Senate committee reviews S.135 to exclude taxes and gratuities from card interchange fees, require most businesses to accept cash

Senate Finance members heard a presentation on S.135, a two-part bill that would 1) prevent card networks, issuers, acquirer banks and processors from charging interchange fees on the portion of a payment that is taxes or gratuities and 2) require merchants to accept cash for transactions of $500 or less except where statutory exemptions apply.

The bill’s drafter, Rick Sable of the Office of Legislative Council, told the committee it adds a subchapter to the consumer-protection portion of Title 9 and “we are adding a subchapter to, our consumer protection portion in title 9 of our statutes.” He explained the core mechanic: when a merchant transmits a card transaction the portion that is taxes or gratuity would be identified and exempted from the interchange-fee calculation. “If your total was, let’s say, $50, but 10 of those dollars were taxes and gratuity, that $10 will not be part of the interchange fee calculation,” Sable said.

Why it matters: merchants—especially restaurants—say card transaction fees reduce their margins. The bill attempts to reduce processing costs for merchants by excluding government-imposed taxes and voluntary or automatic service charges from the base used to compute the interchange fee card networks set.

How the bill would work in practice - Definitions in the draft cover acquirers, issuers, payment-card networks, processors, “gratuity” (including automatic service charges intended to replace tips) and “interchange fee.” - A merchant must transmit, as part of the authorization and settlement process, the dollar amount that is tax and gratuity. If the merchant cannot or does not transmit that breakout at the time of the sale, the merchant may submit tax documentation to the acquirer or its designee within 180 days of the transaction. - An acquirer, issuer or network that receives proper documentation must credit the merchant within 30 days for the interchange fee portion that was improperly collected on the tax/gratuity amount. - The draft makes it unlawful for a network, issuer, bank or processor to alter or manipulate fees to circumvent the section and establishes a penalty of $1,000 per violating transaction. The bill creates a private right of action and makes violations subject to enforcement under the state Consumer Protection Act.

Committee discussion, technical concerns and legal risk Committee members and witnesses raised practical and legal concerns. Drafters and witnesses agreed the approach depends on how card-authorization systems can carry a tax/gratuity breakout through complex, multi‑party payment rails. Sable said the bill assumes the point-of-sale and settlement systems will be able to transmit that identifier, but acknowledged the committee would need to consider implementation details.

Witnesses from credit unions and banks described the payment network as “convoluted” and noted that, under current rails, card issuers typically receive only the final dollar amount and not a detailed tax/gratuity breakout. One witness said the incremental amounts at stake for low-value purchases can be only a few cents per transaction but that the administrative cost to process post‑transaction credits could range from several dollars to tens of dollars per instance.

Members also discussed a pending federal-court challenge to similar Illinois legislation. Sable and committee members noted the Illinois law is enjoined in federal court on federal-preemption grounds; the transcript records concern that federally chartered banks and national-bank regulation could preempt state rules in this area.

Second part: cash acceptance Sable explained the bill’s second section would require merchants to accept cash unless the transaction exceeds $500. The draft refers enforcement to the Consumer Protection Act and includes a private-right-of-action and attorney-fee provision. Drafters told the committee they had considered exemptions—parking garages, remote unmanned toll booths and similar use cases—and that exemptions from the requirement would be included in the language.

Next steps Committee members asked staff to refine statutory definitions (notably ‘tax’ and whether embedded resort fees are tax) and to analyze federal preemption risk. Several members suggested studying alternatives to achieve relief for small merchants, including greater transparency of invoices or targeted regulation of intermediaries.