CHICAGO — A coalition of banking groups filed suit in federal court Thursday challenging a new Illinois law that they say would cause costly chaos in the industry and anger for consumers.
The law prohibits banks and credit card companies from charging retailers a small fee on taxes and tips. Illinois became the first U.S. state to pass such a law earlier this year, sparking outrage and an opposition advertising campaign backed by some of the country’s largest financial institutions.
“We continue to urge state lawmakers to reconsider the (law), but we cannot risk allowing this misguided gift to major corporate department stores to take hold and harm our state’s economy,” said Randy Hultgren, president and CEO of the Illinois Bankers Association, one of the plaintiffs in the lawsuit.
The lawsuit, filed in U.S. District Court in Chicago and naming Illinois Attorney General Kwame Raoul as a defendant, specifically argues that the Illinois law should not be implemented because it is overridden by federal law for national banks. Other existing laws say it should not apply to banks in Illinois or out of state, the suit says.
The plaintiffs – the IBA, the American Bankers Association, America’s Credit Unions and the Illinois Credit Union League – are seeking to block the law from being implemented while the lawsuit is still in court.
Lobbyists are expected to continue to pressure lawmakers to repeal the law as the state legislature’s veto session in November approaches.
Opponents of the law argue that it could ultimately force some consumers to pay for portions of their purchases in cash if credit card companies can’t or won’t deduct taxes or tips. Supporters of the law, including Illinois’ largest retail association and many Democrats, say those claims overstate the consequences.
Illinois Retail Merchants Association President and CEO Rob Karr said in a statement Thursday that the lawsuit was expected.
“It’s no surprise that credit card companies are doing everything in their power to undermine this law and continue to secure their ability to unilaterally impose exorbitant processing fees on their employees’ tips and taxes on consumers’ purchases,” Karr said.
Karr had previously said the deal would result in a fairer system, although both banks and retailers would have to make some changes. Many of the retail association’s members are small businesses that supported the change because it would reduce fees, he said.
The law is set to take effect on July 1. If a court does not stop its implementation, the law threatens to not only impose costs on financial institutions but also “wreak havoc throughout the state’s economy,” the complaint says.
Credit card companies and financial institutions currently charge retailers and restaurants a fee when customers use their cards, based on the total amount of the transaction, taxes and any tips. The bill, which the Democratic-majority Illinois General Assembly passed in the spring, would prohibit financial institutions from adding so-called interchange fees to the tax or tip portion of customers’ bills.
The goal was to lower the amount credit card companies can charge retailers. Retailers had proposed the rule because there was a separate retail tax increase that was part of the state’s revenue package, Rep. Kelly Burke of Evergreen Park, who introduced the bill, said earlier this year.
The new Illinois law is unrelated to the federal interchange fee legislation pushed by U.S. Senator Dick Durbin, but similarly affects Visa, Mastercard and other major financial services companies.
When Governor JB Pritzker signed Illinois’ revenue package earlier this year, he said he didn’t foresee any changes, but the credit card issue was “certainly something I think we’d be happy to discuss, revisit and talk about at any time.”
“There is still time for that during the rest of the year,” he said.
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