As opponents in the legal battle over the Interchange Fee Prohibition Act prepare their motions for the Seventh Circuit U.S. Court of Appeals, legislators in several other states continue to push bills to regulate the card fees.

Bills the payments industry is following closely have been introduced in Pennsylvania, Massachusetts and New Jersey. Each of the three bills seeks to exempt merchants, like retailers and restaurants, from being charged interchange fees on sales tax, and two of them include an interchange exemption for gratuities. 

“I had a liquor store owner tell me that by paying interchange on sales tax, he is getting hit with a fee for collecting sales tax for the state,” New York Assemblyman John T. McDonald III said in an interview last month. McDonald introduced an interchange-relief bill last year and was re-elected to his seat in last week’s election. “Paying interchange on money the state requires merchants to collect on its behalf is unfair,” he said.

What’s drawing attention to the bills in Pennsylvania, Massachusetts and New Jersey is that they could pass before any of the three legislatures adjourns in late 2026 or in early January 2027, not long before oral arguments for the IFPA will be heard late next January by the Seventh Circuit appellate court in Chicago.

“Passing an interchange law before the appeals process in the Seventh Circuit court is settled creates an issue for legislators in other states, because the legal challenge to the IFPA has set a precedent,” Scott Talbott, executive vice president for the Electronic Transactions Association, said last month in an interview. “Pass an interchange-related bill in another state before the legal challenge to the IFPA is settled and a lawsuit is likely to follow.”

In 2026, 32 interchange-related bills were introduced in 20 states, Washington, D.C. and Puerto Rico, according to the ETA. Since 2025, 75 interchange-related bills have been introduced across 32 states, Washington, D.C. and Puerto Rico.

Banks that issue credit cards impose interchange fees on merchants for processing a payment when consumers swipe their credit cards. Those fees are typically separate from other fees charged by the dominant U.S. card networks, Visa and Mastercard, or other intermediaries. Nonetheless, interchange fees often are an inexact reference for all the fees.

Most of the interchange-related bills introduced are focused on exempting sales and tips from the calculation of interchange fees on credit card transactions. 

In New Jersey, for example, Senate bill 4360 prohibits card networks from charging interchange on sales tax or gratuities, “provided the merchant transmits the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction.” 

The Senate bill also prohibits card networks from increasing interchange rates on the non-sales tax and gratuity portion of the transaction to compensate for the loss of interchange revenue on tax and gratuities. The bill is currently before the Senate Commerce Committee. 

A companion bill, Assembly bill 5014, has been introduced and referred to the Financial Institutions and Insurance Committee. The New Jersey State Legislature is scheduled to adjourn Dec. 17.

In Massachusetts, Senate bill 688 would also prohibit charging interchange fees on sales tax and gratuities. The bill would make it “unlawful” for issuers, card networks, acquirers or processors from increasing interchange rates to make up for lost interchange revenue on tax or tips. The bill was designated for further study in July. Results of the study are expected before the end of the year. Final adjournment for the Massachusetts legislature’s 2025-2026 session is Jan. 5, 2027. No companion bill was introduced in the House.

In the Pennsylvania House of Representatives, House bill 2090 seeks to prohibit interchange from being charged on sales tax and prohibits card networks from “increasing other fees to circumvent this rule, charging consumers or merchants for disputed transactions before a resolution, or penalizing merchants for setting prices in compliance with the law.”

The bill also requires that card networks “deduct sales tax from interchange fee calculations or provide merchants a rebate for interchange levied on sales tax.” The bill, introduced during the Pennsylvania legislature’s 2025-2026 regular session, has been referred to to the House Finance Committee. The legislature is scheduled to adjourn Nov. 30.

A companion bill, Senate bill 1202 has been introduced in the Pennsylvania Senate and is before the Senate Finance Committee.

All three bills call for the imposition of monetary penalties for parties collecting interchange on sales tax or gratuities.

One driver behind the flurry of bills to regulate interchange at the state level is that sponsors of the bills consider subjecting sales tax, which merchants typically collect on behalf of the state, unreasonable because merchants do not keep that revenue. Sponsors also make the same argument for collecting interchange on tips.

McDonald’s bill, which was introduced in 2025, seeks to prohibit interchange from being levied on sales tax and gratuities. The bill was in committee when the New York Assembly adjourned in June.

The impetus to introduce the bill grew out of McDonald’s experience as a pharmacy owner and pharmacist by profession, and with the national attention the IFPA is attracting. “Cash is no longer king, credit is – we don’t see a lot of cash at my business,” McDonald said.

