PEP Episode 100 — The Illinois Swipe Fee Shockwave: Who Really Pays? | Illinois Bans Interchange on Sales Tax

Episode Description

Card fees on sales tax? Illinois just lit a fuse. In this milestone 100th episode of the Payments Experts Podcast, hosts James Huber and Christopher Dryden (Managing Partners of Global Legal Law Firm) unpack Illinois’ unprecedented push to exclude sales tax from the interchange base and trace the financial shockwaves moving through the entire payments stack.

When lawmakers target “junk fees,” the payments engine doesn’t stop—it reroutes. What sounds like a tidy policy headline in reality forces a massive systems overhaul for card networks, processors, ISOs, ISVs, and merchants. From complex e-commerce geolocation puzzles to “three-price” checkout confusion and Wisconsin’s unique surcharge restrictions, this conversation exposes where state laws collide with card network rules. Furthermore, the team uncovers how processor contract terms quietly shift programming liability downstream to ISOs, highlighting a jaw-dropping multi-million dollar processor clawback case study that every payment professional needs to hear.

Key Discussion Points

• The Illinois Ruling: Removing sales tax from the interchange base and its cascading effects across payment rails.

• Geolocation E-Commerce Puzzles: How state interchange exclusions apply when the buyer, website registration, and settlement occur in different states.

• Checkout Pricing Confusion: How dual pricing models could morph into “three-price” menus to stay compliant at the counter.

• Wisconsin’s Surcharge Twist: How state rules blocking surcharges on sales tax force software to re-sequence calculation logic.

• Network Rules vs. State Law: Navigating conflicts between Visa/Mastercard operating rules and state-level statutory limits.

• Contractual Liability Shifts: How processors use contract clauses to pin software and compliance errors on ISOs.

• Data Opacity & Processor Clawbacks: A real-world scenario where a routine underpayment inquiry ballooned into a multi-million dollar clawback.

 

Practical Protections for ISOs & Merchants

• Demand Data Access & Audit Rights: Make clear disclosures, audit rights, and raw data access non-negotiable in processor contracts.

• Build Configurable Pricing Engines: Ensure POS software can dynamically handle state tax exclusions, calculate network caps, and adjust billing sequences.

• Review Downstream Liability: Pressure-test ISO and ISV agreements to ensure programming errors caused by processor system limitations aren’t shifted onto your firm.

 

Featured Hosts

• James Huber — Managing Partner, Global Legal Law Firm

• Christopher Dryden — Managing Partner, Global Legal Law Firm

 

Subscribe & Connect

• Subscribe: Celebrate 100 episodes with us! Follow the podcast for masterclass-level discussions on payment law, compliance, and ISO economics.

• Share: Send this landmark episode to an ISO, acquirer, or payments attorney navigating state swipe fee regulations.

• Review: Leave a rating and review to let us know what topics you want us to tackle over the next 100 episodes!

 

Legal Disclaimer

Matters discussed are all opinions and do not constitute legal advice. All events or likeness to real people and events is a coincidence.

Transcript

James Huber (00:00):

That’s how the law works, is if I have no way of knowing or you’re actively concealing it, which we see all the times with the processor. I mean, the whole system is made to actively conceal.

Christopher Dryden (00:12):

Well, the funny part was, is the response that he got back, it was like a million dollar issue to him. The response that he got back was, well, we haven’t been passing through all these interchange fees, so you owe us 2 million.

James Huber (00:24):

Just be quiet, basically away, basically. And they’re going, but we won’t collect that from you if you shut up and go back to

Christopher Dryden (00:30):

Bed. That’s right. Oh yeah. Let’s memorialize that. We don’t owe you anything. And you don’t owe us anything. Exactly.

Jeremy Stock (00:38):

Welcome to the Payments Experts podcast, a podcast of global legal law firm. We hope you enjoy this episode at a very exciting podcast Today, joining us in studio, our founding and managing partner, Christopher Dryden, as well as James Huber, managing partner of Global Legal Law Firm. Gentlemen, this is our 100th episode. It’s been over three years now. Congratulations,

Christopher Dryden (01:08):

Phil. I’ve been celebrating all morning. All

James Huber (01:09):

Morning in between doing work, in between doing work. So we wanted to start off the episode talking about the Illinois brick interchange ruling. What happened in that case is everyone goes, this is ridiculous, because they made a rule saying, you can’t charge interchange on sales tax. So the interchange is typically charged to the transaction as a whole and a lower court said, no, that’s not going to work. And the ETA and the processors are never going to go, no, this really isn’t going to work. We don’t even know how we’re going to do this.

