Acceptance and Use of Electronic Payments For State Taxes and Fees

Acceptance and Use of
ELECTRONIC PAYMENTS
for State Taxes and Fees
Prepared for:
The Council of State Governments
Financial Services Working Group
Sharing capitol ideas.

Eastern Office
National Office
Southern Office
New York
Lexington, Ky.
Atlanta
Alan V. Sokolow, Director

(212) 482-2320 www.csgeast.org
Daniel M. Sprague, Executive Director

(859) 244-8000 www.csg.org
Colleen Cousineau, Director

(404) 633-1866 www.slcatlanta.org
Midwestern Office
Washington, D.C.
Western Office
Lombard, Ill.
Michael H. McCabe, Director

(630) 925-1922 www.csgmidwest.org
Jim Brown, General Counsel and Director

(202) 624-5460 www.csg.org
Sacramento, Calif.
Kent Briggs, Director

(916) 553-4423 www.csgwest.org
April 25, 2007
Dwight V. Denison
Merl M. Hackbart
Juita-Eleana (Wie) Yusuf
Jay H. Song
University of Kentucky
Martin School for Public Policy and Administration
419 Patterson Office Tower Lexington, KY 40506
ELECTRONIC PAYMENTS
Prepared for:
April 25, 2007
Foreword and Acknowledgements

We would like to acknowledge the members of the Study Advisory Committee who were helpful in identifying
the key issues for examination and in developing the electronic payments survey questionnaire. Our thanks also
extend to CSG staff, especially Sujit CanagaRetna, for their assistance during this project.
Members of the Study Advisory Committee were:
Mr. Kenyatta Chandler (former Manager of ePayment Services, Revenue Management Department, Ohio)
Mr. Andrew Chang (Chief Deputy Director, Department of General Services, California)
Mr. Robert Tetz (Department of General Services, California)
Mr. Dennis Colling (Chief Administrator, Administrative Services, Department of Motor Vehicles, Nevada)
Mr. Billy Hamilton (Deputy Comptroller, Executive Administration, Texas)
Mr. Terry Straub (Division of Treasury, Department of Financial Services, Florida)
ii
The Council of State GovernmentsFinancial Services Working Group
Table of Contents
Foreword and Acknowledgements.......................................................................................................................... ii
Executive Summary ...............................................................................................................................................1
Chapter 1:
1.1
1.2
1.3
Introduction and Overview ..............................................................................................................3

Research Objective .............................................................................................................................3
Research Approach .............................................................................................................................4
Report Structure ..................................................................................................................................4
Chapter 2:
2.1
2.2
2.3
Evolution of Payments and Growth in E-payments ......................................................................5

Evolution of Payments ........................................................................................................................5
Growth in E-payments ........................................................................................................................5
Non-cash Payment Instruments ..........................................................................................................6
Chapter 3: Electronic Payment of Government Taxes and Fees......................................................................9

3.1 Benefits and Costs to State Governments of Accepting Electronic Payments....................................9
3.2 Credit Card Payments for Government Services ..............................................................................10
Chapter 4:
4.1
4.2
4.3
4.4
4.5
4.6
Findings of Previous Studies on Government Tax and Fee Electronic Payments.................... 13

Overview of Previous Studies ...........................................................................................................13
How Extensive is the Acceptance and Use of Credit Card Payment for Taxes and Fees? ...............14
What Taxes or Fees Can be (and Are) Paid by Credit Card? ............................................................15
Why Should Government Agencies Allow Payment of Taxes and Fees by Credit Card? ................15
Who Pays the Transaction Fees Associated with Credit Card Payments? How are they Paid? .......17
What is Required for State Agencies to Accept Credit Card Payments? ..........................................19
Chapter 5:
5.1
5.2
5.3
5.4
State Taxes and Fees E-payment Survey Findings.......................................................................21

