The Payments Experts Podcast
Expert payments attorneys discuss the electronic payments industry from a legal perspective.
The Payments Experts Podcast
The Illinois Swipe Fee Shockwave: Who Really Pays? | Illinois Bans Interchange on Sales Tax | PEP100
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
Card fees on sales tax? Illinois just lit a fuse. We unpack who really pays, how ISOs get squeezed, and why “compliance” might mean three prices at checkout.
When lawmakers target “junk fees,” the payments engine doesn’t stop—it reroutes. We dive into Illinois’ push to exclude sales tax from the interchange base and trace how that single change ripples through card networks, processors, ISOs, ISVs, and ultimately the merchants serving customers at the counter and online. From geolocation puzzles to settlement rails, we unpack why a tidy policy headline can turn into a systems overhaul with real costs.
We mark our 100th episode hosted by James Huber and Christopher Dryden, managing partners of Global Legal Law Firm, by unpacking Illinois’ move to bar interchange on sales tax and the cascade of costs, risks, and confusion it creates across networks, processors, ISOs, and merchants. Along the way, we tackle broken surcharging myths, multi state carve outs, and a jaw dropping processor clawback story.
• Illinois ruling removing sales tax from the interchange base
• Geolocation and where online transactions “occur”
• Who bears costs when networks retool pricing and rails
• Visa and MasterCard rules versus state law limits
• Dual pricing and three price confusion at checkout
• Wisconsin’s “swipe fee” approach to surcharges on tax
• Contract clauses shifting programming liability to ISOs
• Enforcement leverage by AGs and regulators
• Data opacity, dispute windows, and clawbacks
• Practical protections for merchants and ISOs
We share concrete scenarios that expose the friction: ecommerce orders where the buyer, website registration, and settlement all live in different states; dual pricing menus that could morph into three prices to stay compliant; and Wisconsin’s “swipe fee” twist that blocks surcharges on tax and forces software to re sequence calculations. We also challenge common myths around surcharging caps, explain how network rules differ from laws, and show why bundled software vendors often limit configuration in ways that quietly shift costs back to merchants.
Beneath the policy debate sits a harder truth about liability and transparency. Contracts are moving risk downstream, pinning programming and compliance errors on ISOs while processors hold the data and the levers. We walk through a live case where a routine underpayment inquiry ballooned into a multi million dollar clawback, highlighting how short dispute windows and opaque reporting can silence smaller players. Still, the legal standard recognizes that you can’t waive claims you couldn’t discover, which makes better disclosures, audit rights, and data access non negotiable.
If you work anywhere in the payments stack—merchant, ISO, ISV, or counsel—this conversation offers practical guardrails: tighten contract language around discovery and fee transparency, cap programming indemnities to vendor specs, demand auditable location logic, and push for coordinated state rules to avoid patchwork chaos. Subscribe, share this with a colleague who handles fees or pricing, and leave a review with your take: does state by state policymaking fix the problem or just raise the bill?
Think you know surcharging rules? Visa caps, state carve outs, and web geo gotcha’s say otherwise. We break down the Illinois ruling and the hidden costs merchants will eat.
**Matters discussed are all opinions and do not constitute legal advice. All events or likeness to real people and events is a coincidence.**
PEP Links:
https://www.globallegallawfirm.com/podcasts/
https://www.buzzsprout.com/2176695
A payments podcast of Global Legal Law Firm
Cold Open: Processors And Concealment
SPEAKER_02Because that's how the law works is if I don't 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.
SPEAKER_01Well, 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 two two million. Yeah.
SPEAKER_02It's like just be quiet. Yeah. Basically. Basically. They're going, but we won't collect that from you if you shut up and go back to bed.
SPEAKER_01That's right. Oh, yeah. Let's let's memorialize that we don't owe you anything and you don't owe us anything. Yeah, exactly.
Milestone Intro And Hosts
SPEAKER_00Welcome to the Payments Experts Podcast. A podcast of Global Legal Law Firm. We hope you enjoyed this episode. 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.
SPEAKER_02All morning. In between doing work. In between doing
Illinois Interchange On Sales Tax
SPEAKER_02work. So we wanted to start off the episode talking about the Illinois brick interchange ruling. Uh, 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 gonna work. And the ETA and the processors are never going to go, no, this really isn't gonna work because we don't even know how we're gonna do this. Yeah. I mean, it's it's impossible to figure out. 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 ride write some software, but it was I was just, you know, basically you charge the interchange here, and then this thing just rides the rails for free.
