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Electronic Tax Filing: Is SaaS the Platform of the Future?

SaaS may level the playing field in contentious electronic tax filing arena.

by / April 8, 2008

With April 15 looming, taxpayers are anxiously calculating their returns. Some defer to full-service accountants and preparers; others take the self-service approach.

Old-schoolers opt for forms, calculators and the trusty No. 2 HB pencil - while the digitally inclined choose between shrink-wrapped software packages and online services.

With at least half of all states facing budget shortfalls, government officials are anxiously watching this tax-filing season. The Center on Budget and Policy Priorities reports that the first 20 states to release estimates have a combined fiscal 2009shortfall of $34 billion.

In response, some states are seeking novel sources of revenue. New York is considering a page from the 1998 tobacco settlement by securitizing lottery proceeds - purchasing loans from lenders, grouping the loans and issuing bonds on the groups. New Jersey is looking at bonds to cover growing public debts, as well as increasing fees and privatizing toll roads and bridges. California Gov.

Arnold Schwarzenegger suggested a 10 percent across-the-board cut to offset the state's $14.5 billion deficit. Even fiscally healthy states are expected to avoid budget problems only until 2010. In the current political climate, raising taxes remains less palatable than cutting programs - but there's heightened interest in collecting more of what's already owed, which brings us back to this filing season.

Taxes are as certain as death and controversial enough to spark historic revolutions and contemporary revolts. They are the fuel of government operations, and their filing is among the most contentious and competitive spaces in public-sector IT - pitting tax agencies, consumer tax software companies and the wider integrator-led technology industry against one another.

A word of disclosure here: I have friends in each of the competing camps and have done work for most of them, so to paraphrase the country lawyer, "I have clients on both sides of the issue and I stand with my clients."

That said, here are where the lines are drawn. Tax authorities in states such as California and Arkansas offer direct online tax filing and payment services, built in concert with integrators and their partners that are steeped in the design-build-operate business model. That has left the tax software industry on the outside looking in, despite its migration from shrink-wrapped shiny discs to online services.

Tax software companies - Intuit chief among them - have long worried about displacement by government-provided direct filing services. In 2003, the software companies' answer was to create the Free File Alliance, a public-private partnership between the IRS, about 20 private tax software companies and 20 states where the Alliance provides free filing to 70 percent of U.S. taxpayers based on income. Reflecting Free File's philanthropic origins, members have extended gratis e-filing to more than 15 million poor and underserved taxpayers.

Today some in Washington, D.C., are trying to move the goal posts away from the 1998 goal set by Congress to have 80 percent of all tax returns filed electronically by 2007.

The new goal is to "provide universal access to individual taxpayers filing their tax returns directly through the IRS Web site." That would effectively end the Alliance.

But it would be a mistake to count tax software players out, particularly as government comes to terms with software as a service (SaaS) and the industry adopts new business models. Consider Intuit's purchase of an online banking service last year. In a New York Times interview, former Intuit CEO Stephen Bennett described the purpose behind the acquisition in SaaS-like terms, "Our vision is our online software-as-a-service suite that integrates all the data flow that makes it one place ... to do online banking, bill payment and customer management." Importantly the service is sold to (and co-branded or privately branded with) banks and other financial institutions, not end-users. It may put this kind of transactional service at the heart of an end-to-end solution, a place where shrink-wrapped products could never have gone. Banking today, tax filing tomorrow?

After five seasons of experimentation, with a requisite amount of elbow throwing and trash talking in legislatures and other arenas, a SaaS-like platform may level the tax-filing playing field for titans and expansion teams alike. Game on.

Editor's Note: This story appeared in Paul W. Taylor's signal:noise column as Tax Truce Through Platform Parity? in the print edition of Government Technology, April 2008.


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Paul W. Taylor Contributing Writer

Paul W. Taylor, Ph.D., is the editor-at-large of Governing magazine. He also serves as the chief content officer of e.Republic, Governing’s parent organization, as well as senior advisor to the Governing Institute. Prior to joining e.Republic, Taylor served as deputy Washington state CIO and chief of staff of the state Information Services Board (ISB). Dr. Taylor came to public service following decades of work in media, Internet start-ups and academia. He is also among a number of affiliated experts with the non-profit, non-partisan Information Technology and Innovation Foundation (ITIF) in Washington, D.C.

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