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 on property taxes, real estate taxes, parking fines, utility bills, etc.
"We provide this service to the government at no charge," said Bruce Zanca, senior vice president of Official Payments. "It gives them the benefit of being able to receive the payment or fine or tax in electronic form. The way we make our money is by charging consumers a convenience fee of a couple of percentage points, depending on [the] kind of payment."
Official Payments cites as beneficiaries:
- those who lack the funds and do not want to borrow or work out a payment schedule;
- taxpayers making estimated payments and extension payments who want to eliminate filing the paper form;
- taxpayers who want to pay by credit card to time the transaction and take advantage of the float period to keep from making the payment for 30 or 60 days; and
- small businesses or professional practices that do not have enough cash on hand to make their quarterly payments.
"Lets say you had a small business and you knew you had a receivable coming in on the 20th of the month and your tax payment was due on the 15th of the month," Zanca said. "Youd be able to use our system, make the payment and when your receivables came in and you had the available cash to make the payment, you could pay it off without paying any extra interest. It allows people to manage their cash flow on their own terms."
Official Payments launched a telephone program in 1999 that enabled users to make payments with their credit cards by calling 1-800-2PAY-TAX. The system was expanded this year to anyone with access to an Internet browser, regardless of the method or software.
"Theres a mindset out there where citizens expect the same kind of services [in government] that are available in the commercial marketplace, and were seeing a trend in the United States of people moving toward the Internet and the telephone to satisfy their obligations," said Zanca.
Though some critics say security should be a concern for citizens making online payments, thus far, Zanca, Rossi and McClure say theyve experienced no security problems.
"Out of the thousands of transactions that weve processed, theres only been one fraudulent use of the card that Im aware of and thats where someone tried to pay his federal income taxes with a stolen credit card," said Zanca.
