State Swipe-Fee Bans Spread: What Travel Merchants Need to Know
Illinois is no longer alone. A wave of state legislation targeting credit card interchange fees is gaining momentum, with Colorado and Delaware advancing bills that would prohibit swipe fees on sales tax and tips. For travel merchants, hotels, restaurants, and tour operators, these changes could reshape payment processing economics starting in 2026.
The Illinois Precedent
In mid-2024, Illinois passed the Interchange Fee Prohibition Act (IFPA), becoming the first state to ban credit card networks from charging interchange fees on the tax and tip portions of transactions. The law survived its first major legal challenge in February 2026, when U.S. District Judge Virginia Kendall upheld most of the statute against a lawsuit brought by the Illinois Bankers Association and Illinois Credit Union League.
The law is now set to take effect on July 1, 2026, after the Illinois General Assembly extended the original deadline to accommodate litigation. Banks have vowed to appeal, but the ruling creates a template other states are already copying.
What the Law Does
Under IFPA, financial institutions cannot charge interchange fees on:
- Sales tax portions of credit and debit card transactions
- Tip amounts added to bills
Interchange fees typically run around 2% of transaction value. For travel merchants operating on thin margins, eliminating fees on tax and tip portions represents meaningful savings. The Illinois Attorney General’s office estimated the reduction in interchange revenue at roughly 9-10% for affected banks.
The Copycat Wave
Illinois lit the fuse. Multiple states have since introduced similar legislation, with Colorado and Delaware making the most headway as of March 2026.
Colorado
A bill introduced in early March 2026 would prohibit interchange fees on sales taxes for transactions involving large banks, based on asset thresholds. Colorado’s merchant-heavy economy and strong small business advocacy make it a significant second domino. If Colorado passes the law, the movement stops looking like an Illinois anomaly and starts looking like a national trend.
Delaware
Delaware is also advancing legislation to curtail card interchange fees on taxes and tips, following the Illinois model. The state’s status as a financial hub adds weight to its regulatory moves.
New York and Others
New York has entertained proposals to exclude state and local taxes from fee calculations, borrowing language from the Illinois framework. Other states are watching closely, and industry observers expect a flurry of similar bills in 2026 legislative sessions.
What This Means for Travel Merchants
Travel businesses face unique exposure to interchange fees due to high transaction values and tax-heavy bookings. A hotel room, cruise package, or tour booking often includes significant sales tax, plus tips for restaurant and service staff. Under current rules, merchants pay fees on money they never keep.
Operational Challenges
Savings will not be automatic. Point-of-sale systems and payment gateways must cleanly separate subtotal, tax, and tip data, especially for restaurants where tips may change after authorization. Merchants will need to:
- Audit POS and gateway capabilities for line-item data transmission
- Update software to isolate tax and tip amounts
- Train staff on new processing workflows
- Monitor compliance documentation requirements
Calculate Your Exposure
Merchants can estimate current costs with a simple formula:
Monthly card volume x average tax rate x effective processing rate = fees paid on tax
For a hotel doing $500,000 monthly card volume with an 8% average tax rate and 2.5% effective processing rate, that’s $1,000 monthly in interchange on tax alone, or $12,000 annually.
Industry Pushback
Banks and payment networks are fighting hard. The Electronic Payments Coalition, representing Visa, Mastercard, and major financial institutions, argues that interchange fees compensate issuers for fraud risk and fund popular rewards programs.
Small business groups have also raised concerns. The Illinois Chamber of Commerce, Illinois State Black Chamber of Commerce, and Illinois Hispanic Chamber of Commerce argued that separating tip and tax portions would be costly for small merchants, potentially limiting payment options.
The banking industry has warned that reduced interchange revenue could lead to cuts in credit card rewards, including airline miles and hotel points programs that travelers depend on.
Key Takeaways
- July 1, 2026 is the effective date for Illinois’ Interchange Fee Prohibition Act, the nation’s first swipe-fee ban on taxes and tips
- Colorado and Delaware are advancing similar legislation, with more states expected to follow in 2026
- Travel merchants should audit their POS and gateway systems now to ensure they can separate tax and tip data
- Calculate your exposure: monthly volume x tax rate x processing rate = potential savings
- Watch for federal preemption challenges and appeals that could delay implementation
- Monitor credit card rewards programs, which could face cuts if interchange revenue declines
