Electronic tax filing wins state and local converts
By Jennie L. Phipps • Bankrate.com

Rose Vargas, bookkeeper at Tony's Diesel Service in Sioux Falls, S.D., gladly dumped the paper when the state offered her the opportunity to file sales and use taxes over the phone.

"It's so easy," says a delighted Vargas. "It saves me a lot of time. And if I make a mistake, I always have a second chance to go back and fix it."

The federal government has been aggressive in pushing electronic tax filing for both businesses and individuals. Now, a handful of state and local jurisdictions are slowly adopting this collection method.

South Dakota has been in the e-filing business for four years. Gary R. Viken, secretary of revenue for the state, says Y2K-related upgrades motivated his staff to explore electronic filing. It didn't take long for both the state and business owners to realize that it was a good idea.

Soon most businesses had switched over from paper, Viken says, cutting the filing error rate dramatically. By some estimates, 30 percent of returns filed on paper have math errors; electronic filing fixes that problem altogether.

E-filing incentives
Like many states, the South Dakota legislature offers businesses an incentive to file electronically. Paper filers must pay by the 20th of each month. Electronic filers get a week-long grace period.

What Vargas at Tony's Diesel likes best is the ability to do the return whenever it's convenient, file it, and then count on the state to take the right amount of money on the day it's due. No penalties when if someone forgets to head to the post office on time.

Harley Duncan, executive director of the Federation of Tax Administration (FTA), an association of state tax agencies, says at least half of the states now offer some degree of online business tax filing. Most commonly, it's sales and use taxes, although some now facilitate the payment of payroll withholding as well.

"States like electronic filing because there is better data and no key-entry errors," he says.

States are choosing to handle the practice by either outsourcing to private companies or by setting up their own Web sites. The FTA's online chart outlines methods and has links for electronic filing in the states that offer it. It's a good place to start if you don't know how your state or another in which you do business operates.

A time- and resource-saving alternative
If you're just filing in one state, the electronic process is likely to save you time and person power.

Accenture has advised several states and the District of Columbia on setting up e-filing systems. Accenture consultant Guy Kirtley says that once a company is registered, it can turn over the payment job to a fairly low-level employee in bookkeeping or accounting and feel confident that this person will be able to handle all aspects of it including approving payment.

While the "garbage in, garbage out" theory always applies, the systems are set up to flag obvious inconsistencies and errors, especially mathematical ones. Plus, electronic transfer payment systems are virtually theft-proof.

Software to the rescue
If your company owes taxes to multiple states, then the issue of online payment becomes more complex. One solution is to buy software that appends to your accounting system and handles state tax payments.

Two that the FTA's Duncan recommends are Taxware International and Vertex Inc. Both sell software that will handle sales and use taxes in all 50 states and the programs are compatible with most common bookkeeping systems.

Another possibility is the Birmingham, Ala.-based, application service provider NationTax Online. NationTax is currently the only private company approved by the Internal Revenue Service to process Form 941, Employers Quarterly Withholding, completely over the Web.

The company also offers a Web-based solution for business tax preparation, filing and payment in all 50 states and many local jurisdictions. Through a function called client manager, a user can set up accounts for each state in which he does business and initiate payments with a minimum of keystrokes. There's a $3 fee for most individual transactions, so potentially, the costs could add up.

Kennon Walthall, vice president of business development for NationTax, believes time saved can offset these fees. While NationTax clients use one Web interface, the real world is very different and the company still must file many payments via snail mail. Walthall estimates that the average time a client spends preparing, filing and paying a sales tax return is reduced from 45 to 60 minutes on paper to one to three minutes electronically.

"More than 80 percent of filings are by businesses with fewer than 10 employees, so in many cases, the filer is directly involved in running the business, so this can be a particularly important savings," he says.

E-filing payment options
The last question facing a business owner considering electronic filing is the tax payment method.

You may file the forms online, but as for actual payment you can mail in a check, put the amount on your credit card (although not in all states) or authorize the state to withdraw the money directly from your bank account.

If that whole thing still makes you nervous despite strict security measures, here are three suggestions for easing your mind:

• Open a separate account for tax payment and transfer in only enough money to pay the taxes. If there's an error, the money just isn't there.
•If your company is assigned an access pin number, ask for a new one anytime an employee involved in paying the taxes leaves.
• Keep good records. File the acknowledgment number from each transfer and jot down the date and time it was made.

Jennie L. Phipps is a contributing editor based in Michigan.

-- Updated: March 5, 2003