The 2025–2026 Surcharge and Interchange Fee Legislative Wave: What Government, Utility, and Business Merchants Must Know Now

By Dale Erling | 15+ years payment & fintech experience | Published April 7, 2026

Quick Answer

A wave of state legislation is reshaping how merchants recover credit card processing costs. Illinois’s Interchange Fee Prohibition Act (IFPA), effective July 1, 2026, bans interchange fees on tax and gratuity portions of card transactions—the first law of its kind. Colorado, Delaware, and Rhode Island are advancing copycat bills. Kansas lifted its decades-old surcharge ban effective January 1, 2025. California’s SB 478 redefines which fees must be included in advertised prices. Government treasurers, utility billing managers, and business owners must act now to stay compliant.

What Is the Illinois Interchange Fee Prohibition Act, and How Does It Affect Merchants?

Illinois became the first state in the nation to prohibit interchange fees on specific portions of card transactions when it passed the Interchange Fee Prohibition Act (IFPA) in 2024 (815 ILCS 151/150-1 et seq.). The law takes effect July 1, 2026, and applies to all electronic payment transactions processed in the state.

What Does the IFPA Prohibit?

The IFPA bars issuers, payment card networks, acquirer banks, and processors from receiving or charging merchants any interchange fee on the tax amount or gratuity portion of an electronic payment transaction—but only when the merchant transmits that data during authorization or settlement. Example: on a $100 restaurant bill with 10.25% Chicago sales tax and a $20 tip, interchange applies only to the $100 base, not the full $130.25.

How Does the Merchant Reimbursement Process Work?

Merchants have up to 180 days from the date of a transaction to submit tax and gratuity data to the card issuer. Once submitted, the issuer has 30 days to reimburse the merchant for interchange fees collected on those amounts (California Credit Union League analysis of IFPA compliance). This creates a new operational workflow that payment processors must support.

What Happened in Court?

Banking trade associations filed suit in Illinois Bankers Association v. Raoul, No. 24-7307 (N.D. Ill.), challenging the IFPA as preempted by the National Bank Act. On February 10, 2026, U.S. District Judge Virginia Kendall upheld the interchange fee prohibition, ruling that card networks—not banks—set interchange fees (PwC analysis). The court permanently enjoined the IFPA’s separate data usage limitation for federally chartered institutions.

The American Bankers Association and other plaintiffs have appealed to the Seventh Circuit Court of Appeals. The court granted an expedited briefing schedule, with oral arguments set for the week of May 11–22, 2026 (Orrick InfoBytes). The plaintiffs requested a ruling by June 15 to allow preparation before the July 1 effective date.

The OCC filed an amicus brief warning the IFPA “may well trigger a cascade of similar state and local laws” creating a “fractured, highly inefficient, and unworkable nationwide payment system” (OCC amicus brief, Case 26-1440).

What Are the Penalties for Non-Compliance?

The IFPA imposes a $1,000 per-transaction civil penalty for violations, enforced by the Illinois Attorney General. This penalty applies to any entity that receives the required tax and gratuity information from a merchant and still charges interchange on those amounts.

What Should Illinois Merchants Do Now?

Government agencies, utilities, and businesses processing card payments in Illinois should:

• Audit POS systems to confirm they can isolate and transmit state/local tax components at the transaction level.
• Evaluate ERP and tax engine configurations to ensure tax data flows through authorization and settlement.
• Review reconciliation procedures to confirm tax amounts are audit-ready.
• Monitor the Seventh Circuit appeal for a ruling before the July 1, 2026 effective date.
• Consult with payment processors about readiness for split-transaction calculations in Illinois.

Which Other States Are Pursuing Interchange Fee Legislation?

The Illinois IFPA has sparked a legislative wave. Multiple states introduced similar bills in early 2026, and nearly a dozen more have proposals in various stages.

Colorado’s SB26-134 passed the Senate committee in March 2026. It prohibits card networks from charging interchange fees as a percentage of gross transaction amounts unless the fee excludes tax. It includes an anti-circumvention clause barring networks from raising rates on the non-tax portion (Colorado General Assembly). The bill exempts issuers with less than $60 billion in consolidated worldwide assets.

Delaware’s HB 315, introduced in March 2026, would prohibit payment card networks from charging interchange fees on tips added to credit card transactions (ABA Banking Journal). Rhode Island’s H 8212 and S 2522 heard testimony in March 2026, with the NFIB testifying in support (Rhode Island Legislature testimony).

What About Federal Legislation?

At the federal level, Senators Roger Marshall (R-KS) and Dick Durbin (D-IL) reintroduced the Credit Card Competition Act in January 2026 with President Trump’s backing. The bill requires banks with over $100 billion in assets to enable at least two unaffiliated card networks, breaking the Visa-Mastercard duopoly (Sen. Marshall press release). This addresses network competition rather than interchange on tax, but signals bipartisan momentum.

