Nothing illegal about it. They are not breaking the law at all. You cant get a building permit with cash, you cant pay for you license or plate with cash (in most states). The Coinage Act states that all US currency is legal tender, but makes no provisions or guidelines that businesses must accept it as payment.
Ive lived in 3 towns/cities with their own local currency. Chapel Hill/Carrboro NC for one of the largest amounts, has their own currency for use in local stores.
http://www.treas.gov/education/faq/currency/legal-tender.shtml