It may not take the sting out of paying taxes, but state and local governments are making tax payments more convenient by allowing citizens to pay them and other fees online using credit cards.

For state and local governments, its just another option that makes collecting taxes and fees easier. For citizens, its an opportunity to pay a bill even if the bank account balance is low. And thats where the biggest impact may be realized -- in collecting delinquent taxes from those who dont have cash on hand.

In Minnesota, the Department of Revenue has collected, via the credit card option, just under $1 million in taxes, student loan repayments, child support and court fines during fiscal year 2001. Nearly $600,000 of that was paid on delinquent tax debt.

"It creates another option, and the more payment options we can make for people to pay off their taxes, the better off we all are," said Jerry McClure, income tax director of the Minnesota Department of Revenue.

While credit cards probably wont become the customary way of paying taxes and other government fees, they do give citizens another viable option -- one that they have become accustomed to. At the same time, it gives government agencies a cost break.

"Anytime we dont have to process a paper check, its a savings for us," McClure said. "Were pushing electronic transmissions, like all states are doing: electronic filing, electronic pay, electronic refund, direct debit-type things. Anytime you do it electronically versus paper it saves you some processing costs, personnel and so forth."

Lockheed Martin helped San Diego County, Calif., implement a similar credit card payment system. So far, the county has seen usage double every collection period. The county has accepted credit card payments over the phone for years, but began taking payments over the Internet just two years ago.

"Theres a small savings in the amount of staff time associated with processing the payments," said Neil Rossi, chief deputy treasurer of the county, which also collects taxes online via check with e-check. "We receive the same electronic file with both [e-check and online credit card payment], so it really doesnt matter to us if they pay with e-check or credit card. We dont make money on either one."

With e-check, there is a standard $3 fee for deducting the appropriate amount of money from the taxpayers personal or business checking account.

Credit card companies, who prefer taxpayers use plastic, are offering perks such as frequent flyer miles, hotel points and cash back to those paying taxes with a credit card. Rossi said he has spoken with several people who paid with their credit cards so they could get the rewards.

San Diego County accepts Visa payments for online transactions and Discover cards for telephone payments. The county processes about $12 million in Discover card payments a year and just $3 million for Visa, despite the fact that Discover accounts for less than 5 percent of the Southern California market. "You do the math," Rossi said. "We should be taking in $40 million to $50 million in payments with Visa."

Rossi said that taxpayers have used their Discover cards to pay for tax debts as high as $70,000.

Paying the Middleman

State and local governments have struggled to offer a convenient method of payment for transactions. But credit card payments previously meant having to pay credit card fees. Thats changed now, because several third-party companies, such as Official Payments Corp., provide the option without charging the government agencies a fee. Instead, the citizen using the service picks up the convenience fee of 2 percent to 3 percent.

Official Payments lists the IRS, 17 state government agencies and more than 700 counties and municipalities across the country as clients. The jurisdictions use the system to accept payments

Jim McKay, Justice and Public Safety Editor  |  Justice and Public Safety Editor