or so per check — meaningful at restaurant volume over a year, but only if the law applies to the card used and your system transmits the data. For a card issued by a national bank or run on a major network, a federal court injunction now keeps the green portions above subject to interchange anyway.
Three Practical Steps for an Illinois Merchant
Illinois is the clearest instance of a broader pattern in how these bills fail. You cannot control whether the court injunction holds, whether a higher court reverses it, or whether the start date slips a third time. What you can control is whether you are positioned to benefit if the carve-out does take effect, and whether you are being sold a story that does not match reality. Three things are worth doing now.
First, ask your processor a direct question: can your point-of-sale system transmit separate tax and gratuity amounts in the transaction data, and is your processor set up to apply or rebate the IFPA carve-out? If the answer is no or “we’re looking into it,” that tells you the savings are not coming on day one regardless of what the law says. Second, do not sign anything — a new processor contract, an equipment lease, a pricing change — on the promise of IFPA savings. The savings are too uncertain, and too far off, to anchor a decision to. Third, if your current effective rate is high to begin with, that is the real cost worth attacking. The IFPA might trim a sliver off your tax and gratuity someday; a genuinely competitive interchange-plus rate addresses the whole bill today.
Frequently Asked Questions
Not soon, and not automatically. Illinois delayed the law a second time, to July 1, 2027, signed into law as Public Act 104-0532 on June 26, 2026. Even once it takes effect, the savings are not automatic: your point-of-sale system has to transmit the separate tax and gratuity amounts with the transaction, and reimbursement runs through a submit-and-rebate process — up to 180 days to submit, 30 days for the issuer to reimburse. If your system doesn’t break those amounts out, nothing changes.
Partially. On June 1, 2026, a federal judge issued a permanent injunction finding the IFPA preempted for national banks, federal savings associations, the card networks, and out-of-state banks — building on an April 2026 OCC rule change. State-chartered Illinois banks and credit unions are not covered, so the law would still apply to their cards if it takes effect (now scheduled for July 1, 2027). Which specific cards are affected is something your processor would have to determine, and further appeals are expected.
Not directly — it applies to electronic transactions processed in Illinois. But it’s the first law of its kind, and similar tax-and-gratuity carve-out bills have been introduced in other states, so the outcome here is being watched nationally.
Don’t switch on that promise alone — the savings are too uncertain and too far off right now. If your effective rate is high, switching for a better overall rate may make sense on its own merits, but treat any IFPA-specific savings as a maybe, not a reason to sign.
Send Us Your Statement. We’ll Tell You What the IFPA Will and Won’t Save You.
If a rep has pitched you guaranteed savings on tax and tip, send Brookside one recent statement first. We’ll tell you whether your current setup can even transmit the data the law requires, what the realistic carve-out is on your card mix given the court injunction, and — more usefully — where your effective rate is actually high regardless of the IFPA. The review takes about fifteen minutes. Learn more about payment processing consumer protections from the CFPB.
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