If you run a restaurant, coffee shop, or retail store in Illinois, you have been paying a fee on money you never keep.
Take a typical $100 dinner for two in Chicago. Your point-of-sale receipt shows an $82 subtotal, $8.45 in state and local sales tax at the current 10.25% combined rate, and a $18 tip your guest adds for the server. When the customer taps a credit card, you pay an interchange fee — usually around 2% — not just on the $82 you earned, but on the full $108.45 that posts to the card. That extra 2% on the $26.45 in tax and tip is about 53 cents per transaction that leaves your bank account, sits briefly in the card network, and lands at the customer's bank. Multiply that by 300 covers a night, six nights a week, and you are transferring more than $4,500 a year to pay for the privilege of collecting taxes for the state and tips for your staff.
On July 1, 2026, Illinois says that transfer stops. The state's Interchange Fee Prohibition Act, or IFPA, is the first law in the nation to ban financial institutions from charging interchange fees — commonly called swipe fees — on the sales tax and gratuity portions of a card transaction. Whether the law actually takes effect on that date will depend on a pending federal appeal and a new federal preemption order, but every Illinois merchant who accepts cards needs to understand what it requires, how you would prove the tax and tip, and how to keep your books clean either way.
Why You Pay Swipe Fees on Taxes and Tips Today
Every card swipe triggers a chain between four parties: you and your acquirer bank, the customer and their issuer bank, and the network that sets the rules (Visa and Mastercard for most transactions).
You do not pay the customer’s bank directly. Your acquirer pays an interchange fee to the issuer, then passes that cost to you as part of your merchant discount rate. The network controls the calculation. Most U.S. interchange schedules blend a fixed amount, often $0.05 to $0.10, plus a percentage of the total transaction amount — typically 1.15% to 3.15% for credit, averaging around 2.15% nationally, and closer to 1% for debit. Supermarket and large retailer categories are slightly lower; restaurants and small businesses often pay more.
Critically, that percentage has always applied to the grand total. The networks have never required merchants to break out tax and tip separately at authorization. Your terminal sends one amount — $108.45 in the example above — and the fee is computed on that single number. Retailers have argued for years that this is unfair: you collect sales tax as the state’s agent and pass tips straight to staff, yet you pay a private fee to move those dollars. Banks and networks counter that they still process, authorize, settle, and bear fraud risk on those dollars, and that the fees fund rewards programs, security, and the cost of extending credit.
According to national data, U.S. merchants paid roughly $111 billion in interchange and related card fees in the most recent full year — about four times the level of 15 years ago. For a small business operating on 5% to 10% net margins, a 2% fee on every dollar, including dollars you will immediately remit elsewhere, is difficult to absorb without raising prices.
Illinois decided to carve out those pass-through dollars.
What the Illinois Interchange Fee Prohibition Act Actually Does
The IFPA was signed in June 2024 as part of the state budget (HB 4951), with an effective date that has already been delayed once from July 2025 to July 1, 2026 to allow time for litigation. It does three things:
1. Who is covered. The ban applies to payment card networks, issuer banks, acquirer banks, and processors — essentially everyone who touches interchange on an electronic payment transaction involving a credit or debit card.
2. What is exempt. No interchange fee may be charged or received on the portion of an Illinois transaction that represents state or local sales tax or a gratuity. If a customer pays $100 for goods, $8.25 in tax, and a $15 tip, interchange may be assessed on the $100, but not on the $23.25.
Tax in this context means sales, use, and occupation taxes collected at the point of sale. Gratuity means a voluntary tip added by the customer. It does not automatically include a mandatory service charge or auto-gratuity that the merchant imposes — that distinction matters for restaurants. Under federal guidance, an automatic charge the house controls is a service charge, not a tip, and it is treated as regular revenue for fee purposes.
3. What is still allowed. The law does not cap or regulate the fee on the subtotal. A network can still charge its normal percentage and fixed fee on the $100 for goods and services. It also does not require you to refund anything retroactively before the effective date, and it does not eliminate other card fees such as assessment fees or processor markups.
The retailer groups that lobbied for the law estimate the carve-out is worth north of $200 million a year to Illinois merchants if it sticks. An industry-funded estimate put the number at $118 million, with about 40% flowing to the 40 largest retailers. Even at the lower estimate, the average Illinois restaurant doing $900,000 in annual card volume with an 8.5% tax rate and 18% tips on food sales would save $1,400 to $2,800 a year on interchange that previously applied to tax and tips. For a high-volume Chicago retailer at the 10.25% rate, the savings are larger.
