An Illinois law that prohibits interchange levies on sales tax and gratuities doesn’t interfere with banks’ or card networks’ ability to set fees, the state’s attorney general said Friday in defending the law before an appellate court.

The Illinois Interchange Fee Prohibition Act isn’t subject to federal preemption by the National Bank Act as the state law doesn’t “purport to constrain national banks’ authority to establish or collect interchange fees from their customers,” Attorney General Kwame Raoul’s office wrote in a filing with the 7th U.S. Circuit Court of Appeals.

The state filed its response Friday to an appeal by a coalition of banks and credit unions challenging the Illinois law. Four trade associations for banks and credit unions sued Illinois in August 2024 over the law, the first state legislation of its kind. 

In February, U.S. District Judge Virginia Kendall in Chicago denied the plaintiffs an injunction to halt the law, though she struck down part of the law, which limited the use of transaction data by banks, networks and other entities.

The 7th Circuit granted the banks’ request last month for an expedited appeal schedule. On Tuesday, the appeals court scheduled oral arguments for May 13.

The Illinois law is scheduled to take effect July 1 after legislators in the state voted last year for a one-year delay.

The banks and several allies that have filed amicus briefs in the case argue that the Illinois IFPA will severely harm the U.S. payments system by inspiring other states to pass similar laws. 

The Office of the Comptroller of the Currency, ten former OCC officials, the Electronic Transactions Association and the Electronic Payments Coalition have filed amicus briefs on behalf of the banks and credit unions.

Card networks are “critical” to card lending and deposit service powers, the former OCC officials said in their March 16 brief, and the Illinois law “significantly interferes” with those powers.

In its filing, the Illinois AG argued that Congress passed the National Bank Act with the expectation that states would continue to regulate national banks so long as state laws did not harm banks’ ability to exercise powers they’ve been given at the federal level.

“States remain free to regulate banks in even-handed ways, even if those regulations affect or impose costs on financial institutions,” the AG’s office wrote in its brief. “At bottom, plaintiffs’ preemption theory is a complaint that complying with the Interchange Fee Limitation will be expensive.”