SPEAKER_01Well, here's here's I 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,
Geolocation And Web Sales Gray Areas
SPEAKER_01but like for geolocation of okay, this is related to Illinois merchants. Right. What happens when you have a website and the website registrant is in a state other than where the merchant is? Where is 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, you know, like if I'm in 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 like carve outs for different ways that the transaction's occurring. Like, you know, does uh does the location of the the website register in or you know, where is the transaction being process actually being processed and settled? Will they try to like you know dissect it out to show that it's not really touching Illinois?
SPEAKER_02Like is that the next you know, kind of the next analysis that happens? I don't know. I it's a nightmare. And when it came out, you know, the the underdog in me is like, yeah, stick it to the processors. And I and it, you know, we all rely on the processors, and you know, but our, you know, 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. Yeah. Because all of our clients are always fighting with them. We're gonna be conflicted out. It ended up being a good business solution. But part of us is, you know, the maverick. I'm going, yes, stick it to them. But then I go, well, wait, they're they're not gonna
Who Ultimately Pays The Costs
SPEAKER_02be stuck with this. Guess who's gonna pay for this technology, everything? Because Visa and MasterCard, they might say, You're not riding the rails for free. We're gonna charge, you're getting charged the interchange. FI serve. Fine. The card the card holder's not. You're gonna get it.
SPEAKER_01Yeah, like what happens to interchange? I mean, because now you've got institutional like construction changes that are gonna have to take place, and it's not a simple fix. And the real problem 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 gonna have to redesign how interchange operates? With different rules. Yeah, like 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. Right.
SPEAKER_02Yeah, and it 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, they're pocketing most of interchange, right? They got three quarters of it or a little more.
SPEAKER_01Uh no, no, no, about three quarters.
SPEAKER_02About three quarters of the interchange goes to the issuing bank, and we're going,
Surcharging Rules Vs Network Caps
SPEAKER_02oh, we're protecting them. If these guys are getting less or having to pay for it, it ends up hurting the consumer.
SPEAKER_01So well, I think the rising prices, like, look, you add costs onto the this is a constant, like when we were talking about, hey, what do you want to talk about for the show? It was it's it's this constant push-pull because you know, oh, well, we'll give you the surcharging ability, but do 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, like Do you know who you're talking to? Yeah, yeah. Like this, that's not you just said that's a law. Please, please tell me the law. And it's not, it's a it's a card network rule for Visa. MasterCard's still 4%, even though they may come down to the same point. But everybody's kind of like 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 uh statement. Disablaimer about it. Like, this doesn't work. And we're trying to tell them, you know, you guys should probably hire us about this stuff, but they wouldn't, they
Dual Pricing And State Variations
SPEAKER_01limited our ability to actually, in their system, do surcharging. Like we have to eat, still have to eat a significant portion of the Amex charge because it's the cost of acceptance versus what they cap. And they're not even they don't even understand what's going on. And the and the reason I bring it up is because what's gonna end up happening is 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 uh interchange costs around the Illinois case, and in the middle's the merchant. And dude, when you're mom and pop, you don't know any of this stuff. I mean, it's kind of ridiculous.
SPEAKER_02Right. Or when you're, you know, 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 gonna have to have three prices now. Maybe. Maybe. Wouldn't you? Because it's you have your cash price, is just what it is, and then you have your card price with the inner this on the side. That's a nightmare.
SPEAKER_01Yeah, well, it's it it's interesting that this came out. I had another client come to us related to a particular business segment where they're doing surcharging, and they actually their whole pitch is let's do compliance surcharging, nobody's really doing it right. And
Liability Pushed To ISOs
SPEAKER_01they sent me an 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 the list price, you add your surcharge to that, and then you apply the sales tax. So ultimately, you're only getting uh 90% of the surcharge amount because 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 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. Right.
SPEAKER_02I thought that was super interesting, too. Well, who and then who does it apply to? Does it apply to Visa, MasterCard, the merchant, the you know, who's gonna be called in violation if your machine's malfunctioning or just it's just operating as they do now?
SPEAKER_01The ISO, because that's who programs because that's who programs the machine a lot of times. And so, yeah, but does
Enforcement Risks And AG Playbooks
SPEAKER_01the I actually saw language in an agreement. I wanna I I I don't know if I want to say the the 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 an 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 disdirect misdirected. But I could see what you just said, this being a clause coming in every contract that if you're taking the compliance of whatever equipment's being used and you're programming it or you're you're connecting it to a software system like the physical device, whatever you're doing, right? If for whatever reason there is a a miscalculation of whatever is whatever rate or fee or whatever's being regulated, yeah, I think it then it gets pushed down.
SPEAKER_02It gets pushed down all the liability because that's how it always happens. That's how it always happens.