The Two Ways to Comply: Real-Time Exemption vs. 180-Day Rebate
This is where your bookkeeping becomes operational. The law anticipates two compliance pathways, and you will need to be ready for at least one.
Path 1: Real-Time Exemption at Authorization or Settlement
The preferred method in the statute is to identify the tax and gratuity amounts when the transaction is first authorized or when it is settled, typically within 24 hours.
In practice, that means your point-of-sale system and your processor must send three fields instead of one: subtotal, tax amount, and tip amount. The network then calculates interchange only on the subtotal.
No national network today requires those three fields globally, and most U.S. POS systems currently send only the grand total. Networks operate in more than 200 jurisdictions with different tax rules, and their authorization messages were designed around a single total. Retail advocates say the change is trivial — your receipt already separates subtotal, tax, tip, and total, so moving the fee from grand total to subtotal is a coding change. Financial institutions say it requires retooling across networks, acquirers, issuers, and the International Organization for Standardization messaging standards, plus certification and testing of updated terminals and software worldwide.
If your processor upgrades to support the extra fields before July, you would see the benefit immediately as a lower fee on each settlement file. Your daily settlement report would show gross sales, tax, tip, and a net interchange line computed only on the eligible amount.
Path 2: The 180-Day Rebate
For merchants whose systems cannot send the breakdown in real time, the law provides a fallback. You may submit tax documentation to your acquirer bank or its designee no later than 180 days after the transaction. Documentation can include invoices, receipts, or other settlement records that show the tax and gratuity for that specific card payment.
Once you submit, the issuer has 30 days to credit you for any interchange that was charged on the tax or tip portion.
This is the path that most small businesses will likely use in the first year, and it is the one that creates real accounting work. Instead of an automatic reduction, you receive a delayed credit — potentially hundreds of individual credits scattered across months — that must be matched to original transactions.
Violations carry a civil penalty of $1,000 per transaction if an institution fails to comply after proper documentation, which is part of why banks are fighting the law. With tens of millions of Illinois card transactions per month, the theoretical exposure is enormous.
Where the Law Actually Stands in Court and in Springfield
Understanding the status keeps you from rebuilding your entire reporting stack for a law that gets delayed again.
Legislative history. The IFPA was added late in budget negotiations in May 2024. Supporters paired it with a change that capped the retailer's discount — the small percentage retailers keep for collecting sales tax — at $1,000 per month. Larger chains hit that cap, while smaller merchants who typically claimed $200 to $600 a month kept their full discount, which helped the coalition hold together.
Court challenge. A group of banks and credit unions sued immediately, arguing federal law preempts state regulation of fees. In February 2026, a federal district court in Illinois partially upheld the law: it found interchange is set by networks, not by banks directly, so the core ban on charging fees on tax and tips is not preempted, but it blocked a companion provision that would have limited how financial institutions use transaction data. Both sides appealed to the Seventh Circuit, which held oral arguments on May 13, 2026. As of late June 2026, no appellate decision had been published, leaving the July 1, 2026 date in legal limbo.
Federal preemption order. In May 2026, the Office of the Comptroller of the Currency (OCC) issued an interim final order stating that federal law preempts the IFPA for national banks. The order had a 30-day comment period and has not yet been finalized, but if it survives judicial review it would remove a large share of the cards in Illinois from the state ban. Industry comment letters from retail groups have urged the OCC to withdraw it, noting the district court already rejected the preemption theory.
Legislative delay talk. Separate bills have been introduced both to repeal the IFPA outright and to delay it again. One proposal would push the effective date to July 1, 2027. Its sponsor has said as of late May 2026 she does not plan to advance a full repeal but considers another delay more likely if the courts do not resolve the issue in time.
Bottom line for planning: treat July 1, 2026 as the operative date for internal readiness, but build a process you can switch off if a court or agency pauses it. Do not sign a multi-year contract for an expensive "IFPA module" without a termination clause tied to the law's status.
How Much Will You Actually Save? Do the Math Before You Spend
Before you invest in upgrades, estimate the prize.
Example 1: Neighborhood restaurant. Annual card sales: $850,000, including 8% sales tax and an 18% average tip on the 70% of checks that include a tip. Roughly $58,000 of your volume is collectible tax and $95,000 is tips. At a blended 2% interchange, the tax-and-tip portion currently drives about $3,060 in fees a year. At 1% for debit-heavy volume, it is closer to $1,530. Even if half your volume is debit, savings fall in the $2,000 range.