Christopher Dryden (01:50):

Yeah, I mean, it’s impossible to figure out.

James Huber (01:53):

Well, I thought I figured it out, and I can’t remember what I said. I was like, it’s not that hard. I mean, obviously someone just has to write some software, but I was just basically, you charge the interchange here, and then this thing just rides the rails for free.

Christopher Dryden (02:07):

Well, I listened to you yesterday and a lot of it made sense, but here’s something that, well, maybe it’s ride the rails for free, but for geolocation of, okay, this is related to Illinois merchants.

Christopher Dryden (02:20):

What happens when you have a website and the website registrant is in a state other than where the merchant is? Where’s the sale actually taking place? I mean, there’s case law that talks about taxation and whether or not a certain jurisdiction’s tax laws apply to, if I’m in South Dakota and I buy something from a New York company, that New York company is still subject to South Dakota’s sales tax laws because they’re entering into South Dakota to do the transaction. So it’ll be interesting to see if there’s carve outs for different ways that the transaction’s occurring. Does the location of the website registrant, or where is the transac actually being processed and settled? Will they try to dissect it out to show that it’s not really touching Illinois? Is that the next analysis that happens?

James Huber (03:18):

I don’t know. It’s a nightmare. And when it came out, the underdog in me is like, yes, stick it to the processors, and we all rely on the processors. But one of our big things is we’re always fighting with the processors. And I remember it was probably like 15 years ago, we were getting vetted to work for one of the processors to do lease collections, and we were going through the process and it was really long. And then all of a sudden, a light bulb, I think went off with both of us of we don’t want to work for the processor because all of our clients are always fighting with them. We’re going to be conflicted out. It ended up being a good business solution, but part of us is the maverick. I’m going, yes, stick it to ’em. But then I go, well, wait. They’re not going to be stuck with this. Guess who’s going to pay for this technology? Everything, because Visa and MasterCard, they might say, you’re not riding the rails for free. You’re getting charged the interchange. Fiserv, fine. The cardholder’s not you’re going to get

Christopher Dryden (04:20):

It. Yeah. What happens to interchange? I mean, because now you’ve got institutional construction changes that are going to have to take place, and it’s not a simple fix. And the real problem is, is that if it’s okay in Illinois now, the Colorado bill that’s out, it’s okay in Colorado. And so for every single state, are they going to have to redesign how interchange operates with

James Huber (04:45):

Different rules?

Christopher Dryden (04:47):

There won’t be any standardization. It’ll make it more expensive. It’s actually more that the card networks can hide behind to pass along costs and profit with it, in my opinion.

James Huber (04:57):

Right? Yeah. But then it all goes, we’re going, oh, well, we’re protecting the consumer, but we know that the issuing bank, the bank that gives you your card, their pocketing, most of interchange, right? They get three quarters of it or a little more?

Christopher Dryden (05:13):

No, no, no. About three quarters

James Huber (05:14):

Of three quarters of the interchange goes to the issuing bank and we’re going, oh, we’re protecting them. If these guys are getting less or having to pay for it, it ends up hurting the consumer.

Christopher Dryden (05:25):

Well, I think the rising prices, look, you add costs onto the, this is a constant. When we were talking about, Hey, what do you want to talk about for the show? It is this constant push pull because, oh, well, we give you the surcharging ability, but you really, I mean, we just did a CRM migration to a new CRM system for our operations, and I’ve been fighting with the guy that is our representative when he told me it was against the law to charge more than 3% in a surcharge. And I went, whoa, whoa, whoa, whoa, whoa. I said, first off, do you

James Huber (05:59):

Know who you’re talking

Christopher Dryden (06:00):

To? You just said That’s a law. Please tell me the law. And it’s not. It’s a card network rule for Visa. MasterCard is still 4%, even though they may come down to the same point, but everybody’s kind of towing this line and the ISV that we’re with, they force us into the payment processing relationship. They wouldn’t even let us give our own statement disclaimer or going, this doesn’t work. And we’re trying to tell them, you guys should probably hire us about this stuff. But they limited our ability to actually, in their system, do we have to still have to eat a significant portion of the Amex charge because it’s the cost of acceptance versus what they cap and they don’t even understand what’s going on. And the reason I bring it up is because what’s going to end up happening is now we have these dueling and competing forces of surcharge limitations, a lack of transparency in how you can do cash discount legitimately without getting fined by the card networks, and then potentially increasing interchange costs around the Illinois case. And in the middle is the merchant. And dude, when you’re mom and pop, you don’t know any of this stuff. I mean,

James Huber (07:19):

It’s kind of ridiculous. Or when you’re a judge or in the legislature, they can’t figure it out. I just thought of another potential problem. What do you do with dual pricing in Illinois? You’re going to have to have three prices. Now,

Christopher Dryden (07:32):

Maybe.

