Judge Upholds Illinois Law’s Interchange Fee Restrictions; Strikes Down Data Usage Limitation

Earlier this week, the Northern District of Illinois upheld a prohibition on 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 Illinois Interchange Fee Prohibition Act (IFPA) is scheduled to be effective July 1, 2026. The Court struck down the portion of the IFPA that makes it unlawful for “[a]n entity, other than the merchant” involved in a transaction to “distribute, exchange, transfer, disseminate, or use” the associated data “except to facilitate or process the electronic payment transaction or as required by law” (“Data Usage Limitation”).

Under the IFPA, the interchange fee restrictions require merchants to transmit the tax and gratuity information as part of the transaction; provided however, that the merchant has up to 180 days to submit the relevant documentation, which in turn triggers a 30-day window in which the card issuer must credit the merchant for the excess interchange fees. As there does not currently appear to be an automated process to complete the information submission, card issuers should expect merchants to manually submit information under the IFPA. Card issuers and payment card networks are subject to a civil penalty of $1,000 per electronic payment transaction under the IFPA if they have received the tax and tip documentation and do not credit the merchant within the 30-day window.

On August 15, 2024, numerous banking associations filed a complaint against the Illinois Attorney General challenging the enactment of the IFPA and sought a declaratory judgment that the IFPA is preempted by federal laws, unconstitutional, and invalid as applied to any participant in the payment system. Further, the associations sought to permanently enjoin the state from taking any investigatory or enforcement actions under the IFPA.

In December 2024, the Court granted a preliminary injunction to nationally chartered banks and federal savings associations and, in February 2025, expanded the injunction to out-of-state banks. The Court found that the National Bank Act and the Home Owners’ Loan Act likely preempted the IFPA’s application to national banks and federal savings associations, while the Riegle–Neal Interstate Banking and Branching Efficiency Act likely preempted the IFPA’s application to out-of-state State-chartered banks. Credit unions, Illinois-based banks and credit card companies were not covered by preliminary injunction.

In denying the permanent injunction for the interchange fee restriction, the Court relied upon the fact that the payment card networks, not the financial institutions, set the interchange fee amount and merchants must transmit the information about what portion of the transaction is gratuities and taxes. Acknowledging the complicated compliance challenges of the IFPA, including the onerous manual processing, the Court focused on whether federal law preempts the IFPA noting that the thrust of federal regulations is not to protect fees centrally established by a third-party company. The Court stated, however, that “This is a close call.”

In issuing the permanent injunction for the Data Usage Limitation, the Court found that the IFPA directly constrains the powers under federal law that gives banks broad power to process data. The Court stated, “The federal power to use data is express, and it permits the processing and use of data whether or not it comes from particular transactions. Unlike the prior provision, the scope of the conflict is not a close call.” The Court also concluded that the Data Usage Limitation is also preempted with respect to out-of-state State-chartered banks and federal credit unions.

As it stands, the interchange fee restrictions will apply to card issuers whose cardholders who use their cards or cardholder data for purchases in the state of Illinois. As the July 1^st compliance date nears, debit and credit card issuers will need to prepare for compliance by (i) tracking Illinois state and local taxes; (ii) creating procedures to receive and review merchant documentation regarding the amount of the taxes; (iii) informing merchants to which address to mail the documentation; (iv) creating procedures to pay merchants refunds within 30 days of receipt of the documentation; (v) training employees on the new procedures; and (vi) revising accounting practices for this trailing activity. Card issuers will also need to work with their payment networks to determine the process to include any previously issued merchant refunds in the chargeback process. We expect a manual process for card issuers until merchant acquirers can update the point of sale terminals in the state of Illinois to bifurcate taxes and gratuities from the purchase amount. Reach out to Winthrop if you need assistance in creating these compliance procedures.

This is a devastating ruling for the payment card industry; an industry that is still waiting for the merchant promised discounts after the Regulation II’s regulation of debit card interchange. The plaintiffs bank associations issued the following a joint statement in response to the Court’s ruling:

We are deeply disappointed by today’s ruling, and given the July 1 implementation date of the Illinois Interchange Fee Prohibition Act, we will appeal this decision. As the co-plaintiffs demonstrated and the OCC agreed, IFPA is clearly and fully preempted by federal law. The decision not to protect the payment system from this misguided state law is a serious error that will unleash chaos and confusion on Illinois consumers and businesses. We cannot let that stand.

In light of this outcome, we renew our call for state lawmakers to repeal this flawed law before it can do any more harm to the Illinois economy. The fight over IFPA and any similar proposal will continue.

Illinois is the first state to enact interchange fee restrictions. Unfortunately, this order may open up the flood gates for other states to enact similar legislation. Winthrop will monitor for copycat laws. Winthrop will monitor the case on appeal to the Seventh Circuit.