Example 2: Boutique retailer in Illinois. Annual card sales: $600,000, no tips, 8.5% effective tax on taxable goods (some items exempt). About $47,000 of your volume is tax. At 2% interchange, the carve-out saves about $940 a year. At the Chicago 10.25% rate on fully taxable sales, it is closer to $1,150.
Example 3: Coffee shop with small tickets. Average ticket $7.50, 500 card transactions a day, 8% tax. Tax per transaction is $0.56, fee on that at 2% is just over a penny. But at 182,500 transactions a year, that is $2,050 in fees on tax alone — plus any tips.
These are not transformative sums for most merchants individually, which is why banks argue compliance costs could swallow the benefit for small operators who must manually compile documentation for a rebate. The Retail Merchants Association argues the opposite: that because small retailers rarely hit the $1,000 discount cap, the combination of that change and the swipe fee relief makes the law the largest small-business benefit the state has passed.
To estimate your own number, pull the last three settlement statements and calculate:
- Total card volume
- Total sales tax collected on card transactions (your POS sales-by-tax report)
- Total tips paid via card
Multiply the sum of tax plus tips by your effective interchange rate (check your processor's interchange-plus breakdown, not your flat rate). That product is your theoretical IFPA reduction before processor markups.
How to Prepare Your Books Now: A Practical Checklist
You do not need to rebuild your accounting system, but you do need to be able to prove, transaction by transaction, what was tax and what was tip.
1. Split Your POS Reporting Three Ways
If your POS currently reports only gross sales, turn on detailed sales categories today. You need daily totals for:
- Net sales (subtotal before tax and tip)
- Sales tax collected via card
- Tips via card (voluntary, customer-added)
Most modern systems — Square, Toast, Clover, Shopify POS, Lightspeed — already track these, but many owners never export them. Run a daily sales detail export for one week and confirm the three columns tie to your Z-report. If you use an older system that only prints tax on the receipt but lumps everything in the settlement, ask your vendor whether a software update will emit tax and tip fields in the settlement file before July.
2. Reconcile Gross Settlement to Net Deposits With the New Split
Today your bookkeeping likely looks like this: debit cash, credit sales, debit merchant fees. Under either IFPA path, your processor's settlement file may show lower interchange or a separate rebate deposit.
Create a clean reconciliation habit now so you can spot the change:
- Import gross card sales from the POS, not from the bank deposit. The bank deposit is net of every fee and reserve.
- Post tax collected to a liability account (Sales Tax Payable), not to revenue.
- Post tips to a liability account (Tips Payable to Staff) until paid out.
- Post interchange and assessment fees to a separate expense account, ideally broken out as Interchange Fees vs. Processor Markup.
When the IFPA applies, you will see either an immediately lower Interchange Fees line (real-time path) or a periodic credit to the same account (rebate path). Do not net the rebate against revenue. Treat it as a reduction of merchant fee expense so your revenue and margin reports remain comparable year over year.
3. Create an IFPA Rebate Receivable Account If You Will Use the 180-Day Path
If you expect to use rebates, set up an Other Current Asset account called IFPA Rebate Receivable.
At month-end, estimate the interchange overpaid on tax and tips from that month's settlement reports (tax+tip × interchange rate) and debit the receivable, credit Merchant Fee Expense. When the issuer credits you — it has 30 days after you submit, and you have 180 days to submit — clear the receivable against cash. Keep a simple spreadsheet that lists each batch, submission date, and expected credit so you can follow up. The $1,000-per-transaction penalty for non-credit gives you leverage, but only if you can prove you submitted complete documentation.
4. Document at the Transaction Level, Not Just Daily Totals
The statute allows acquirers to require documentation tied to specific electronic payment transactions, not just a monthly summary. Keep:
- Itemized receipts or invoices that show tax and tip per transaction — most POS systems can export this as CSV with transaction IDs.
- A daily batch report matched to the processor's settlement batch ID.
- For 180 days, retain those files in a folder named by settlement date, not just month.
If you are a restaurant, ensure your house distinguishes voluntary tips from service charges and delivery fees. Only the voluntary portion is exempt. If you add an auto-gratuity for large parties that the house controls, that amount will likely still bear interchange.