Survey Overview and Methodology .................................................................................................21
Acceptance and Use of Electronic Payments ...................................................................................22
Benefits of and Challenges to Accepting Electronic Payments ........................................................23
Electronic Payment Policies and Practices .......................................................................................26
Chapter 6: Summary and Conclusions ............................................................................................................31

Endnotes ...........................................................................................................................................33
References.........................................................................................................................................34
Appendix A: Survey Instrument .........................................................................................................................35
Acceptance and Use of Electronic Payments for State Taxes and Fees
iii
List of Figures
Figure 2.1
Number of Credit and Debit Card Transactions in the U.S. (in millions), 20012005 ......................6
Figure 2.2
Dollar value of Credit and Debit Card Transactions in the U.S. (in $ billions), 20012005 ..............6
Figure 2.3
Number of Credit and Debit Cards in the U.S. (in millions), 20012005 ..........................................7
Figure 3.1
Two Primary Credit Card Payment Systems for Government Agencies ..........................................11
Figure 4.1
Responsible Party for Paying Fees Associated with Tax Payments..................................................16
Figure 4.2
Citizen Willingness to Pay for On-line Government Services..........................................................18
Figure 5.1
States that Responded to the E-payments Survey .............................................................................22
Figure 5.2
Form of Electronic Payments Accepted for State Taxes ...................................................................23
Figure 5.3
Initial Acceptance of Credit or Debit Card for Tax or Fee Payment ................................................24
Figure 5.4
Average Credit Card Payment Transaction Amounts by Tax Category ............................................26
Figure 5.5
Average Debit Card Payment Transaction Amounts by Tax Category .............................................26
Figure 5.6
Fees Paid by States for Accepting Credit Card Payments ................................................................27
Figure 5.7
Criteria Cited by States as Basis for Awarding Third-Party Provider Contracts ..............................27
Figure 5.8
States Satisfaction with Existing Credit Card Payment Programs ..................................................28
Figure 5.9
States Perceptions of Taxpayer Willingness to Pay Convenience Fees

or Transaction Surcharges.................................................................................................................28
List of Tables
iv
Table 2.1
Growth in Electronic Payment Transactions ......................................................................................7
Table 3.1
Transaction Fees by Payment Channels and Payment Types ...........................................................10
Table 4.1
Trends in Credit Card Payments of Federal Income Taxes...............................................................14
Table 4.2
Credit Card Payment Transactions for State Taxes and Fees............................................................19
Table 5.1
Forms of Electronic Payments Accepted for State Fees ...................................................................22
Table 5.2
Percent of Tax Payment Dollar Volume by Different Payment Options ...........................................23
Table 5.3
Percent of Tax Payment Transactions Made by Different Payment Options ....................................23
Table 5.4
Credit or Debit Card Acceptance by Tax Category ..........................................................................24
Table 5.5
Accepted Methods of Credit Card Payment .....................................................................................24
Table 5.6
Reasons for States Accepting Electronic Payments.........................................................................25
Table 5.7
Cost Savings Realized from Accepting Credit and Debit Cards, by Tax Type .................................25
Table 5.8
Breakdown of Net Savings from Credit and Debit Card Acceptance...............................................25
Table 5.9
Reasons for Not Accepting Debit Cards for Payment of Taxes and Fees .........................................25
Table 5.10
Required Initial and Annual Investments in Infrastructure, Marketing, Staffing

and Training: Examples from Three States.......................................................................................27
Table 5.11
States Use of Convenience Fees or Transaction Surcharges ...........................................................28
Table 5.12
States Use of Third-Party Provider by Tax Type .............................................................................28
Table 5.13
Proposed Changes to Credit and Debit Card Policies or Procedures ...............................................29
Executive Summary
Rapidly expanding proportions of retail- and business-related
payments, traditionally made by cash and check, are now being made electronically through Automated Clearing House
(ACH) or using credit or debit cards. Increasingly, the shift to
electronic payments is also occurring in the public sector.
In fact, the economy-wide shift towards electronic

