Illinois Legislature Passes Bill Banning Credit Card Swipe Fees on Sales Tax and Gratuities

SPRINGFIELD, Ill. — The Illinois state legislature passed a sweeping budget bill in late May 2024 that includes a first-in-the-nation provision prohibiting credit card interchange fees, commonly known as swipe fees, from being charged on the sales tax and gratuity portions of customer transactions. The measure, part of a broader package of tax changes, marks a significant victory for retailers who have long argued they are unfairly penalized for collecting taxes on behalf of the state. The bill now awaits the expected signature of Governor J.B. Pritzker. Under the current system, when a customer pays with a credit card, banks and payment processors charge the retailer a percentage-based fee on the entire transaction total. This includes the pre-tax sale amount, the state and local sales tax, and any tip left by the customer. Because retailers must remit the full amount of collected taxes to the government, they effectively pay the swipe fees on that tax portion out of their own revenue. The Interchange Fee Prohibition Act, included in the state budget, aims to end this practice, allowing retailers to be reimbursed for or avoid paying these fees on funds they do not keep. While the swipe fee victory is grabbing headlines, Illinois businesses must not overlook the fine print in this legislative package. In our experience, the new $1,000 monthly cap on the vendor's discount is a significant trade-off that could easily outweigh the savings from interchange fees for many mid-sized retailers. This isn't just a minor tweak; it's a direct impact on the bottom line that was specifically designed to increase state revenue at retailers' expense. When you combine this with the enormous operational lift required by the January 1st shift to destination-based sourcing, the compliance burden is mounting. Businesses will need to immediately reassess their financial models and technology stacks. Proactive planning is essential to manage these intersecting changes without disrupting operations or incurring penalties. For guidance on navigating these new state regulations, our team specializing in tax preparation and compliance can help. Business owners can review their specific situation with C&S Finance Group LLC at csfinancegroup.com. The inclusion of the swipe fee ban was the result of negotiations between merchant groups and the governor's office. According to reports from Crain's Chicago Business, Governor Pritzker’s budget proposal originally included a provision to cap the discount retailers can claim for collecting and remitting sales tax. In exchange for accepting the cap, merchant groups successfully lobbied for the inclusion of the Interchange Fee Prohibition Act. The new law is set to take effect on January 1, 2025. Effective for returns due on or after January 1, 2025, the vendor’s discount will be limited to a maximum of $1,000 per month in aggregate. This discount is intended to compensate businesses for the administrative cost of collecting taxes for the state. Previously, the discount was a percentage of tax collected, which could amount to significant savings for businesses with high sales volumes. The new cap will generate more revenue for the state but will represent a direct cost increase for many retailers, potentially negating the benefits of the swipe fee prohibition. Adding to the complexity for Illinois businesses is another major change slated for the new year. As of January 1, 2025, Illinois will shift its sales tax sourcing rules for many retailers. According to the Illinois Department of Revenue, the state will implement a destination-based Retailers’ Occupation Tax (ROT). This means that for many remote sellers and sales not fulfilled from Illinois inventory, the sales tax rate will be determined by the location where the product is delivered to the customer, not the seller's location. This change requires businesses to track and apply potentially thousands of different local tax rates across the state, a substantial increase in compliance complexity compared to the previous origin-based system. The legislative package, HB 4951, also clarifies the tax treatment of leases. The new rules establish that for leases with recurring periodic payments, the sale is sourced to the primary location of the property. This move to destination-sourcing for leases will require lessors to report sales to various localities. According to analysis from PwC, the legislation also eliminates the pyramiding of tax on leases in Chicago. Previously, lessors paid use tax on property purchased for lease and also collected the Chicago Personal Property Lease Transaction Tax from customers. Starting January 1, 2025, lessors will be able to acquire property for lease tax-free, while still collecting the Chicago lease tax. As the January 1, 2025 effective date for these changes approaches, businesses and payment processors must prepare for implementation. Processors will need to upgrade software and systems to isolate tax and gratuity amounts from the base on which interchange fees are calculated. Retailers, in turn, must update their accounting and point-of-sale systems to comply with the new destination-sourcing rules and account for the capped vendor discount in their financial planning. With Governor Pritzker expected to sign the bill into law, Illinois businesses should monitor the Department of Revenue for forthcoming bulletins and detailed guidance on implementation. The key questions will be how the swipe fee reimbursement process will function and what resources will be available to help small and mid-sized companies manage the transition to destination-based tax sourcing before the new rules take effect.