There's no doubt online tax returns are taking off, but where are they headed?
When Paul Bettencourt was elected tax assessor/collector of Harris County,
Texas, in 1998 — partially on the strength of his campaign pledge to put
the agency online — he inherited an office that seemed an unlikely candidate
for cutting-edge technology.
Long-established tax-collection traditions, decades-old office equipment,
and a nearly complete lack of financial and IT infrastructure made the notion
of moving the office into the Internet Age seem laughable.
But the need to improve the accuracy, security and simplicity of collecting
more than $2 billion in taxes each year proved a good incentive. After intensive
development, the office's e-tax effort succeeded: The county accepted its
first online property tax payment by credit card in October 2000.
"We got into the 20th century just as it was ending," Bettencourt said.
Although far from typical, the Harris County effort is representative
of the newest trend in electronic tax collection. Faced with a deluge of
paper forms and the need to collect and track enormous amounts of money,
many state and local revenue departments are exploring ways of using the
Internet to simplify the filing process and speed the collection of various
types of taxes.
Since its launch, Harris County's system has been responsible for the
collection of $3.6 million in property tax paid online by credit card — a dollar volume that exceeds the total amount of taxes collected by 10 of
the Tax Office's 14 branch locations. The higher-than-expected volume represents
about 1 percent of all tax payments during the system's first three months.
"We thought we'd do about a million and a half during the first year,
but the system has been so successful, it's like adding a virtual branch,"
With the system's launch, Harris County became the only tax authority
in the nation to offer online programs for both property tax payments and
auto registration. The office is responsible for 3.5 million auto registrations
and 1.5 million tax accounts.
About 18 states and a handful of local governments offer Internet-based
electronic filing for personal, property or business taxes.
Taxpayers in 22 Kansas counties, for example, paid approximately $225,000
in property taxes online via their personal checking accounts during the
state's November-December tax session. The online property tax program was
launched Nov. 1 by the Kansas County Treasurers Association, and is slated
for expansion this year with the participation of additional counties and
an option to pay via credit card.
The rise of online tax systems has its roots in the federal e-file program
for individual income tax returns, launched by the Internal Revenue Service
in 1987 and expanded four years later to include electronic filing of state
returns. By allowing states to piggyback on federal returns, the IRS' expanded
Federal/State e-file program has given states a relatively inexpensive
means of introducing e-filing, often with impressive results.
"We have done a lot of work in partnership with the IRS, and our program
uses the same protocol as the federal program," said June Summers Haas,
Michigan's Commissioner of Revenue. In 1999, Michigan processed about 900,000
personal income tax returns with the e-file program and an additional 150,000
through its telefile system.
"We can process returns more quickly, we have quicker turnaround of
refunds and we can spend less staff time on data entry. That allows us to
free up our staff to do more affirmative customer service," Summers Haas
In keeping with the most widely accepted approach to online tax collection,
Michigan relies entirely on traditional tax preparers for the transmission
of e-filed returns.
"Right now, we only allow electronic filing through tax preparers. We
have not implemented Internet filing yet," Summers Haas said. "We're following
the lead of the IRS."
E-filing vs. Internet Filing
The traditional Federal/State e-file system requires taxpayers to use
an "electronic return originator" — typically software from a professional
tax practitioner, such as Intuit Inc.'s Turbo-Tax — to prepare a return
on a PC. the taxpayer submits the return to the company, which then submits
the return to the taxing authority.
In the online model, the taxpayer prepares the return electronically
with the assistance of a commercial Web-based tax-filing service — such
as H&R Block's Online Tax Program — which also acts as the e-file "transmitter"
by sending the finished return to the taxing authority. The Internet filing
service provides the taxpayer with increased control over the reporting
and payment process and works with the tax authority to provide accurate
data and fast transfer of payments, which are typically charged to the payer's
Internet-based systems are currently in the minority. And the
success of the initial e-file implementations, coupled with pressure from
private tax practitioners, has spurred widespread adoption of the Federal/State
The support of professional preparers has led to impressive adoption
rates even in states that have only recently launched e-file programs. Ohio,
for example, topped the 1 million mark for tax returns filed by computer
or phone in 1999, the first year that the state began accepting electronic
California has taken a hybrid approach to the e-file vs. Internet-file
decision. Following a successful pilot of its traditional e-file program
in 1994, the state began to accept returns filed by Web-based tax services
in 1998. Last year, California processed more than 2 million personal income
tax returns electronically, including 1.6 million generated by tax practitioners
and 457,000 from individual taxpayers, according to Patrick Hill, a spokesman
for the California Franchise Tax Board.
