Can states ban swipe fees on taxes and fees?

A growing number of states are looking to reduce payment card processing costs for merchants and consumers. Illinois is prohibiting interchange fees (aka, swipe fees) on taxes and gratuities starting July 1, 2026, and the Colorado Legislature has sent a similar bill to the governor.

Key takeaways

• States are moving to restrict swipe fees on taxes and fees. The Illinois Interchange Fee Prohibition Act (IFPA) prohibits payment card networks from charging interchange fees on sales tax and gratuities starting July 1, 2026. The Colorado Legislature has passed a similar bill, and many states have introduced similar legislation
• Alabama has taken a different approach. Senate Bill 221 excludes credit card transaction fees from the sales tax base starting September 1, 2026.
• The new laws may require businesses to separate tax and fee data at checkout. This could increase compliance complexity and operational burdens.

What is the Illinois Interchange Fee Prohibition Act?

The Illinois Legislature passed the Interchange Fee Prohibition Act (IFPA) in 2024, becoming the first state to prohibit swipe fees on taxes and gratuities.

The law prohibits issuers, payment card networks, acquirer banks, or processors from receiving or charging a merchant “any interchange fee on the tax amount or gratuity of an electronic payment transaction,” provided the merchant takes the necessary steps.

To avoid being charged interchange fees on the tax or gratuity amount of an electronic payment transaction, the merchant must:

1. Inform the acquirer bank (or its designee) of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction.
2. Transmit data about the tax or gratuity amount as part of the authorization or settlement process.

A merchant that fails to transmit tax and gratuity data immediately has up to 180 days to submit supporting tax documentation to the acquirer bank (or its designee). The bank then has up to 30 days to credit the merchant for interchange fees charged on the tax or gratuity.

Illinois swipe fee law under fire

Several banking associations challenged the IFPA in 2024. They claimed, in part, that the Illinois law is unconstitutional and conflicts with federal law, and they asked the courts to stop Illinois from enforcing the law.

Illinois stands by its law, but it did push the effective date back a year, to July 1, 2026.

On February 10, 2026, the U.S. District Court for the Northern District of Illinois upheld the provision prohibiting payment card processors from charging interchange fees on state and local taxes and gratuities. (The court struck down a different aspect of the law related to limits on data usage.) The banking associations appealed.

With the July 1 effective date fast approaching, the U.S. Court of Appeals for the Seventh Circuit scheduled oral arguments for May 13, 2026 — though as explained below, it later canceled those arguments.

In another development, on April 24, 2026, the U.S. Office of the Comptroller of the Currency (OCC) issued an unsolicited interim final rule clarifying that national banks have “the power to assess, collect, impose, levy, receive, reserve, take, or otherwise obtain non-interest charges and fees, including interchange fees from credit and debit card operations.” Furthermore, “national banks may charge non-interest charges or fees, even when such charges and fees are set by or in consultation with third parties.”

In short, the OCC ruled that national banks and federal savings associations are neither subject to the Illinois Interchange Fee Prohibition Act, nor required to comply with it. The interim final rule takes effect June 30, 2026, one day before Illinois is set to prohibit swipe fees on taxes and gratuities.

The OCC also issued a separate interim final concluding that federal law preempts the Illinois Interchange Fee Prohibition Act. This, too, is effective June 30, 2026. Interested parties may submit comments to the OCC on or before May 29, 2026.

Whether the OCC’s action will protect banks from the loss of interchange fees on Illinois card transactions in the short term is uncertain, observes the law firm Moore & Van Allen in a JD Supra article. The practical effects of the OCC’s rulemaking and order also remain uncertain.

On May 8, 2026, the U.S. Court of Appeals for the Seventh Circuit canceled the oral arguments set for May 13. It decided the district court should reconsider the issues raised by the OCC, and any related issues, before the appellated court attempts to address them.

Other states look to prohibit swipe fees on taxes

On May 6, 2026, the Colorado Legislature passed a law prohibiting payment card networks with more than $60 billion in assets from including sales tax in percentage-based transaction fees. It’s been sent to the governor for his approval.

Other states interested in prohibiting interchange fees on taxes, fees, and/or tips include:

• Alaska
• Arizona
• California
• Iowa
• Kansas
• Massachusetts
• Minnesota
• New York
• North Carolina
• Pennsylvania
• Rhode Island
• Tennessee
• Vermont
• Washington, D.C.

Alabama has taken a different approach. On April 16, 2026, Governor Kay Ivey signed a law excluding credit card transaction fees from the sales tax base.

According to a survey conducted by Morning Consult and the National Restaurant Association, 64% of voters surveyed are opposed to swipe fees being calculated on sales tax and gratuities, and 72% of voters would support prohibiting swipe fees on sales tax and tips.

Bottom line for businesses

If allowed to take effect, the IFPA and any similar laws enacted by other states could impact tax compliance processes for affected businesses. To prevent swipe fees from being applied to taxes or gratuities, businesses would need to separate that information at the time of settlement (though Illinois will allow merchants to receive reimbursement after the fact).

The National Restaurant Association asserts that “any restaurant that accepts payment cards — which is the vast majority of them — already has equipment that separates the sales tax portion of the ticket from the original purchase price.”

Yet Ben Beaudoin, VP of Tax at Avalara, says including sales tax amounts for each transaction throughout the payment card ecosystem could be burdensome for payment card networks and sellers because this information likely isn’t being transmitted between the parties today.

“These policies may require sellers to provide timely and accurate sales tax amounts on a transaction-by-transaction basis when processing card payments,” observes Beaudoin. “Avalara AvaTax has been designed to calculate that tax quickly and accurately and merchants using it likely already have the data needed to benefit from the interchange fee savings provided it is transmitted appropriately to payment processors.”

FAQ

What’s an interchange fee or swipe fee?

A credit card interchange fee, also called a swipe fee, is a percentage-based fee that merchants pay whenever a customer pays with a credit card, debit card, or other payment card. The fees are charged by banks, credit card payment networks, payment card processors, and other institutions involved in the payment transaction.

Though merchants are charged the fee, they may pass some or all of the cost on to customers in the form of higher prices or a separately stated credit card fee.

Are credit card fees subject to sales tax?

It depends on the state and other factors, such as the type of transaction and whether the fee is included in the sales price or separately stated.

Can states ban swipe fees on taxes in the United States?

Illinois has passed a law restricting swipe fees on taxes and gratuities, but federal rulings may limit their ability to enforce those laws. The Office of the Comptroller of the Currency has indicated that national banks may not be required to comply, creating ongoing legal uncertainty.

When will Illinois swipe fee laws take effect?

The Illinois Interchange Fee Prohibition Act is scheduled to take effect July 1, 2026, but court appeals and the federal preemption could impact this timeline. 

How could swipe fee laws impact business tax compliance processes?

If enforced, swipe fee laws may require businesses to separate taxes, fees, and gratuities during payment processing. This could increase compliance complexity and require more accurate transaction-level tax data management to help ensure proper reporting.