The banking industry is mounting a vigorous effort in Illinois to block restaurants and retailers there from excluding taxes and tips from assessments after July 1 of what they owe in credit card processing fees.
The effort has implications for other states as well, with a number of jurisdictions already eyeing similar exemptions in the calculation of interchange charges, or what are commonly known as swipe fees.
In Illinois, the concession was slipped into the $53 billion state budget approved by the legislature and signed into law by Gov. Jay Pritzker just before the summer. Similar measures have been aired before in state legislatures, including Illinois’, but never enacted. The Midwestern state is believed to be the first to get the exemptions on the books.
Proponents there argued that the provision would provide much-needed help to an industry still rebounding from the pandemic. Swipe fees have become a major cost for the typical restaurant, sometimes surpassing mortgage charges or rent.
Some advocates asserted the move would be anti-inflationary because it would bring down operators’ costs and thereby temper menu prices. Industry trade groups estimated in a lawsuit filing that swipe fees cost the typical restaurant-going household about $1,000 a year in passed-along charges.
Other states have shown interest in measures similar to what passed in Illinois. A bill was introduced in Pennsylvania’s General Assembly to exclude taxes but was eventually tabled. The legislatures of both Tennessee and Georgia passed motions to study the repercussions of omitting taxes from swipe-fee calculations. The topic was reportedly a talking point at a recent convention of state politicians.
In August, a lawsuit challenging the Illinois law was filed in a U.S. District Court by national and state trade groups for the banking industry. It contended that the state provision was unlawful because only the federal government is empowered to regulate interstate banking.
What’s more, the suit argued, the exemption would “throw well-operating payment card systems into chaos.” It contended that the software underlying the complex network for processing credit card transactions was not written to accommodate exemptions like the ones provided in the Illinois bill.
Regearing by July 1 would be improbable, according to the Electronic Payments Coalition, a consortium of banks and credit card companies. With no infrastructure in place, it argues, consumers could still pay for meals or merchandise with a card but would have to leave any gratuity in cash.
The group has run ads declaring, “Tipping on your credit card is closed to Illinoisans.”
The plaintiffs also argued in their suit that the Illinois measure would deny card-issuing institutions the funds they need to combat fraud and protect consumers’ personal data. They added that the impact would be felt nationally, not just in Illinois.
A “friend of the court” brief challenging the assertions was filed jointly last week by the Illinois Restaurant Association, the Retail Litigation Center and the Restaurant Law Center, the legal arm of the National Restaurant Association. It asked the District Court for the Northern District of Illinois to deny the banking industry’s request for an injunction, arguing in part that it is unfair to ask restaurants to collect sales taxes for state and local governments and then charge the places for performing the service.
It also contended that tips flow to employees, not the restaurants where they work, yet the establishment in effect pays a tax on that income.
Tempering swipe fees was prioritized earlier this year by the National Restaurant Association as one of the industry’s top three political priorities. The group is a strong supporter of the Credit Card Competition Act, a measure that aims to bring down the charges by fostering competition for restaurants’ card-processing business. Most transactions charged on a credit card are currently processed by Visa or MasterCard. Without competition, the industry argues, those two powerhouses have tremendous pricing power.
The champion of the Credit Card Competition Act is Sen. Dick Durbin, a Democrat representing Illinois.
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