James Huber (07:33):

Maybe, wouldn’t you? Because you have your cash price is just what it is, and then you have your card price with this on the side as a nightmare.

Christopher Dryden (07:45):

Yeah. Well, it’s interesting that this came out. I had another client come to us related to a particular business segment where they’re doing, and actually their whole pitch is, let’s do compliance. Nobody’s really doing it. And they sent me a Wisconsin law, and the Wisconsin law calls the surcharge a swipe fee, but they’re having to do some reprogramming in their software because for Wisconsin merchants, you can’t surcharge sales tax. So what ends up happening is the list price. You add your surcharge to that, and then you apply the sales tax. So ultimately you’re only getting 90% of the surcharge amount

James Huber (08:31):

Because

Christopher Dryden (08:31):

The sales tax then can’t be included. So then you have to pay the sales tax back. And so rather than just attributing it all to the list price plus the surcharge, now there’s a rebate back to the states because they’re trying to take it off of sales tax. Similarly to Illinois where you can’t charge interchange. Now they’re saying that a surcharge, they’re treating it the same way and really kind of exempting sales tax from its application. I thought that was super interesting

James Huber (08:59):

Too. And then who does it apply to? Does it apply to Visa, MasterCard, the merchant who’s going to be called in violation if you’re machine’s malfunctioning or it’s just operating as to do

Christopher Dryden (09:12):

Now is the iso because, because that’s who programs the machine a lot of times,

James Huber (09:16):

So yeah, but

Christopher Dryden (09:18):

I actually saw language in an agreement. I don’t know if I want to say the company, so I’ll leave it alone, but it was one of the first times I’ve ever seen it from a upstream vendor, from a agent ISO perspective where it had a whole clause about programming the equipment and any errors in programming. Now, I think the clause was more geared to if you program the wrong DDA in and the money gets misdirected, but I could see what you just said, this being a clause coming in every contract that if you are taking the compliance of whatever equipment’s being used and you are programming it, or you are connecting it to a software system like the physical device, whatever you’re doing, if for whatever reason there is a miscalculation of whatever rate or fee or whatever’s being regulated, yeah, I think then it gets pushed down. It gets pushed down

James Huber (10:19):

All the liability, how it always happens.

Christopher Dryden (10:21):

That’s how it always happens. It’s either the merchant or the ISO that’s going to eat it, and I hesitate to say agent, the agents are people that they’re not going to be able to satisfy some of these hefty fines that go along with this. I mean, they don’t think about when they’re doing the regulatory fine framework, they’re not thinking about the fact that there’s all these level, like you said, somebody, a judge, somebody in the legislature, they don’t understand necessarily who this is going to impact and

James Huber (10:51):

Who enforces it. I’m guessing it’s going to be

Christopher Dryden (10:54):

The Illinois state, state of

James Huber (10:55):

Illinois, Illinois state. There’s going to be plaintiff’s attorneys, the ambulance chasing

Christopher Dryden (11:01):

A private right of

James Huber (11:02):

Action. I don’t know. I haven’t looked at it. How do you enforce that and who do you enforce it against? And I think you’re right, it’s going to fall on the iso.

Christopher Dryden (11:09):

Well, maybe because I watched this with the FTC. The FTC usually uses prosecution as a way to push settlement to get money in their coffers. And I say that not hesitantly. I believe that they actually look at,

James Huber (11:27):

I think that they advertise, they do that. The FTC,

Christopher Dryden (11:31):

Maybe their whole thing get, but wouldn’t an AGS office isn’t this now the Illinois ags ability to get funding outside of the public budget, maybe. I mean, if they’re the ones that are watch dogging it and then assessing the penalties and fines, and it’s similar to you don’t pay. We had another client that had a lender’s license in the state of California. They failed to file a California state tax return in 2000 and in 2025, they had an issue with the Department of Financial Protection and Innovation, which is the watchdog agency in California for anything financially related where there’s a license required. When I went to discuss settlement, and it was literally like a late annual filing, that’s all it was. I couldn’t actually negotiate a settlement with the DFPI because a 2000 tax return hadn’t been filed and almost commensurately. So I don’t know if they’re talking to one another. The franchise tax board suspended the

James Huber (12:38):

Corporation,

Christopher Dryden (12:39):

And it took eight months to get a updated filing, and we’re talking about an $800 issue. So what happens? Do they just start suspending corporations or limited liability companies that are somehow not in

James Huber (12:56):

Compliance? I don’t know. I mean, it is a potential nightmare. And the solution, it’s funny because it’s going to be the ISOs responsible for it, but they’re not going to be the ones responsible for writing the technology because it has to come from Visa and MasterCard, unless you’re just going eat it. I mean, I bet the initial one will be, yeah, you’re just eating it.