payments continues to gain momentum. In December
2003, the Federal Reserve announced that e-payment
transactions had, for the first time, exceeded the number of check payments (NECCC 2005). For the year
2003, e-payment transactions (credit cards, debit cards,
and ACH transactions) totaled 44.5 billion, compared
to 36.7 billion check transactions. In 2000, research by
the Federal Reserve showed check payments exceeding
electronic transactions by 42 billion to 31 billion. This
change represents an average annual growth rate for
electronic payments of 13.2% from 2000 to 2003. For
the same time period, the use of checks for non-cash
payments declined by 4.3% annually. Also, according
to statistics published by the National Automated Clearing House Association (NACHA 2005), the distribution
of payment transactions in the U.S. has shifted over the
past 20 years, from 96% checks and 4% electronic to
49% check and 51% electronic. Electronic payments
through ACH increased 14.5% from 2005 to 2006 to
slightly under 16 billion transactions.
Given these national trends, the principal purpose of
this study was to determine current state government
acceptance and use of electronic tax and fee payments.
Related purposes included an analysis of policies and
procedures implemented by the states to more effectively facilitate and manage electronic payment processes. Among such policies are alternative ways of
financing transactions fees associated with electronic
payments and policies designed to encourage electronic tax and fee payments. Such information is useful to
state policy makers who might be considering changes
in their states policy regarding the acceptance of electronic payments and/or initiating new programs and
activities to encourage
greater use of electronic
payment processes and
mechanisms.
Among the findings of
this study were first that
citizens will take advantage of electronic payment options if state government agencies accept
electronic payments and
establish policies and procedures which encourage
Results of a 50-state survey suggest
and facilitate such payments. Citizens appreciate
that states are becoming increasingly
the convenience, flexibility (including credit card
supportive of the use of electronic media
payments to meet timelines of tax payments), for the receipt of payments from citizens.
security, and efficiency
of these payment options.
Second, there are major financial management benefits
for states associated with accepting electronic payments
including reducing processing costs, accelerating funds
availability and reducing delinquent payments. Third, a
potential barrier to expansion of electronic payments is
managing the transactions costs associated with such
payments. Currently, states have two principal options
for addressing the issue of transaction fees including
direct state payment for such fees or passing the fees
to taxpayers via a convenience fee or surcharge (directly or through a third party). In addressing this issue,
states may make the distinction between required
payments such as taxes and payments for services. Be1
cause states are typically required to collect 100% of

the taxes owed, electronic transactions fees may have
to be paid by the taxpayer while fees for services (such
as licenses and registrations of various types) may be
absorbed by the respective state agency. Innovative approaches to dealing with this important issue are summarized in this report.
Following a review of previous federal, state and local government studies of electronic tax and fee payments, the research team administered a 50 state study
of current state policies and practices regarding electronic tax and fee payments with the support and assistance of CSG staff and an advisory committee. Among
the findings of the survey, responded to by 37 states,
are the following:
ACH was the most commonly used electronic
payment option for business-related taxes while
credit cards were the most commonly used electronic means for individual income tax payments
as well as licenses or permits.
Of the responding states, 95% indicated that they
provided citizens the option of paying some form
of state taxes or fees with a credit card while 54%
permitted debit card payments.
The major reasons cited for accepting electronic

payments were to expedite fund deposits and to
reduce the time it takes for funds to be available,
and to reduce the costs of collecting and processing payments.
Cost savings were identified as the major reason
for accepting payment by credit or debit cards although estimated cost savings varied considerably
among the states that responded to this inquiry.
Issues surrounding the payment of transactions
fees were one of the major challenges to accepting or expanding the use of electronic payments.
The study indicated a high degree of satisfaction
with electronic payments by the states responding
to this study.
These and other results of this study are summarized
in the various sections of this report. It appears that
states, like private businesses are becoming increasingly supportive of the use of electronic media for the receipt of payments from citizens. This trend is supported
by citizens as well as state governments as they improve the efficiency of the collection and accountability associated with the various sources of state revenues.
Chapter 1
Introduction and Overview

