Questions Arise Over How to Comply With Illinois’s Interchange Law

With the national spotlight now shining on the Illinois Interchange Fee Prohibition Act, questions are being raised regarding merchants’ ability to comply with the law.

The biggest challenge facing merchants will be separating tax and tips on credit or debit card transactions submitted to their card processor so they can be exempted from interchange charges. While opponents of the law have repeatedly raised this and other questions, some payment experts are starting to echo the same concerns.

“It will be challenging for merchants to make these changes by the [July 1, 2025] deadline,” says Eric Cohen, chief executive and founder of Merchant Advocate, a Colts Neck, New Jersey-based consultancy that works to help merchants reduce card-processing costs.

Small merchants are likely to face more challenges in implementing the law, as they are more likely to be using point-of-sale terminals that don’t support such capabilities.

To illustrate his point, Cohen cites the example of a small merchant that doesn’t have a terminal integrated to its back-office systems. Such merchants would need to manually separate out the tax and tip portions of the sale and enter them as separate line items in the terminal, rather than entering a total amount. That information would then need to be sent to the processor as separate line items.

“A small merchant that uses a credit card machine that is not integrated into a system will now have to have the machine reprogrammed so that when they enter values, they are forced to enter tax as a separate line item,” Cohen says by email. “Not only is this an issue with getting the merchant set up properly, but I believe asking a business to teach all employees to enter a base amount and then a separate tax amount will be challenging and could lend itself to user error and be costly.”

The IIFPA exempts Illinois merchants from paying interchange on sales tax and gratuities linked to credit and debit card transactions. In exchange, the state will cap what merchants earn for collecting sales tax at $1,000 per month.

One example of an error that can occur when manually separating out tax and tip from credit or debit card transactions is that some employees may simply enter the total amount and then enter the tax prompt, which would cause the merchant to pay interchange on the entire sale, according to Cohen.

“The integrated solutions in the market today can pass these amounts, so there wouldn’t be as much of an issue for these merchants,” Cohen adds.

Even larger, more technologically sophisticated merchants are expected to face challenges complying with the law, as they too would have to make sure their POS systems are set up to pass correct values to the processor, Cohen says.

“If these systems must be updated, then who is going to pay for the updates? This could be significant and outweigh any immediate savings or relief,” he adds.

Cost of compliance with the law could be another challenge facing merchants, as this expense extends beyond the purchase of new hardware and software.

“If a business is using a simple credit card machine, the upfront cost is minimal, but what is the cost of training employees, and better yet, what is the cost of errors?” Cohen asks. “The passing of tips is common and is simple to continue to do. However, the passing of sales tax in a transaction for those using a non-integrated credit card machine is new and will also cause an extra step in processing sales. For a busy establishment, having to key anything extra into a system can cause issues.”

Another question that ought to be addressed before the law takes effect is how it will apply to online purchases, says Cohen. “Will the law only apply to businesses based in the state or will this be based on the location of the purchaser? This could also be a challenge,” he says. 

Another looming question: how will the law affect merchants charged a flat rate per transaction because they are not on interchange pass-through. “If this law goes through, these merchants would not see any decreases in costs. In fact, the processor and/or sales representative would be the winner here,” Cohen adds.

While Cohen says he understands and agrees with the concept of not paying interchange on taxes and tips, he contends there needs to be a strategic plan in place to prepare merchants for compliance before the law takes effect.

“I think there must be a lot more thought put into how to accomplish this in a way that is easy and simple for business owners,” Cohen says. “This is a very large undertaking.”