Christopher Dryden (13:22):

Yeah. Well look, the process,

James Huber (13:24):

You’ll program the software to do that, but it’s still getting charged. This is not to the cardholder.

Christopher Dryden (13:32):

Yeah. Well, the question is, will there be any ability for the party programming the equipment to do something that would affect that technology? I would say yes. Right? I would think so too. Yeah, I would think so too, but identifying what that is presently, I don’t know, because I don’t know how they’re going to implement it, and I don’t think they’ve said it.

James Huber (13:52):

No, and I don’t think they’ve said it. If we could get the processor to come on. Actually, we’ve asked Fiserv to come on. I think she said yes, but she needed to

Christopher Dryden (14:01):

Get authority.

James Huber (14:01):

Well, she needed a script beforehand and to make sure that I don’t go off script, which I would be biting my tongue

Christopher Dryden (14:09):

To not. Yeah, she needs creative authority on it, but the interesting part is that when looking at how it’s going to trickle down and really fall on the iso, look, I don’t know what causes it, but there’s these spikes in processor behavior where things happen. And I’ll give you a for instance. I got a case right now that I’m working on, our client did business with a large processor, and I won’t crap on them right now. It’ll be public because there’s no arbitration provision if the processor decides to move forward. But the processor and our client entered into a series of residual purchase agreements from 2018 to 2020 or 2019 to 2020. The first one. They went back and forth on a purchase price, an identity of the merchants. Our client got the merchant list, corrected it and said, no, no, these aren’t. The merchants sent it back.

Christopher Dryden (15:11):

They updated the purchase price, sent back a merchant list. He had presumed that they were in agreement when he redlined it, and lo and behold, evidently they’re not in agreement. And that wasn’t discovered. In addition, after the revenue that was purchased related to the merchants that were identified, the processor never segregated out those merchants from his portfolio for an eight month period. So he’s getting paid on those merchants for eight months, but he’s not really paying attention to a lot of this stuff, and he’s putting in new merchants all the time, does a couple more residual purchase agreements. Flash forward to 2024. Yeah, 2024. He doesn’t think he’s being paid properly on the remaining merchants that were left over after these agreements. And so he goes to him and he says, Hey, I think I’ve kind of looked. I think you guys owe me about $73,000. They come back and go, well, actually, we went back and looked at all this stuff and you owe us 3.6 million.

James Huber (16:16):

Yeah,

Christopher Dryden (16:18):

And I see that as a, and I just was talking to another industry attorney yesterday that told me that Fiserv related to a pay fac, exact same thing just happened. He went to them and his client went and said, Hey, I believe that you’ve miscalculated this. And their first response was, oh, well, you didn’t notify us within the first 60 day period. And he’s like, well, look, I couldn’t have had any of the information or detail to be able to identify

James Huber (16:48):

This would be, and I’ll always put in the agreements. You see that all the time. If you don’t notify us in these dates, then you’ve waived it. And I’ll put in the language like, look, unless I couldn’t discover it.

Christopher Dryden (16:58):

That’s right.

James Huber (16:59):

But that language isn’t necessary because that’s how the law works, is if I have no way of knowing or you’re actively concealing it, which we see all the times with the processor. I mean, the whole system is made to actively conceal.

Christopher Dryden (17:13):

Well, the funny part was is the response that he got back, it was like a million dollar issue to him. The response that he got back was, well, we haven’t been passing through all these interchange fees, so you owe us 2 million.

James Huber (17:24):

It’s like, just be quiet, basically. Basically. And they’re going, but we won’t collect that from you if you shut up and go back to

Christopher Dryden (17:31):

Bed. That’s right. Oh yeah. Let’s memorialize that. We don’t owe you anything and you don’t owe us anything. Yeah,

James Huber (17:36):

Exactly.

Jeremy Stock (17:37):

Thank you for listening to this episode of the Payments Experts Podcast, a podcast of global legal law firm. Visit us online today at global legal law firm.com. Matters discussed are all opinions that do not constitute legal advice. All events or likeness to real people and events is a coincidence.