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Contact: Jack Penchoff
859-244-8153
jpenchoff@csg.org

Acceptance and Use of Electronic Payments for State Taxes and Fees:
CSG’s Financial Services Working Group Releases National Study

Distribution of payment transactions has undergone a transformation in the past 20 years, from 96 percent checks and 4 percent electronic payments to 49 percent checks and 51 percent electronic payments. That transformation continues.

A growing proportion of retail- and business-related payments in the private sector are now being made electronically through Automated Clearing House (ACH) and credit and debit cards. State governments are accepting electronic payments for an increasing number of state taxes and fees; ACH is the most commonly accepted form of such payments.

Those findings are part of a study completed for The Council of State Governments’ Financial Services Working Group (FSWG). The comprehensive national study—the first of its kind, given its scope and magnitude—explored the use of electronic payments for state taxes and fees. It was one of the major accomplishments of the committee under the leadership of Rep. Donna Stone of Delaware, the 2005-06 FSWG chair.

While there was some limited anecdotal evidence documenting the greater efficacy of paying some state taxes and fees electronically, there was no all-inclusive report. This study, conducted by the University of Kentucky’s Martin School of Public Policy and Administration, remedies that.

Among the findings:

• Eighty-six percent of the responding states accept ACH for business and corporate taxes, and 92 percent accept ACH for excise, sales or usage taxes.
• Thirty-five of the 37 states that responded indicated they offer residents the option of using credit cards, and 20 states offer the option of using debit cards for the payment of a variety of state taxes and fees.
• Credit cards are accepted for individual income taxes by 78 percent of the responding states, fees such as licenses or permits by 57 percent, and agency user fees by 41 percent.
• Credit and debit cards are not yet extensively used for payment of tax and fee payments and amount to less than 1 percent of the total dollar volume of payments for the main tax categories—corporate, income tax withholding transfers, sales, individual income.
• States cited multiple reasons for accepting electronic payments, but cost-savings was the predominant motivating factor because of reduced collection and processing costs, including the reduced cost of “bad” checks and the lower cash and check-handling costs.
• The primary challenges to greater acceptance of electronic payments by states were credit card transactions fees and the required investments in equipment, technology, marketing and staffing.
• Thirty-four of the 37 reporting states had enacted statutes or policies requiring or permitting electronic payments, while 15 states reported recent legislative action regarding the acceptance of electronic payments.
• Based on the states’ responses, the report identified best or effective practices in encouraging the more extensive use of the e-payment option.

(1) Marketing the credit and/or debit card payment option and educating citizens and taxpayers on the availability of these payment options;
(2) Refraining from charging convenience fees or surcharges that may detract from the use of credit or debit cards;
(3) Using a third party service provider and contracting with one primary service provider for all state agencies;
(4) Maintaining a standardized payment processing system or platform across all agencies;
(5) Providing citizens and taxpayers with the option to pay online using credit or debit cards; and
(6) Making credit and debit card payment options available across a variety of state taxes and fees.

To view the report, visit www.csg.org.

For more information, contact Jack Penchoff or Sujit CanagaRetna.