WASHINGTON — A first-of-its-kind swipe fee measure recently passed in Illinois could have dramatic implications for banks both within and beyond the state's borders, experts say.
Illinois Gov. J.B. Pritzker, a Democrat, late on Friday
It's a tradeoff between lawmakers and Illinois retailers — who are getting a separate tax exemption eliminated — that is designed to pass the cost of that elimination to banks and payment processors rather than consumers.
But trade groups say the measure creates an unworkable situation for banks and card companies and will impact not just Illinois financial firms, but any bank that has customers that pass through the state.
The crux of the issue, said Jerry Peck, senior vice president of government relations at the Community Banker Association of Illinois, is that it's difficult with the current payments infrastructure to isolate an interchange fee on just the taxes or tip of a purchase.
It's unclear how the state will implement its new law, but Peck said that it'll likely be expensive for banks and payments companies.
"Right now, when you're charging interchange, you just do that on the total fee on the bill," he said. "There's nowhere where they ever break that up and say 'This is the tax portion, this is the top portion' — they don't calculate what the local sales tax rate is, or the state sales tax rate is. None of that gets done."
Banks and credit card processing companies will then have to develop an entirely new system to discern between goods and services and taxes and tips before the July 2025 implementation deadline, critics say. Failing that, consumers will likely have to require at least two swipes of a card to make a purchase.
As an additional complication, Peck said it's unclear how payment processors and banks would account for a bill that includes items with varying tax rates. If someone goes to a gas station, fills up their tank, gets a snack and picks up a case of beer to take home, they will have purchased several items that each are taxed at varying rates.
"You have thousands of different tax rates, so they're not sure how you build that into the system where it recognizes that the card was swiped here, the purchase was here, what was the tax rate, how do you break it out and instantaneously access that?" he said.
While banks in Illinois would bear the brunt of managing this new interchange mandate, any bank whose customers make purchases in Illinois would have to grapple with the same problem, Peck said.
The Illinois state legislature, as part of an agreement with retailers to raise state tax revenue, passed a budget bill that would bar the collection of interchange fees on sales taxes, excise taxes and tips for transactions that would be subject to Illinois sales taxes.
"Obviously we're right in the middle of the country, in Chicago, where people travel through, where you stop for gas," Peck said. "It can't just be Illinois residents' cards — it's got to be for every card that might travel through the state. How do you figure that out?"
The transition would likely take far longer to implement than the 13 months currently allowed in the legislation, he said. By way of example, banks have been making the transition to a chip payment system for the better part of a decade.
Nicklaus Simpson, a spokesperson for the Electronic Payments Coalition, said the differentiation issues are not the only ones that have to be managed under the new budget bill.
"What happens if I live in Maryland and buy something online from a store in Illinois?" he said. "Is the processor going to have to figure that out? Implementation would definitely be tricky or burdensome."
While the budget bill is now law in the state, it could be rolled back with an amendment or a new law. There's a fall veto session where lawmakers could repeal or amend the law. If that doesn't happen, the Illinois legislature will meet again in the spring next year and could repeal or amend the provision before the law goes into effect.
"Our next step is educating legislators, talking with them about the impact and seeing if we can go back and repeal or amend the law," Peck said. "Long term, we're now looking at, and we have to think about the potential of a lawsuit and go in and get an injunction against this because it's just going to be an unworkable implementation."
Beyond the impact of the one bill, Aaron Klein, a senior fellow at the Brookings Institution, said that it could serve as a model for other states to follow suit.
"The idea of running tax and tips as small dollar transactions feels to me like a strange outcome, one that would create a lot of microtransactions, and I'm not sure how they ride the rails, so to speak," he said. "But it's an example that the existing infrastructure system is not politically stable."
Other states, including Texas, Georgia and Florida, have considered similar bills.
"What this episode is showing me is that it may not be economically optimal, it may be politically plausible," Klein said. "Illinois is a huge state, what's happening in Illinois could be happening to you."
