Illinois Interchange Fee Law Faces Legal Challenges and Federal Injunction

Illinois' new law banning interchange fees on state taxes faces legal challenges and a federal injunction, highlighting conflicts with banking regulations.

In a recent move, Illinois enacted the Illinois Interchange Fee Prohibition Act (IFPA), aiming to eliminate interchange fees on credit card transactions that include state or local taxes and gratuities.

Slated to take effect on July 1, 2025, this legislation has stirred significant legal controversy, prompting the Illinois Bankers Association and allied organizations to challenge the law in federal court.

Their argument centers around a potential clash with federal statutes, a violation of the U.S. Constitution’s Supremacy Clause, and alleged discrimination under the dormant Commerce Clause by unfairly privileging local businesses over those from outside the state.

Federal Court Intervention

As the legal proceedings continue, a federal court has stepped in, issuing a preliminary injunction that currently halts the law’s enforcement.

This ruling comes from the Northern District of Illinois in the case of *Illinois Bankers Association et al. v. Kwame Raoul*, dated December 20, 2024.

The court’s decision to grant a preliminary injunction is grounded in the belief that the plaintiffs have a strong chance of winning their case.

Additionally, they face the risk of irreparable damage if the law takes effect before the legal dispute is resolved.

This situation is set to expedite court proceedings to evaluate both the plaintiffs’ odds of success and the possible harm they could suffer.

Key Observations from the Court

  • The IFPA prohibits credit card issuers from charging interchange fees on transactions that include Illinois state or local taxes as well as gratuities.
  • Under the IFPA, interchange fees are defined as any fees charged by a payment card network to compensate the card issuer for processing electronic transactions.
  • The National Bank Act allows banks to perform activities that are incidental to their banking functions.
  • Guidance from the Office of the Comptroller of the Currency makes it clear that credit and debit card transaction processing falls within the banks’ purview of banking activities.
  • The IFPA imposes specific regulations on credit and debit card transactions by dictating what fees banks may charge.
  • By restricting interchange fees on transactions involving state and local taxes and gratuities, the IFPA alters the dynamics of banks’ negotiations with merchants regarding their fees.

Potential Impact on Banking Institutions

The banks argued that they would suffer irreparable harm if forced to alter their payment processing systems, which currently do not differentiate transactions based on tax or gratuity components.

Any financial investment needed to implement these changes would be a sunk cost if the law were later ruled unconstitutional.

This scenario reveals how a preliminary injunction, alongside a federal court challenge, can serve as a compelling legal strategy when conditions are favorable.

However, it’s essential to highlight that federal courts typically exercise limited jurisdiction over state tax matters due to the Tax Injunction Act.

This act prevents federal courts from hindering the assessment and collection of state taxes when a viable remedy exists within state court systems.

Nevertheless, if a case gains traction in federal court, it could lead to significant and favorable outcomes for those involved.

Source: Natlawreview