More state tax collectors also take plastic, at a price
By Kay Bell • Bankrate.com®

With the April income tax deadline nearing, the Internal Revenue Service is getting a lot of attention for letting taxpayers pay with credit cards. But many state tax collectors have even more wide-ranging plastic payment systems in place.

Taxpayers from California to Maine are charging everything from state income taxes to business sales taxes to property taxes to vehicle registration fees to parking tickets. And the types of taxes payable by credit card, along with the dollars collected, just keep growing.

Official Payments Corp., the leading provider of electronic payment services, watched its state credit card transactions jump 290 percent in just one year, from almost 16,500 in 1999 to more than 64,000 the next year. In dollars, that translates to almost $85 million collected in 2000 state taxes.

"This is a real growing trend," says OPC spokesman Bruce Zanca. "Last year, we had six states and 650 municipalities." Now, the company has contracts with 17 states and the District of Columbia and more than 700 counties and cities.

As state tax officials and the IRS embrace more paperless processing, the ease of plastic payments is a logical next step. Both state and federal taxpayers say the convenience factor is a prime motivation in the decision to charge their tax bills. But the state charges have the same financial pitfalls found in the federal system.

Then there's the matter of interest on any credit card balance you carry.

Bankrate's look at average national credit card rates shows that as of March 28 the best fixed rates a cardholder could expect ranged from 15.37 to 17 percent. If you carry $3,000 on a credit card at 17 percent and pay only the minimum balance each month, credit counseling firm Myvesta.org figures it will be 30 years before you wipe out that bill, with $6,629 added in interest along the way.

Zanca acknowledges that credit card tax payments can pose problems for some credit-strapped individuals. "We do not believe that this is the solution for someone in dire financial straits," he says. "Indeed, the IRS and every state have hardship tax payment programs."

For others, it's simply a matter of convenience. That ease factor, says Verenda Smith of the Federation of Tax Administrators, is what prompted state tax officials to begin accepting credit cards in the first place.

"There's really nothing much in it for governments," says Smith, who tracks tax legislation for FTA. "State and local jurisdictions must keep their cash tax and fee collection systems in place. Acceptance of credit cards just provides more options for citizens."

In fact, taxpayer use of credit cards to pay state and local taxes and fees sometimes costs governments. "States actually are creating a new bureaucracy to handle a new system," says Smith, "so it actually is increasing the states' costs."

But it's a safe bet the governments will find a way to deal with those additional costs as they continue their move toward paperless transactions. Tax collection is just the latest step in this progression.

Now that state tax credit card payments have broken through, most tax observers believe use of this payment method will only increase. Every state tax department now has an Internet presence, with most pushing for totally paperless filing. Couple that with growing taxpayer acceptance of, and confidence in, electronic commerce and more state tax departments are expected to start taking plastic.

Smith notes that truckers on the road who may not have cash or a checkbook usually do have a credit card, either personal or corporate. If a hauler needs a one-time trip permit to travel through a state, with a credit card he can buy it at a border weigh station or call in the request from a truck stop en route. Once taxpayers make these smaller government payments with credit cards, it's not difficult to move on to paying larger state tax bills with plastic.

"Suddenly you find you owe money and it's easier to pay with a card," says Smith, "particularly when filing electronically. It continues the paperless process, which all states are looking to do in all operations."

-- Posted: April 4, 2001