On December 20, 2024, Judge Virginia Kendall of the United States District Court for the Northern District of Illinois, Eastern Division, issued a preliminary injunction enjoining enforcement of the Illinois Interchange Fee Prohibition Act (IFPA). The case is Illinois Bankers Association v. Raoul, No. 24 C 7307, (December 20, 2024).
IFPA, which was set to go into effect July 1, 2025, would have prohibited financial institutions from charging credit and debit card interchange fees on the portions of transactions tied to state and local taxes and tips. The law also would have restricted the sharing of certain data obtained in the transactions. This challenge to IFPA was brought by the Illinois Bankers Association (Illinois Bankers), a trade association representing financial institutions and other participants in electronic payment transactions. The suit claimed that IFPA was preempted by several federal laws, including the National Banking Act (NBA), the Home Owners’ Loan Act (HOLA), and the Federal Credit Union Act (FCUA).
The court determined that Illinois Bankers had standing and could bring a preemption claim under the NBA and HOLA, but not FCUA. The association was likely to succeed on the merits of the preemptions claims under NBA and HOLA. IFPA’s interchange fee prohibition was in direct conflict with NBA and HOLA provisions allowing financial institutions to charge such non-interest fees as part of a national banking system. The court determined that the Illinois law was more restrictive than similar laws that had been previously preempted. IFPA threatened to undermine the national banking system Congress intended to create under NBA and HOLA.
The court further found that the data usage limitation provisions were also preempted by NBA and HOLA. The federal laws gave national banks the power to provide data processing and data transmission services that would have been impermissibly curtailed by IFPA’s restrictions.
In addition, the threat of harm to financial institutions forced to comply with IFPA would be irreparable, justifying an injunction. Illinois Bankers showed that the cost of IFPA compliance was prohibitively expensive for many financial institutions, which would have had to invest in new software and IT infrastructure capable of separating taxes and tips from other parts of credit and debit card transactions. Most existing systems do not make such distinctions, and changing out systems to meet the July 1, 2025, deadline would be impossible for many institutions. Furthermore, there would be no way to recover the costs of compliance should the law be struck down in a challenge after enforcement began.
Balancing these equities and public interest considerations led to the granting of the preliminary injunction as applied to national banks and savings institutions regulated by NBA and HOLA.
Jim Eads, Principal, Advocacy at Ryan, notes: “Although the Illinois Legislature tried to make this a tax issue, it is more of a banking issue. While the Illinois Bankers won an injunction, it is my understanding that Visa and Mastercard will still have to abide by the law, which may force them to renegotiate their contracts with the federal banks. This ruling doesn’t cover state-chartered banks. Note that Europe has imposed maximum transaction fees, so there may be additional developments in the future. So, on July 1, when you use your credit card to pay for a dinner, will there be multiple charges, one for the food, one for the tax, and one for the tip? Will the consumer see a difference? Questions remain to be answered so, as always, vigilance and watchfulness of the Legislature, the courts, and the administrative agencies are necessary.”
If you have questions about this topic or any other Illinois state and local tax matter, contact one of the experts listed below today.
TECHNICAL INFORMATION CONTACTS:
Jim Eads
Principal
Ryan
512.476.0022
jim.eads@ryan.com
Jonathan Geiger
Manager
Ryan
425.440.2333
jonathan.geiger@ryan.com
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- James R. Eads, Jr.