SPEAKER_01So it's either the merchant or the or the ISO that's gonna eat it. And I and I I hesitate to say agent, because the agents are people that they're not gonna be able to satisfy some of these hefty fines that go along with this. I mean, they don't they don't think about when they're doing the regulatory fine framework, they're they're not thinking about the the fact that there's all these level, like you said, somebody, a judge, somebody in the legislature, they don't they don't understand right necessarily like who this is gonna impact and how and who enforces it.
SPEAKER_02I mean, I'm guessing it's gonna be It's gonna be the Illinois state. Illinois state or it's gonna be plaintiff's attorneys, you know, the ambulance chasing.
SPEAKER_01Yeah, but was there a private right of action that's not? I don't know.
SPEAKER_02I haven't looked at it, but so you know, how do you enforce that and who do you enforce it against? And I think you're right, it's gonna fall on the ISO.
SPEAKER_01Well, maybe because you know, I watched this with the FTC. Um, the FTC usually uses prosecution as a way to
Tech Implementation And Processor Control
SPEAKER_01push settlement to get money in their coffers. Right. I and I and I I say that not hesitantly. I believe that they actually look at I think that they they advertise they do that, the FTC. Maybe their whole thing isn't it? But wouldn't an AG's office, isn't this now the Illinois AG's ability to get like funding outside of the public budget, maybe? I mean, like, you know, if they're the ones that are are watchdogging it and then assessing the penalties and fines, and it's similar to like you don't pay like 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, it they had an issue with the Department of Finance 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 to discuss settlement, and it was literally like a late annual filing, that's all it was. I couldn't I couldn't actually negotiate a settlement with the D FPI because a 2,000 tax return hadn't been filed, and almost commensurately, so I don't know if they're talking
Case Study: Residuals And Clawbacks
SPEAKER_01to one another, the the franchise tax board suspended the corporation, and it took eight months to get a updated filing, and everything we're talking about an $800 issue, right? Right? So, like what happens? Do do they just start suspending corporations or limited liability companies that are like somehow not in compliance?
SPEAKER_02I don't know. I mean, it's it it is a potential nightmare. And the solution, it's funny because it it's the ICE, it's gonna be the ISOs responsible for it, but they're not gonna be the ones responsible for writing the technology because it has to come from Visa and MasterCard unless you know you're just gonna eat it. Yeah, and that I mean I bet the the initial one will be yeah, you're just eating it.
SPEAKER_01Yeah.
SPEAKER_02Well, they look the still program the software to do that, but it's still getting charge is just not to the cardholder.
SPEAKER_01Yeah, well, the question is 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. 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. Yeah.
SPEAKER_02No, and they I don't think they've said it. You know, we should if we could get the processor to come on. We actually we've asked Fiserve to come on. I think she said yes, but she needed to get authority. She need well, she needed like a script beforehand to make sure that I don't go off script, which I would be biting my tongue.
SPEAKER_01Yeah, she needs she needs creative, uh, yeah, creative authority on it. Yeah. But it's the interesting part is that when looking at how it's going to trickle down and really fall on the ISO, it look, I don't know what what causes it, but there's these spikes in 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. Um, our client did business with a large processor, and I won't crap on them right now. Um, 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 like 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 and identity of the merchants. Our client got the merchant list, corrected it, and said, no, no, these aren't the merchants, sent it back, they updated the purchase price, sent back a merchant list. He 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 the revenue that was purchased related to the merchants that were identified, the processor never segregated out that those merchants from his portfolio for like 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.
Silence Settlements And Takeaways
SPEAKER_01And so he goes to him and he says, Hey, I think, you know, 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. Yeah.
SPEAKER_02Yeah.
SPEAKER_01And and and I see that as a, and I just was talking to another industry attorney yesterday that told me that FIServe related to a pay fact, exact same thing just happened. They went, he went to them and and and said, his client went and said, Hey, you know, I believe that you've miscalculated this. And their first response was, Oh, you well, you didn't, you know, 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 this, right?
SPEAKER_02Yeah, and I'll always put in the agreements because 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. That's right. But that language isn't necessary because that's how the law works. Is if I don't if I have no way of knowing, or you're actively concealing it, which we see all the time with the processor, I mean, the whole system is made to actively conceal.
SPEAKER_01Well, 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 two two million.
SPEAKER_02Yeah. It's like just be quiet. Yeah, basically. Basically, and they're going, but we won't collect that from you when you shut up and go back to bed.
SPEAKER_01That's right. Oh, yeah, let's let's memorialize that we don't owe you anything and you don't owe us
Closing And Disclaimer
SPEAKER_01anything. Yeah, exactly.
SPEAKER_00Thank you for listening to this episode of the Payments Experts Podcast, a podcast of Global Legal Law Firm. Visit us online today at Global Legalaw.com. Matters discussed are all opinions and do not constitute legal advice. All events or likeness to real people and events is a coincidence.