Tax Insight

Federal court upholds Illinois interchange fee ban on state and local tax and gratuities, enjoins data use restrictions

Insight
5 minute read
February 26, 2026

What happened?

The US District Court for the Northern District of Illinois issued a memorandum opinion and order on February 10, 2026, partially granting cross-motions for summary judgment in litigation challenging the Illinois Interchange Fee Prohibition Act (IFPA).

The court upheld the IFPA provision prohibiting the charging of interchange fees on state and local tax and gratuity components of electronic transactions, finding that it is not preempted under the National Bank Act (NBA) and related federal statutes.

The court permanently enjoined enforcement of the statute’s data usage limitation as applied to national banks, federal savings associations, federal credit unions, certain out-of-state state banks, and certain payment card networks and processors.

Illinois Bankers Association et al. v. Raoul, No. 24-7307 (N.D. Ill. Feb. 10, 2026)

The American Bankers Association has indicated it intends to appeal the ruling. The IFPA becomes effective on July 1, 2026.

Why is it relevant?

Illinois is the first state to prohibit interchange fees specifically on state and local tax and gratuity portions of an electronic payment transaction. While the court enjoined the data usage limitation for certain federally protected issuers, the interchange fee prohibition remains scheduled to take effect July 1, 2026.

This decision elevates the importance of merchants identifying and transmitting tax components within electronic payment data. The statute also includes a $1,000 per-transaction civil penalty for certain violations by an entity that has received the required information.

As a first-of-its-kind measure, the IFPA may influence legislative proposals in other jurisdictions, increasing the need for monitoring and scenario planning. Industry stakeholders have raised concerns about the ability to comply with the IFPA based on substantial changes to the existing data infrastructure used by merchants, issuers, and payment card networks. For merchants with large state and local tax remittances, the interchange fee provision may offset incremental costs resulting from the $1,000 cap instituted on the Illinois retailers’ discount effective as of January 1, 2025.

Actions to consider

Merchants and other electronic payment ecosystem participants with Illinois activity should assess readiness for the July 1, 2026 effective date of the interchange fee prohibition while monitoring potential appellate developments.

Entities using the payment card network should consider:

evaluating whether point-of-sale systems can isolate state and local tax and gratuity components at the transaction level in a manner consistent with Illinois requirements
assessing ERP and tax engine configurations to transmit tax component data through the payment ecosystem
reviewing reconciliation procedures to confirm tax amounts remain identifiable and supportable for audit and reporting purposes
analyzing contractual arrangements with processors and acquirers regarding data transmission obligations
preparing contingency planning scenarios while monitoring further judicial developments
monitoring potential legislative activity in other states that could expand similar limitations.