While McDonald acknowledged that New York pays merchants to collect sales tax, he added the amount is typically not enough to cover the cost of interchange levied on sales tax.

If interchange on tax and gratuities amounted to a few hundred dollars a month, McDonald contends businesses “could live with the cost,” but when interchange fees on tax and tips total $1,000 a month or more, it’s a cost that businesses, especially small businesses, can’t afford to ignore. 

“Affordability has been an ongoing conversation with merchants for years,” said McDonald. “My aim is to try and do something to lower this cost. It’s not just small businesses that are affected, large businesses are affected too. “Most people don’t know the cost impact of interchange on businesses,” he contended.

Like many state legislators, McDonald is paying close attention to the legal challenge to the IFPA. 

In June, the Office of the Comptroller of the Currency issued an order declaring that the National Bank Act preempts Illinois from regulating interchange for national banks and federal savings associations. Afterward, U.S. District Judge Virgina Kendall, in the Northern District of Illinois, issued a permanent injunction exempting national banks and federal savings associations from the IFPA, but that doesn’t affect state-charted banks or financial institutions.

Plaintiffs in the case, led by the Illinois Bankers Association, have appealed Kendall’s ruling in an effort to exempt state-charted banks and financial institutions from the IFPA. Plaintiffs have until Dec. 21 to file their brief for the appeal.

“We are looking at every legal avenue to provide relief [from the IFPA] to the entire banking industry,” Carolyn Settanni, executive vice president and general counsel for the Illinois Bankers Association, said last month in an interview. “If one player is left out, it will impact the entire global payments system.”

In the meantime, Illinois Attorney General Kwame Raoul’s office filed notice of an appeal in October requesting the appellate court overturn the lower federal court ruling that national banks and federal savings associations be exempt from the IFPA and that the law be allowed to stand as passed. The Illinois Attorney General has until Nov. 23 to file its brief and until Jan. 11, 2027, to file a reply to the plaintiff’s brief. Oral arguments for the appeals have been set for Jan. 27, 2027.

If plaintiffs in the case succeed in getting the IFPA struck down by the courts, their next step would be to push for the IFPA to be repealed. “It makes no sense to keep a law on the books that is unapplicable,” Ashley Sharp, the Illinois Credit Union League’s chief legal officer and senior vice president of state advocacy, said in an interview last month.

Illinois legislators voted to push the implementation date for the IFPA back to July 1, 2027, to allow time for legal challenges to the law to play out.

While Sharp acknowledges that operating costs for businesses drive a lot of conversation around interchange relief, she argues the IFPA is not the fix merchants need to combat rising operating costs. “Sales costs are rising,” Sharp said. “The broader question is what are all the factors contributing to rising costs for merchants.”

Sharp argues that merchants have pushed to exempt sales taxes and tips from interchange because they do not keep that revenue, but “requiring financial institutions to process these portions of card transactions for free shifts costs rather than eliminating them.”

Interchange also helps fund “a secure payment infrastructure, fraud prevention, and consumer protections that make electronic payments possible,” Sharp added.

If the IFPA is eventually struck down by the courts, legislators in other states are expected to continue introducing bills to provide merchants interchange relief. 

“Merchants are constantly talking to state legislators about affordability and efforts to reduce interchange will continue,” Doug Kantor, general counsel for the National Association of Convenience Stores, said in an interview last month. “There will likely be bills written that avoid, or sidestep, problems the court finds with the IFPA.”

One potential strategy for upholding the IFPA and similar interchange relief bills would be for merchants to challenge the OCC’s ruling that federal banking laws supersede state law. “The OCC’s ruling could be challenged in court,” Kantor said “I don’t see it holding up to scrutiny.”

Should the IFPA be enacted in its current form, Illinois legislators are likely to find themselves facing a conundrum: do they keep the law in place and put state-chartered banks and financial institutions at a financial disadvantage relative to national banks because they can’t collect interchange on tax and tips or do they revise the law. They could also take an entirely different approach to interchange relief.

“What the IFPA does in its current form is punish state-charted banks and financial institutions,” said John Berlau, a senior fellow and director of finance policy at the Competitive Enterprise Institute.

That anti-regulatory organization opposes the IFPA, as well as interchange relief bills in other states. “The legal challenges to the IFPA should give Illinois legislators, and legislators in other states, pause,” Berlau said in an October interview.