October 24, 20265 min read

Can Processors Charge Card Fees on Your Sales Tax and Tips? The State Fight So Far

By Yan Payments

Does any state actually stop processors from charging card fees on your sales tax and tips?

Not yet, anywhere. Illinois passed a law to do exactly that, but it’s been delayed twice and partly blocked in court. Colorado’s version got vetoed. Alabama took a completely different approach that doesn’t touch interchange at all. And in California, the one bill that would have banned this died in committee earlier this year.

Here’s the mechanic behind all of it: when a customer pays $107 for a $100 item with $7 sales tax, interchange is a percentage fee calculated on the full $107, not on $100. Same with tips. A $20 tip at a restaurant means the card network’s cut gets calculated on the tip amount too. Money that passes through your business but isn’t your revenue (tax that goes to the state, a tip that goes to your server) still gets a processing fee attached to it.

Illinois: the law that keeps not quite happening

Illinois passed the Interchange Fee Prohibition Act (IFPA) to ban card fees on the tax and tip portion of a sale. It was supposed to take effect in 2025, then 2026. The legislature pushed the date back again on June 1, 2026, this time to July 1, 2027.

The delays aren’t just foot-dragging. The Illinois Bankers Association, the American Bankers Association, the Illinois Credit Union League, and America’s Credit Unions sued the state in August 2024, arguing federal preemption. On June 1, 2026, a federal judge issued a permanent injunction blocking enforcement against national banks and federal savings associations; that got extended to federal credit unions in September. State-chartered banks and credit unions aren’t covered by that injunction, so the picture is genuinely split depending on which bank issued the card. Even once July 2027 arrives, the law may only bind a subset of issuers.

Colorado: vetoed

Colorado’s SB 26-134 would have barred interchange on the sales-tax portion of a transaction specifically (it didn’t touch tips), with an exemption for card issuers under $60 billion in assets. Governor Jared Polis vetoed it on June 3, 2026, citing the legal uncertainty from Illinois’s unresolved court fight and arguing this is better handled federally. The bill is dead.

Alabama: a different fix entirely

Alabama didn’t touch interchange. Governor Kay Ivey signed SB 221 on April 22, 2026, effective September 1, 2026, and it does something narrower: it excludes the card processing fee a merchant charges a customer from the state and local sales tax base. If you pass a surcharge on to a customer, Alabama no longer taxes that surcharge amount. That solves a different problem than Illinois is trying to solve, worth not conflating the two.

What about California?

There’s no current law, and no live bill. Assembly Bill 1065, introduced in the 2025-26 session, would have barred card issuers, networks, and processors from charging interchange on both the sales tax and tip portions of a transaction. A legislative fact sheet backing the bill cited an estimate that California merchants paid around $1.7 billion in swipe fees on sales tax alone in 2023; that’s an advocacy estimate, not an independently audited figure, so treat it as directional. The bill died in committee in February 2026 and nothing has replaced it.

That means California merchants are still paying interchange calculated on the full ticket, tax and tip included, with no relief in sight from Sacramento right now.

State	Bill	Status	Covers
Illinois	IFPA	Delayed to July 1, 2027; partly enjoined	Sales tax and tips
Colorado	SB 26-134	Vetoed June 3, 2026	Sales tax only
Alabama	SB 221	Effective Sept 1, 2026	Excludes surcharge from tax base (not interchange)
California	AB 1065	Died in committee, Feb 2026	Would have covered tax and tips

Worth being clear this is a different question from California’s existing surcharge rules. SB 478 restricts whether you can add a surcharge on top of an advertised price at all, and SB 1524 sets disclosure requirements for restaurants that do (we covered those at yanpayments.com/blog/visa-surcharge-cap-enforcement-fines). Those laws govern what you can charge your customer. The interchange-on-tax/tip fight is about what the card network charges you, the merchant, on what amount. You can be fully compliant with SB 478 and SB 1524 and still pay interchange on tax and tips, because nothing in California law currently stops that.

Should you expect this to change soon?

Several other states have introduced similar bills this session, and the pattern so far is delay, veto, and procedural death more than passage. Nothing suggests an imminent change in California or federally. If you’re budgeting around processing costs, the honest planning assumption right now is that interchange on tax and tips isn’t going away this year or next, regardless of which state you’re in.

This is general information about pending and enacted legislation, not legal or tax advice. Laws here are moving quickly and court rulings can change enforceability; confirm current status with your processor or an attorney before making decisions based on anything described here.

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