Why Does This Matter for Government and Utility Merchants?

Government agencies and utilities are disproportionately affected because a significant portion of every payment they process is tax. If interchange on those tax components is eliminated, the economics of card acceptance shift—and fee recovery programs must be recalibrated.

What Changed in Kansas? Understanding the New Surcharge Law

For decades, Kansas prohibited credit card surcharges under K.S.A. 16a-2-403. That changed on January 1, 2025, when House Bill 2247 took effect, lifting the ban with new conditions.

How Did the Ban Get Lifted?

In February 2021, the U.S. District Court for the District of Kansas ruled in CardX, LLC v. Schmidt that the no-surcharge law was an unconstitutional restriction on commercial speech under the First Amendment (Arnall Golden Gregory analysis). Kansas lawmakers passed HB 2247 in 2024 to codify the new legal reality.

What Are the New Rules?

Under the revised K.S.A. 16a-2-403, surcharges are permitted if the merchant provides “clear and conspicuous” advance notice at the point of entry or point of sale (Kansas Legislature). Key requirements include:

• Surcharge disclosure must occur before the transaction is completed.
• The surcharge must not exceed the merchant’s actual cost of processing (typically 2–3%, and never more than 4% per card network caps).
• Surcharges cannot be applied to debit or prepaid card transactions (per card network rules and the Durbin Amendment).
• The Kansas Consumer Protection Act (KCPA) provides enforcement authority—merchants who charge deceptive or excessive surcharges face civil penalties and investigations.

Kansas merchants implementing surcharges should also comply with Visa’s requirement of 30 days’ advance written notice to the card network and a cap of 3% (Visa interchange information).

How Does California’s SB 478 Affect Surcharging and Fee Recovery?

California’s SB 478, the “Honest Pricing Law,” took effect July 1, 2024. It prohibits businesses from advertising or listing a price that does not include all mandatory fees or charges, other than government-imposed taxes and reasonable shipping costs (California Attorney General’s Office).

Are Credit Card Surcharges Still Allowed in California?

Yes, but with an important nuance. California’s longstanding Civil Code section 1748.1 prohibits credit card surcharges. However, that law was held unenforceable by the Ninth Circuit in Italian Colors v. Becerra (2018), and the California Attorney General has indicated it generally applies that ruling to similarly situated merchants (California AG surcharge guidance).

Credit card surcharges survive SB 478 because they are avoidable fees—customers can choose to pay with cash, check, or debit card to avoid the surcharge. SB 478 targets only mandatory fees that a consumer cannot avoid regardless of payment method. The California AG’s FAQ explicitly states that the law applies to fees that are “automatically applied and hard to remove” (California AG SB 478 FAQ).

What Should E-Commerce and Online Bill Pay Merchants Know?

The critical distinction is between mandatory and avoidable fees:

• A “service fee” automatically added to every transaction, regardless of payment method, is a mandatory fee and must be included in the advertised price.
• A credit card surcharge applied only when a customer selects credit card is an avoidable fee and need not be in the advertised price—but must be disclosed before the transaction is finalized.
• Businesses cannot advertise one price and add variable fees at checkout. The advertised price must be the price the consumer pays for mandatory charges.

What Happens if Regulation II Is Struck Down?

On August 6, 2025, the U.S. District Court for the District of North Dakota vacated Regulation II—the Federal Reserve’s framework for capping debit card interchange fees—in Corner Post, Inc. v. Board of Governors of the Federal Reserve System. The court found the Fed exceeded its statutory authority under the Durbin Amendment by including costs unrelated to specific electronic debit transactions when calculating the interchange fee cap (Cooley LLP analysis).

What Costs Did the Court Find Impermissible?

The court ruled the Fed improperly included fixed ACS costs, network processing fees, transaction-monitoring costs, and fraud losses. Under the Durbin Amendment’s plain language, only incremental ACS costs are permissible.

What Is the Current Status?

The court stayed its vacatur, so the current cap of 21 cents plus 0.05% remains in force. The Fed appealed to the Eighth Circuit in October 2025; oral arguments were heard February 19, 2026 (ClearingPost analysis). Three outcomes are possible: preserve the cap, affirm the vacatur (returning debit interchange to pre-2011 levels), or remand with instructions.

How Does This Affect Surcharge Economics?

If the cap is struck down and debit interchange rates rise, the gap between credit and debit processing costs narrows. For surcharging merchants, this would not change surcharge calculations directly (surcharges apply only to credit), but it could shift consumer payment behavior and overall fee recovery economics.