As states face what Osborne and Hutchinson (2004) call a permanent fiscal crisis, cash-strapped state governments are focusing on becoming more and more aggressive in searching
for ways to maximize revenues without raising taxes.
One way to maximize net revenues is to enhance the

efficiency of tax and revenue collection. Such efficiency can be enhanced by reducing the cost of collecting
and processing payments and/or ensuring that all revenues are collected. Revenues can also be enhanced by
processing funds into interest-bearing accounts sooner
to maximize investment revenue.
Many government organizations are attempting to
meet these financial management goals by taking advantage of the digital revolution, moving away from
traditional collections and processing structures based
on cash and check payments toward electronic-based
payments using such means as ACH, credit cards and
debit cards. Over the past decade or so, many government agencies have allowed businesses and individuals
to pay their taxes and government fees electronically
using ACH. Today, many states are providing taxpayers with expanded options for paying for government
services, taxes and fees using credit or debit cards as
well as other electronic means.
For decades citizens have been using cash and
checks to pay taxes and user fees or to reimburse states
for services. More recently, as credit card acceptance
has become virtually universal as a payment method
within the private sector, state and local governments
have also begun to accept credit card payments for services, taxes, and fees. Both governments and citizens
have encouraged policy changes that permit greater acceptance of credit card payments by government agencies and encourage the use of credit cards by citizens
for tax and fee payments.
Studies suggest that citizens and businesses realize
the benefits associated with electronic payments for
products and services including the convenience and safety of such transactions. At the
same time, governments, like
businesses, are beginning to
perceive the benefits associated with receiving revenues
electronically. Such benefits
include: (1) reduced transaction processing costs, (2)
more immediate receipt and
recording of revenue receipts,
and (3) greater transparency
and enhanced payment trails
which can facilitate auditing
and payment verification.
As credit card acceptance has become

virtually universal as a payment
method within the private sector,
state and local governments have also
begun to accept credit card payments
for services, taxes and fees.
1.1 Research Objective

There is little empirical evidence, other than anecdotal comments and suggestions, of the benefits that
governments actually realize from accepting electronic
tax and fee payments. As a result, states are making policy decisions to accept or encourage expansion of electronic tax payments (particularly taxpayer credit card
payments) without the benefit of broad-based information about state experiences with credit cards and other
forms of electronic payments. Therefore, the purpose
of this research was to examine the use of electronic
paymentsparticularly credit and debit cardsfor the
payment of state taxes and fees and to obtain evidence
regarding the advantages and disadvantages of electronic payments. Specifically, the goal was to assess
current and future state policies and practices regarding
3
the use of electronic payments for state taxes and fees,

along with financial implications for states of accepting
electronic payment. The five key issues or questions
addressed in this study regarding government acceptance of credit card payment for taxes and fees were:
1. How extensive is the acceptance of credit card
payment for taxes and fees?
2. What taxes or fees can be (and are) paid by credit
card?
3. Why should government agencies allow payment
of taxes and fees by credit card?
4. Who pays the transaction fees associated with
credit card payments and how are they paid?
5. What actions are required for state agencies to accept credit card payments.
1.2 Research Approach

To answer the five questions discussed above, a twophased research approach was utilized. The first phase,
completed in November 2006, involved identifying and
analyzing previous studies regarding electronic payments for taxes and fees to determine trends in electronic payment acceptance, use, policies, and practices.
The second phase involved conducting a survey of the
50 states to:
1. Determine acceptance of electronic payments;
2. Determine current policies and procedures;
3. Estimate financial implications of electronic payments;
4. Determine best practices regarding e-payments;
and
5. Determine policy changes that might enhance use

of electronic payments
The survey was initiated in October 2006 and the
analysis of survey data and compilation of survey findings were completed in March 2007. Thirty-seven states
responded to the survey for a response rate of 74%.
1.3 Report Structure

