WASHINGTON — The Illinois state legislature has passed a budget bill Wednesday morning that includes a provision barring the collection of interchange fees on sales taxes, excise taxes and tips for transactions that would be subject to the state's sales taxes.
The passage of the budget bill in a 65-45 vote came early Wednesday morning at about 2 a.m. The bill, overall, raises taxes to increase the state's budget, and limits the tax discount that retailers receive for collecting sales tax, estimated to bring in about $101 million in revenue.
But the Illinois Retail Merchants Association, which has lobbied against measures like the tax discount elimination from being implemented in the past, agreed to the deal this time in exchange for prohibiting the credit card fees on the portion of transactions that includes sales tax and tips.
The measure comes as Senate Majority Whip Dick Durbin, D-Ill., and Sen. Roger Marshall, R-Kansas, have been pushing a federal law that would require credit card issuers to allow their cards to be used on two separate networks that aren't both Visa and Mastercard. The measure has been heavily opposed by banks and credit card networks and has so far been kept off of
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The state's banking association pushed back against the provision, which was added just days before legislators approved the budget bill.
"Consumers might be forced to make two separate payments, one for the good or service provided and as second for the tax and tip," said Jerry Peck, senior vice president of governmental relations at the Community Bankers Association of Illinois. "That second transaction wouldn't be subject to interchange fees, so who knows if payment processors would let it ride the rails for free? In theory, consumers may have to pay taxes and tips in cash or other non-card payment."
The bill now goes to Illinois' governor, who is expected to sign.
"Retailers were willing to trade $100 million a year in revenue for the state inserting itself into private contracts," Peck said. "Illinois would be the first state, and we think first place in the world, to do this."
The interchange limits wouldn't become effective until July 2025. Jaret Seiberg, a financial services analyst at Cowen, said he expects a lobbying push to eliminate limits entirely.
"Merchants have long sought to have states attack credit card interchange, though prior efforts have never resulted in restrictions," Seiberg said in a note. "As Illinois appears likely to impose interchange limits, we worry that this could become a precedent for other states."
Were this provision to be implemented, Seiberg said, it remains unclear how merchants could charge consumers interchange on only one part of a transaction.
"It may mean multiple transactions," he said. "It is unclear what entity would bear the cost from not charging the merchant discount. It could be just the processors or both the processors and the banks. In other words, we know the part of each transaction would be exempt from the interchange fee even if it is not clear what entities would absorb this cost."