What Does the Legislative Wave Mean for Fee Recovery Programs?

The convergence of state interchange prohibitions, changes to surcharge laws, and federal debit fee litigation creates a complex compliance landscape. Here is how each fee recovery approach is affected.

How Are Government and Utility Merchants Specifically Affected?

The Illinois IFPA directly affects fee-recovery economics for card payments that include tax, nearly every government and utility transaction. If the tax portion is eliminated, the cost that fee programs recover decreases, and surcharge rates must be recalculated to remain within actual processing costs.

Which Fee Recovery Models Remain Viable?

What New Compliance Requirements Do Interchange Prohibition Laws Create?

Interchange prohibition laws like the Illinois IFPA create compliance requirements that are separate from and in addition to surcharge rules:

• Payment systems must be able to isolate and transmit tax and/or gratuity amounts in the authorization message.
• Reconciliation systems must track reimbursement claims and the 180-day/30-day timelines.
• Processors may need to build state-specific transaction flows — the current national interchange calculation model does not natively exclude tax.
• Merchants operating across multiple states will face an increasingly complex patchwork of rules if additional states follow Illinois.

Service fee programs under Visa’s MCC 4900 framework for utilities are not surcharges and operate under a different compliance structure, unaffected by state surcharge bans or interchange prohibition laws. For government and utility merchants, service fee and convenience fee models remain the most straightforward path to fee recovery.

Frequently Asked Questions

Q: Does the Illinois IFPA apply to debit card transactions, or only credit cards?

A: The IFPA applies to all “electronic payment transactions,” which includes both credit and debit card transactions. Interchange fees on the tax and gratuity portions are prohibited for both card types when the merchant transmits the relevant data.

Q: Can merchants still surcharge in states that are passing interchange prohibition laws?

A: Yes. Surcharging and interchange prohibition are separate legal concepts. A state can allow surcharging while also prohibiting interchange on the tax portion. In Illinois, surcharging remains legal. However, the allowable surcharge amount may decrease if underlying interchange costs drop.

Q: Is dual pricing affected by any of these new laws?

A: No. Dual pricing displays two prices—one for cash and one for card—and remains legal in all 50 states. It is not classified as a surcharge or an interchange fee. Neither surcharge bans nor interchange prohibition laws affect dual pricing.

Q: How does Colorado’s SB26-134 differ from the Illinois IFPA?

A: Colorado’s bill focuses on the sales tax portion of transactions only (not gratuity) and targets payment card networks specifically. It exempts issuers with less than $60 billion in consolidated worldwide assets. Illinois’s IFPA covers both tax and gratuity and applies to issuers, networks, acquirers, and processors (Colorado General Assembly).

Q: What should Kansas merchants do now that surcharging is legal?

A: Kansas merchants should: (1) give Visa 30 days’ written notice before implementing a surcharge program; (2) ensure the surcharge does not exceed their actual processing cost; (3) post clear signage at the point of entry and point of sale; (4) apply surcharges only to credit card transactions, not debit or prepaid; and (5) monitor the Kansas Consumer Protection Act for enforcement updates.

Q: If Regulation II is struck down, will debit interchange fees increase immediately?

A: Not immediately. The district court stayed its vacatur, so the current 21-cent cap remains in effect during appeal. Even if the Eighth Circuit affirms, the Durbin Amendment remains law and Congress could direct a replacement rule (ClearingPost).

Sources

Illinois Interchange Fee Prohibition Act (815 ILCS 151/150-1 et seq.)

Illinois Bankers Association v. Raoul, No. 24-7307 (N.D. Ill. Feb. 10, 2026) — PwC analysis

Seventh Circuit expedited briefing order — Orrick InfoBytes

OCC amicus brief, Case 26-1440 (7th Cir.)

Colorado SB26-134 — Colorado General Assembly

Delaware HB 315 — ABA Banking Journal

Rhode Island H 8212 testimony — RI Legislature

Credit Card Competition Act — Sen. Roger Marshall

Kansas K.S.A. 16a-2-403 — Kansas Legislature

CardX, LLC v. Schmidt — Arnall Golden Gregory

California SB 478 Hidden Fees — California Attorney General

California AG surcharge guidance

California AG SB 478 FAQ (PDF)

Corner Post v. Fed. Reserve — Cooley LLP

Regulation II Eighth Circuit oral arguments — ClearingPost

Visa interchange information

California Credit Union League IFPA analysis

DISCLAIMER

This article is for informational purposes only and does not constitute legal or financial advice. Consult qualified legal counsel before implementing any fee recovery program. Payment laws and card brand rules change frequently — verify current requirements with your state attorney general, legal counsel, and payment processor before taking action.