Illinois bill law bans interchange fees on taxes and tips gratuities

Yesterday, Illinois lawmakers passed a bill that included a provision that will bar the charging of credit card interchange fees on both sales tax and gratuities. Want to read it?Look for Section 150 in this bill.

This bill has actually fully passed and only awaits Governor Pritzker’s signature – which he has promised is forthcoming. It will be the first law of its kind in the nation.

Your first thought might be the same my first thought. It seems fair that small restaurant owners shouldn’t have to pay these fees on tax and tips because they don’t keep either one. Certainly, paying in the neighborhood of 2% on that portion of a bill, which can easily average 30%, is a burden on small businesses (although large businesses will benefit equally).

In an interview with Crain’s yesterday, I referred to it as a Robinhooding of sorts. They are passing the burden of these transactions back to the payment processors (not that is costs the processors anywhere near what they charge in interchange fees to process the payments).

But your second thought should be: “What affect could this have on credit card rewards?”

Well, if this stays within Illinois borders, two things could happen: 1) the processors eat it to keep things simple or 2) they add language into credit card agreements that says you won’t earn rewards on tax and tips paid in the state of Illinois.

I could see either happening.

But what if other states decide this is a great idea?

Well, then we could see a sea change in credit card rewards, where you could potentially not earn any rewards on tax and tips. That would mean you would likely lose out on roughly 30% of the rewards you currently earn. The issuers could choose to either reduce overall rewards to balance it out or they could break out tax/tips on your statements as charges not eligible for rewards.

Either way, much like the awful proposed Credit Card Competition Act of 2023 which would kill credit card rewards as we know it in an effort to boost corporate profits at the expense of consumers, this move by Illinois seems to have a definite possibility of having the same effect.

Surely some people will say they don’t mind taking a hit on rewards to help their favorite local businesses, and I get that, but know this will also apply to gigantic chains like the Olive Garden and Chili’s, for example.

I’d be curious what you think about this? Head on over to the MilesTalk Facebook group to sound off!

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  1. Unlike the interchange fee reduction, I actually find this makes sense.

    Why should a business bear the brunt of the transaction fee if it doesn’t get to keep any of the money it’s being charged for?

    Some states have high sales tax, and 2%-3% on that sales tax revenue shouldn’t be fronted by the business.


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