5. Update Your Chart of Accounts for Clarity
A minimal IFPA-ready chart of accounts for an Illinois card-accepting business:
- 4000 Sales - Net (subtotal, your revenue)
- 2200 Sales Tax Payable
- 2210 Tips Payable to Employees
- 6150 Merchant Fees - Interchange
- 6151 Merchant Fees - Assessments and Processor Markup
- 6152 Merchant Fees - IFPA Rebate (contra-expense, credit balance)
- 1205 IFPA Rebate Receivable
This structure lets you answer, in seconds, what the law saved you and whether a missing rebate is material.
6. Ask Your Processor and POS Vendor Five Direct Questions
Email them now and save the replies:
- Will you transmit the tax and gratuity amounts at authorization or settlement by July 1, 2026 for Illinois transactions?
- If not, will you support the 180-day rebate documentation process, and what format do you require (CSV, PDF receipts, batch ID)?
- Will rebates appear as a separate line item or credit batch on my settlement report, and will you identify the issuer?
- Will you charge a fee to prepare or submit IFPA documentation?
- If the law is stayed or preempted, will any upgrade be rolled back or become a paid feature?
If they cannot answer, that is information too — plan for manual documentation.
7. Do Not Forget Sales Tax Compliance
Carving interchange off the tax portion does not change how you collect, report, or remit sales tax. You still collect the full combined rate at the register and remit it on your ST-1. The IFPA only changes what you pay to move the money. Keep your sales tax liability untouched by any interchange rebate.
8. Build a Switch You Can Flip
Because the effective date may move, create a single toggle in your close checklist: "IFPA active? Yes/No." If yes, post to the receivable and expect monthly credits. If no, leave fees as usual and archive the tax-and-tip export without submitting. Avoid hard-coding assumptions into pricing — do not lower menu prices on the assumption of a rebate that may be delayed in court.
Common Mistakes That Will Cost You
Treating the rebate as revenue. It is a recovery of an expense you already booked. Posting it to Sales inflates revenue and can distort sales tax and tip reporting.
Netting tax and tips into sales. If tax and tips live inside your revenue account, you cannot prove the exempt amount without rebuilding history. Separate them now.
Assuming flat-rate pricing equals interchange. If you pay a flat 2.6% + 10¢, your statement may not show the interchange component. Your IFPA savings will still be calculated on the underlying interchange, which the flat-rate provider may or may not pass through transparently. Ask how much of the IFPA reduction will reach you versus being retained as part of the flat spread.
Mixing Illinois and non-Illinois volume. If you have locations outside Illinois or sell online shipped from Illinois, only the Illinois portion of the transaction — where the merchant is located — is covered. Do not claim non-Illinois tax amounts. Separate your books by location.
Letting the 180-day clock lapse. A manual rebate process requires discipline. Assign one person to export, submit, and track within 30 days of month-end. Add a calendar reminder at 150 days for any unsubmitted batches.
Ignoring the OCC order. If you bank with a national bank, the OCC's position is that the law does not apply to that issuer's cards. You may see inconsistent credits depending on the cardholder's bank. Track credits by card type so you understand the actual effective rate, not just the theoretical one.
What If You Are Not in Illinois?
Pay attention anyway. About 30 states are weighing similar bills, Colorado has passed a related measure, and Alabama will exclude card transaction fees from its sales tax base starting September 2026 — a different mechanism aimed at the same frustration. If networks do build a mechanism to split tax and tip for Illinois, that mechanism becomes the blueprint every other state can copy. The compliance work you do to isolate tax and tip now — clean POS exports, liability accounts for tax and tips, a receivable for expected rebates — will be reusable whether your state acts next year or not.
For e-commerce sellers who are Illinois-based but ship nationally, the law follows the merchant's location for in-person sales, but card-not-present and interstate rules may be contested. Keep shipping-origin documentation consistent with your sales tax nexus records.
Simplify Your Financial Management
Whether the Interchange Fee Prohibition Act takes effect July 1, survives an appeal, or gets preempted for national banks, the underlying discipline is the same: clear separation of what you earned, what you collected for the state, what you hold for staff, and what you paid to move the money. Merchants who can prove those three numbers at the transaction level will claim every dollar they are owed and will reconcile in minutes instead of hours.
Beancount.io provides plain-text accounting that makes that separation transparent and version-controlled. Every card batch, tax liability, tip payable, and fee — including a future IFPA rebate — can be tracked as explicit entries you own, not as a black-box report from a dashboard. Get started for free and keep your Illinois books ready for whatever July brings.