Illinois interchange fee law: card fees on sales tax and tips

Illinois passed a law, the Interchange Fee Prohibition Act, aimed at stopping card networks and banks from charging interchange fees on the sales tax and tip portions of a card payment. For a restaurant, where tax and tip can be a large share of a check, the idea is to lower card costs. The law has been delayed and challenged in court, so the start date can move. Here is what the law is meant to do, what to ask your processor and how to read your own statement.

What does the Illinois law do?

The Act targets interchange fees charged on the tax and tip portions of card transactions. Interchange is the fee that goes from the merchant's bank to the card issuer on each payment, and today it is usually a percentage of the full amount, including tax and tip. Under the Act, the fee could not be charged on those two parts, and the law also limits how card data can be used. Restaurants with tips and sales tax on most checks are among the businesses it was written for.

When does it take effect?

That is the part to check, not to assume. The start date has been moved before and the law has been the subject of litigation, so an older date may no longer be right. Check the Illinois General Assembly's website for the current status, and ask your processor what date it is planning around and what it will change before then. If your contract has a clause about changes in law, ask your processor to explain it in plain words.

What would change for a restaurant?

If the law takes effect as written, your processor would need to calculate interchange on the pre-tax, pre-tip amount of each Illinois transaction. That requires the point of sale to send the tax and tip separately, which many systems do, and some processors may change their pricing or require new data fields. Ask how your processor plans to handle it, whether your effective rate will fall and whether it will pass any savings on to you.

A worked example with made-up numbers

A $100 check has $10 of tax and an $18 tip, so the card payment is $128. At an interchange cost of 2.5 percent on the full amount, the cost is $3.20. If the fee were calculated on $100 only, it would be $2.50, a saving of 70 cents per check. At 50,000 such checks a year, that would be $35,000. The actual saving depends on your contract, because your processor's markup and any fixed fees do not change, so treat the sum as an illustration of the size, not a forecast. The 2.5 percent is invented for the arithmetic.

What should you ask your processor?

1. What start date are you planning for in Illinois, and where does it come from?
2. Will my point of sale need to send tax and tip as separate fields?
3. Will my effective rate change, and how will you show it on the statement?
4. Are there any changes to how tips are settled to me?
5. What happens to my contract if the law is delayed or changed again?

How does it relate to Illinois tip and tax rules?

It does not change who owns the tips, how a pool works or whether a gratuity is taxable. Those questions are covered in the guides on tip pooling and on mandatory gratuities. The law is about the cost of processing the payment, and it matters to your margin.

What should you do now?

Review your most recent processing statements to see your interchange and fees, check that your point of sale can report tax and tip separately and put a review date in your calendar for the start of each year. A short conversation now is cheaper than a surprise on a statement later. Keep dated notes of what your processor tells you, because the answer may change as the law does.

How should you read your processing statement?

Look for three numbers: the total card volume, the total fees and the effective rate, which is fees divided by volume. Then look at whether the statement separates interchange from the processor's own markup, which is the case with interchange-plus pricing and not with a flat rate. If you pay a flat rate, any change in interchange may not reach you unless the contract says so. If you pay interchange-plus, the change should show up as lower pass-through costs. Ask your processor for a statement sample for a month with high tips, so you can see how tips are treated today.

Who else can help you understand it?

Your state restaurant association often follows laws that touch card costs and may explain them in plain words. An attorney or accountant who knows your contract can tell you whether a change in law gives you any right to renegotiate. Bring one recent statement and the contract to the conversation.

More guides for your business:

• Illinois tip pooling and service charges for restaurants
• Illinois mandatory gratuity and sales tax for large parties
• Illinois restaurant gift card law

More in the US guides for food businesses.