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More states are introducing legislation exempting merchants from paying interchange on sales tax and tips. Bills are currently pending in Alaska, Massachusetts, and New York.
In Alaska, the proposed bill, which was attached at the 11th hour to a bill authorizing businesses to pay employees using reloadable cards, has been put on hold until January, when the legislature reconvenes to finish its two-year session. Attaching one piece of legislation to another prior to adjournment is a common political tactic intended to improve the odds of passage, payments experts say.
The bill, sponsored by representative Bill Elam, is positioned as an “effort to reduce unnecessary costs for Alaska’s small businesses” by addressing interchange fees. In a written statement accompanying the bill, Elam argues that subjecting sales tax and tips to interchange places a cost burden on merchants by charging them acceptance fees on revenues that pass through their business, but are not retained, as sales tax goes to the state and tips are paid to employees. “This legislation helps ensure that small businesses aren’t penalized for handling money they never keep,” Elam says in the statement.
The bill is currently in committee and waiting to be introduced in Alaska’s house, where passage by a simple majority would send it to the governor to be signed into law or vetoed.
“A lot of procedural boxes have been checked, and the bill is on the precipice of coming to a vote and going to the governor’s desk,” says Scott Talbott, executive vice president of the Electronic Transactions Association.
It is the farthest any state bill to regulate interchange has gotten since the Illinois Interchange Fee Prohibition Act, Talbott adds.
Similar bills have been introduced in Massachusetts and New York. The Massachusetts legislature is scheduled to adjourn Nov. 19. The New York legislature is set to adjourn June 12.
The momentum behind state efforts to regulate interchange on sales tax and tips comes from the passage of Illinois’s IFPA, payments experts say. That law is scheduled to go into effect July 1, The IFPA has been challenged in the courts, and a temporary injunction has been granted to exempt federally chartered financial institutions, including credit unions, from compliance. Plaintiffs have filed a motion to extend the injunction to out-of-state financial entities doing business in Illinois, such as the card networks and processors. A hearing on the motion is scheduled for June.
“Illinois’s Interchange Fee Prohibition Act encouraged politicians, merchant lobbyists, and activists seeking to reduce payment-acceptance cost by legislation and fueled efforts at the state level from sea to shining sea,” says Eric Grover, principal of Intrepid Ventures.
Since the passage of the IFPA, bills to regulate the payment networks’ interchange fees have been introduced “in a raft of states and in the District of Columbia,” Grover adds.
If individual states begin regulating interchange, it would “create a patchwork of moving price caps on interchange that will not be good for consumers, merchants, or banks,” Grover says.
Such legislation would impose additional compliance costs on merchants and the payments industry and pull resources away from innovation, Grover argues. “If that were to happen, it would reduce the payment system consumers take for granted,” he says.
As implementation of the IFPA, which was attached to a budget bill at the 11th hour and passed without debate, draws near, momentum for a vote in the state legislature to extend the implementation date by 18 months is reportedly gaining support.
“In Illinois, recognition is growing that the lawsuit and the complexity of implementing the law necessitate an extension or a repeal,” Talbott says.
In addition, the failure of similar legislation in other states is an indication the IFPA was an “anomaly, and that other states recognize the danger in enacting similar legislation,” says Ashley Sharp, senior vice president, state advocacy and legislative counsel, for the Illinois Credit Union League says via email.