Participation in California's e-file program has nearly doubled each
year since it was first offered statewide in 1995, while the number of filers
using the state's telefile option has remained static at approximately 260,000,
Hill said. Last year's combined e-file and telefile returns represent about
15 percent of California's 14.5 million personal income tax filers — which
puts the state well on the way to its goal of processing a majority of its
personal income tax returns without paper by 2010.
The drive toward greater e-file participation is fueled by the benefits
the state reaps in time and dollars saved. In a survey conducted during
last year's tax season, the state found its cost of processing a balance-due
e-file or telefile return is about 55 cents — roughly a third of the cost
of processing a similar paper return, Hill said.
"The accuracy of electronic filing reduces or eliminates our need to
contact taxpayers. It's easier and less expensive for us to process electronic
returns because paper returns have a higher probability of error," Hill
Next Horizon: Business
Buoyed by successful personal income tax return systems, many states
are expanding their electronic filing offerings to include e-filing of business
and other taxes.
But with their reliance on Internet front ends, increased taxpayer participation
and closer cooperation with online tax-filing companies, the new systems
often bear little resemblance to their predecessors.
In theory, business tax e-filing should be a much easier sell than personal
income programs because of the greater complexity of reporting and calculating
levies such as sales or license taxes. And businesses have to file and pay
more frequently than personal filers. But even in states that have launched
successful online business tax-filing systems, the benefits of convenience
and online accessibility don't always translate into widespread adoption.
Launched in October 1999, South Dakota's SD Quest (Quick Easy Secure
Tax Filing) online business e-file system processed 18,893 returns and collected
$173 million in sales, use and contractor's excise taxes during its first
year. Renaissance Government Systems developed the system.
The state collects 34 percent of its tax revenue electronically, even
though the SD Quest system is used by only about 4.5 percent of its taxpayers.
"Usage patterns have been what we expected, but less than what we'd
hoped for," said Scott Peterson, director of South Dakota's Business Tax
Division. "To make this really successful, we need to get the smaller payers,
and that's difficult because this is not what the average taxpayer is used
Growth in the number of users has been strongest during periods when
the state has aggressively marketed the system, Peterson said. Drawing on
the success of initial focus groups with business users and associations,
the Business Tax Division has conducted seminars throughout the state and
plans a new round of sessions this spring.
"This isn't the field of dreams," Peterson said. "Just because you
build it, that doesn't necessarily mean that they will come. You have to
give users a good reason to change their way of doing business."
To provide business users a risk-free incentive to try its new Web-based
filing option, Delaware is underwriting the transaction fee costs for the
system's first year. Users have responded well to the incentive so far,
and the state is on track to meet its first-year participation goals, according
to David Sullivan, a representative of the Delaware Division of Revenue.
The success of the state's internally developed personal income e-file
program inspired Division of Revenue planners in their search for a simple,
secure way for companies to electronically file business taxes. For the
actual implementation of its business tax system, however, the state turned
to an external vendor, the Birmingham, Ala.-based Internet tax-filing company
Nationtax Online Inc.
"We were looking for a company that could provide us with a solution
very quickly," Sullivan said. "Speed and cost were primary considerations,
and with so many people having access to the Internet, we felt it was a
necessary and logical step to support Internet filing for business taxes."
Nationtax offers online preparation, filing and payment of business
taxes such as sales, use, corporate income and personal income tax withholding.
In addition to Delaware, the IRS and a number of states — including Florida,
Hawaii, Idaho, Louisiana, Pennsylvania and Rhode Island — have adopted the
company's Web-based business tax filing application. The company has processed
more than $200 million in Web-based tax payments since July 1999.
In a typical scenario, a business taxpayer accesses the Nationtax network
online, selects the appropriate form and completes the necessary filing
information. The Nationtax application then transmits the return to the
tax authority and arranges for any payment to be transferred from the user's
bank account. The service is funded through a transaction fee, typically
$3.95 for most filings.
"Governments get clean data, and the money is automatically deposited
into [taxpayers'] accounts," said Rhonda Jung, Nationtax public relations
manager. "They don't have to deal with all those paper forms, and they don't
have to process paper checks."
Web-based systems provide a particularly welcome solution for business
filers in the six states that allow counties and cities to "self-collect"
their own taxes.
In Alabama, for instance, companies doing business throughout the state
face the challenge of calculating sales taxes for as many as 453 taxing
jurisdictions, in addition to the state's own sales tax. Through its AlaTax
Inc. division, Nationtax provides outsourced tax collection for 92 cities
and counties in the state, enabling business filers to prepare, file and
pay about 300 of those taxes in a single filing.
"Some businesses have told us that they have two people in their tax
department — one for Alabama and one for the rest of the country," said
Andrea Hunter, the company's vice president of product management. "We make
the process simpler for taxpayers and for the governments."
Walsh is a freelance writer based in Peekskill, N.Y.
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