The Green Sheet Online Edition

August 26, 2024 • Issue 24:08:02

Navigating the repercussions of scattered state laws - Part 2

A new law in Illinois slated to take effect in July 2025 that prohibits interchange assessments on sales taxes and gratuities was challenged by bank and credit union groups on Aug. 15, 2024.

In what industry observers have called a bold move to protect consumers and financial institutions from a disruptive and unconstitutional law, several leading financial organizations, including the American Bankers Association (ABA), the Illinois Bankers Association, America’s Credit Unions, and the Illinois Credit Union League, filed a joint complaint in the U.S. District Court for the Northern District of Illinois.

The groups argue that the Illinois Interchange Fee Prohibition Act (IFPA) threatens to destabilize the state's payment system and harm consumers, small businesses and financial institutions alike.

Signed into law on June 7, 2024, the IFPA prohibits banks, payment networks, and other entities from charging or receiving interchange fees on the portion of debit or credit card transactions that are attributable to tax or gratuity. While proponents of the law argue that it could save consumers and businesses money, it has faced significant opposition from the financial industry and Illinois business groups, as well as critical editorials from the Chicago Tribune and Crain’s Chicago Business.

The plaintiffs argue that the IFPA, if allowed to take effect, would not only disrupt the efficiency of modern payment systems but also violate several federal statutes, including the National Bank Act, the Federal Credit Union Act, and others. They are seeking a preliminary injunction to prevent the law's implementation while the court examines its legality.

Legal arguments against IFPA

The ABA and its co-plaintiffs believe the IFPA poses a direct threat to the longstanding dual banking system established by President Lincoln in 1863. This system, which grants the federal government specific authority over national banks, is a cornerstone of the U.S. financial system.

According to Rob Nichols, ABA president and CEO, the IFPA infringes on federal powers by attempting to regulate national banks and credit unions, which are protected by the National Bank Act and the Federal Credit Union Act.

The plaintiffs contend that the IFPA is also preempted by such federal laws as the Home Owners’ Loan Act (HOLA) and the Electronic Fund Transfer Act (EFTA). These grant national banks, savings associations and credit unions the authority to process credit and debit card transactions without interference from state laws. The plaintiffs argue that the IFPA would significantly interfere with these federally granted powers, making it unconstitutional and unenforceable.

Economic impact and consumer confusion

Another concern raised by the plaintiffs is the IFPA's potential economic impact. Randy Hultgren, president and CEO of the Illinois Bankers Association, warned that the law could "wreak havoc at the register" by creating confusion for consumers and increasing costs for small businesses and banks across Illinois. The IFPA would require complex adjustments to the payment processing systems currently used by millions of consumers and businesses, leading to delays and higher transaction costs, he said.

Jim Nussle, president and CEO of America’s Credit Unions, echoed these concerns, emphasizing that the IFPA's disruption to the electronic payment system could harm local economies. He also criticized Illinois lawmakers for passing a law that, in his view, benefits large retailers at the expense of small businesses and consumers. Nussle stated that America’s Credit Unions joined the lawsuit to protect the financial well-being of the over 4 million Illinois residents who rely on credit unions.

Tom Kane, president and CEO of the Illinois Credit Union League, highlighted the global implications of the IFPA, noting that it could disrupt a payment system that is regarded globally as efficient and effective. He expressed concern that the law could set a dangerous precedent, leading to similar legislation in other states and causing further disruptions to the U.S. financial system.

The lawsuit filed by the ABA and its co-plaintiffs represents a significant legal battle over state versus federal authority in regulating the financial industry, industry analysts noted. As the case progresses, it will likely attract attention from both the financial sector and policymakers. The outcome could have far-reaching implications for how interchange fees are regulated in the United States and may set a precedent for future state-level legislation.

GS Advisory Board perspectives

Before the IFPA was challenged, we asked members of The Green Sheet Advisory Board the following questions:

1. What are the immediate and long-term effects of scattered state laws likely to be on stakeholders such as merchants, consumers, your business and/or the payments industry as a whole?
2. Is complying with the Illinois bill and similar legislation in other states feasible? If not, why not? If so, what will service providers need to do to help merchants comply?
3. It appears lawmakers are well-intentioned in drafting legislation that attempts to ensure merchants aren't gouged by growing payment-acceptance costs. Could legislators have a more effective approach to legislation that affects the payments industry? And how might payment professionals work with them?

Our Aug. 12 issue contained a portion of their responses to these questions. This article concludes this series with additional views from our Advisory Board. We wish to appreciate all who participated.

Justin Milmeister, CPP, Elite Merchant Solutions

1. If you read only the highlights on this new bill that takes effect July 2025 it appears to make sense. Why should merchants pay interchange on revenue that goes elsewhere such is the case with sales tax which goes to the government and gratuities which go to employees.

   When you dig deeper into this new law, as with anything there are significant downsides. Compliance will be extremely difficult at the point of sale considering there are different tax rates for different products and sales tax rates can vary from county to county. This will require merchants to upgrade their current point of sale devices or, in many cases, force businesses to purchase new equipment which can be costly.

   The winners of this law being passed will be larger merchants who will save a tremendous amount of money not paying interchange fees on sales tax and gratuities. The losers will be the smaller merchants that will have to absorb high costs upfront to remain compliant with much less benefit from interchange savings.

2. We have always been a very adaptable industry to changes in the law with respect to payments. Should the law recently passed in Illinois spread to other states, as four additional states are considering a similar law, compliance will be quite difficult but certainly feasible. Point of sale providers will be constantly having to update their systems as new laws pass in various states, which certainly will be cumbersome.
3. I think with most legislation there are always clear winners and clear losers should a specific law pass. The best way to ensure that well intentioned legislation is not only beneficial to the masses but is not detrimental to others is to have legislators meet with leaders in the payment space to discuss the negative impact specific legislation could unintentionally create.

   One thought would be to provide a tax break for companies potentially most adversely affected in our industry, such as point of sale providers and payment platforms. This could subsidize the enormous costs to implement, monitor and update their systems to reflect current and potential changes in tax rates.

Steve Norell, US Merchant Services

1. For starters it will drive the brands and processors crazy as they now have to have two separate ways to process cards. One with the current method and one with the exemption of sales tax and tips.

   The sales tax I agree with 100 percent, since the merchant has to give 100 percent of the amount collected to the state but because of IC, they do not get 100 percent of it. Granted it is a very small amount, but over time it becomes a large amount. The tip side of it is dicey, as some restaurants charge 3 percent back to the server.

2. Yes it is. It will take hours and hours of man hours to write code and get all terminals and POS to handle leaving out the fees for sales tax and tips.
3. What they all need to do is hire former legislators to help them navigate the waters for issues like this. Here is the bottom line. The states don’t care how they get their money as long as they get 100 percent of their money and on time.

   I am surprised that there has not yet been a lawsuit from a merchant group where they should not have to pay a dime of the sales tax as it relates to credit card fees. If anything, processors need to make an arrangement where they collect the sales tax and pay it for the merchant.

I am aware there are companies that do this, but it is not a direct relationship with the states. If I had a dollar for every restaurant that was on a payback arrangement for unpaid sales tax, I would be richer than Warren Buffett.

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