This year, however, Internet-savvy taxpayers in New Jersey have a free online payment option: e-checks. After a few clicks on a state Web site, they enter their bank account information. The state then automatically deducts the tax payment from the taxpayer's checking account. "The fees are eliminated," says taxation division chief Robert Thompson. "I think more people will file electronically using e-check."
Tax collection has gone high-tech, as state and local governments look to automate one of their most onerous and paper-intensive tasks. For individuals and businesses, online filing and payment means more remittance options than ever. But as the e-tax era takes off, governments are struggling with the question of who should finance the costs of the service--especially for taxpayers who want to use a credit card.
Taxes, it seems, aren't as straightforward as other e-government services emerging on the Internet. The sticking point is the transaction fees that credit card companies charge. For a $15 hunting license, governments can afford to absorb the transaction fees, which typically range between 1 and 3 percent. They don't add up to much. But tax collection is a big-dollar business--New Jersey collects $16 billion a year--and even a tiny percentage of that can add up to serious money.
So at least when it comes to credit card users, most state and local governments are choosing to pass the fees on to taxpayers. This has sparked a broad philosophical debate. Some tax collectors argue that the whole reason government is doing this is to make tax collection easier and cheaper for everybody. Government should cover those fees because the increased efficiencies are worth it. And user fees will only discourage taxpayers from actually using the service.
On the other hand, eating credit card fees could break the bank for some governments. When Montgomery County, Maryland, set up a system to pay property taxes online, officials figured it would cost $3 million to absorb credit card charges. "With taxes, you're dealing with transactions that are thousands of dollars," says e-government manager Kevin Novak. "The county would need a separate fund to pay all the fees."
These questions have sent tax collectors in search of less expensive and ever-easier ways for individuals and businesses to pay taxes online. An early contender is the e-check, also known as an "ACH payment." It works like direct deposit in reverse and costs governments only pennies per transaction for the use of a bank's wires. Large companies have paid state and local taxes this way for years, but the Web opens the option to smaller businesses and individuals. Down the road, ATM debit cards will also likely become a low-cost payment alternative, although standards are still being worked out for their use.
What is emerging is a complex e-tax landscape. States and localities are taking many different approaches to e-tax collection, both with user fees and without. Some are developing their own tax-collection systems in-house, often with the help of private software developers. Others are using the services of third-party vendors who offer their own ready-made systems.
Perhaps the most powerful state or local tax system coming online is in the nation's capital. In May, Washington, D.C., launched its e-tax center for businesses at www.taxpayerservicecenter.com. The system not only allows taxpayers to file and pay taxes online, it also lets them actively manage their tax accounts in the same way that they might manage a bank account over the Web.
Businesses use the Web site to pay sales and use taxes, employer withholding, franchise taxes or personal property taxes. All the user does is key in raw data for the filing period; the system automatically calculates the taxes owed. The user then decides how he wants to pay. Credit cards are one option--although a fee applies--and taxpayers can still send a check by snail mail if they wish. But the option most D.C. businesses are using is e-check.
Another big plus is that businesses can view their tax accounts and payment histories online. This gives taxpayers unprecedented access to and control over their own account information. This access alone, it is hoped, will cut the number of telephone queries that the Office of Tax and Revenue receives from taxpayers in half. The most frequently asked question is, "Have you received my payment?" Now, that information is online, in the taxpayer's own secure account. "We wanted to set this up like any other large financial institution would," says Deputy Chief Financial Officer Herbert Huff. "It works like a stock brokerage account."
Since it is so new, only a handful of businesses have used the system. But early results look positive. The accountant for one business user reports that taxes, which used to take parts of three days to file and pay, now take 20 minutes. From the government's perspective, the system promises to reduce paperwork and free up staff to handle other tasks. Over the next 18 months, D.C. is looking to expand the system to individual taxpayers for personal income and property taxes.
While the D.C. system took more than two years to develop, many state and local governments wanted to get e-tax collection up and running sooner. Some, such as Delaware, turned to third-party vendors for a quick online start-up. Delaware contracted with Nationtax Online to handle its business taxes only. "Our business-tax structure is pretty complicated," says revenue chief Bill Remington. "We thought the quickest way to get from nothing to full service was to go with a vendor who had done this before."
Taxpayers go to the company's Web site and indicate which Delaware tax they want to pay. They pay with an e-check. Like the D.C. system, Nationtax takes the raw data and calculates the taxes owed. There is an added benefit: Businesses can also file and pay their federal taxes at the same site, as well as taxes for 16 other states. Nationtax charges a flat fee of $3.95 or $4.95, depending on the transaction, but to promote the site, Delaware is covering those fees for the time being. "We're trying to capture a market here," Remington says.
For its initial foray online, New Jersey went with Official Payments Corp., which has contracts with 18 states, 750 localities and the Internal Revenue Service. Taxpayers go to the company's Web site, enter in a state code and pay what they owe. The catch is that they have to use a credit card and pay the fee.
For government, this is a quick and easy path to the Internet. For taxpayers, however, it doesn't always make economic sense. For big transactions, the fee is expensive enough to outweigh the convenience. Consumers also risk going further into debt. Americans already carry $600 billion on their credit cards, and some wonder whether it's right to add taxes atop that pile. "Consumers should not rack up credit card debt by paying their taxes," says Ed Mierzwinski of the U.S. Public Interest Group. "About half of all consumers carry a balance and are paying excessive interest on that balance."
But paying with plastic could be a boon for some people in certain circumstances. Last-minute taxpayers concerned about their cash flow may want a credit card's float period, and the fee in some cases is less than the government's penalties for late payments. Bruce Zanca, spokesman for Official Payments, notes that taxpayers with large bills can reap big payoffs from frequent-flyer award programs.
In Newport News, Virginia, taxpayers have been paying with credit cards over the phone for several years, and treasurer Marty Eubank is working on an Internet link between the city's and Official Payments' Web sites. But he very much wanted a free online option for citizens to pay their personal property taxes, real estate taxes and storm water management fees. He seized on the e-check idea and took it quite literally: His IT staff designed a Web payment engine that actually looks like a paper check.
Taxpayers click through the screen, and see an image of a blank check with their name and address on it. As they fill in their bank account information, followed by the type of tax they are paying and the amount, the check fills in with numbers. The taxpayer then agrees to have his bank account debited. "It has the look and feel of a paper check, so it gives you that comfort level," Eubank says.
In just six months, Newport News has received some 1,500 tax payments by "easy check," making it more popular than Eubank expected. He thinks the success all comes down to one thing: no fee. "Anytime there's a fee involved, users will shy away," Eubank says. "Especially when you're paying a tax. You're paying more, yet you feel like you're not getting anything back in return."