This report is structured to address the studys five
key research questions in the following manner. Chapter 2 provides an overview and background of payment
instruments available to consumers for reimbursements
for private goods and services. It provides a discussion
of the different payment options, paying particular attention to different forms of non-cash payment options.
This is followed by a review of the growth trends in
electronic payments. Chapter 3 shifts away from the
consumer market to discuss payment instruments available to citizens and taxpayers for reimbursing government agencies for government services. Chapter 4 reviews the existing literature regarding electronic payment of government taxes and fees, and discusses their
findings in terms of the extent of acceptance and use of
credit card payments, benefits to be realized by government agencies from accepting credit card payments,
transaction costs associated with credit card payments,
and challenges to state governments in accepting credit
card payments. Preliminary findings from the existing
literature are then strengthened by the findings of the
national state taxes and fees electronic payment survey.
This national survey is discussed in Chapter 5 and key
findings are highlighted in this chapter. Chapter 6 concludes the report with a summary of the studys findings.
Chapter 2
Evolution of Payments and Growth in E-payments

In the non-barter world, cash was the dominant form of payment for goods and services up to the middle of the 20th century. Paper checks then entered the payment landscape and
became dominant in the 1960s.
2.1 Evolution of Payments

Beginning in the 1950s, credit cards became more
and more accepted as a payment media, particularly for
personal travel. The Automated Clearing House (ACH)
joined the mainstream payment system in the 1970s.
The ACH network developed in response to the rapid
growth of check payments, and was perceived to be an
efficient, electronic alternative to checks. The use of
debit cards began in the 1980s and has recently gained
popularity. The most recent electronic payment option
is the electronic check or e-check, an ACH payment
option that is used for consumer payments.
2.2 Growth in E-payments

As noted, many payments traditionally made by
cash and check are now being made electronically
through ACH or by using credit or debit cards. Between 2000 and 2003, the use of checks for non-cash
payments declined by 4.3% annually, while ACH, debit
card and credit card transactions exhibited average annual increases of 13.4%, 23.5%, and 6.7%, respectively
(Gerdes et al. 2005). A summary of electronic payment
transactions for 2000 and 2003 are shown in Table 2.1.
According to statistics published by the National
Automated Clearing House Association (NACHA),
the distribution of payment transactions in the U.S. has
shifted over the past 20 years, from 96% checks and
4% electronic to 49% check and 51% electronic. As
a general proposition, this evolution from traditional
methods to electronic alternatives has been mirrored in
the public sector. However

there is still plenty of
room for continued movement away from paper
and towards alternatives
(NECCC 2005, p. 1).
The migration towards
electronic payments continues to gain momentum in the
U.S. In December 2003, the
Federal Reserve announced
that e-payment transactions had, for the first time,
exceeded the number of
check payments (NECCC
2005). For the year 2003, eThe distribution of payment
payment transactions (credit
cards, debit cards, and ACH
transactions in the U.S. has shifted over
transactions) totaled 44.5
the past 20 years, from 96% checks and
billion, compared to 36.7
billion check transactions.
4% electronic to 49% check
In 2000, similar research by
the Federal Reserve showed
and 51% electronic.
check payments exceeding electronic transactions National Automated Clearing House Association (NACHA)
by 42 billion to 31 billion.
This change represents an
average annual growth rate for electronic payments of
13.2% from 2000 to 2003, and a corresponding average
annual decline in check payments of 4.3%. The 44 billion electronic payment transactions in 2003 had a dollar value of $27 trillion, and included consumer, busi5
ness, and government-initiated electronic payments.

Figures 2.1 and 2.2 show the trends in credit and
debit card use over the past 5 years. Figure 2.1 summarizes the number of transactions by credit and debit
cards from 2001 through 2005. Figure 2.2 summarizes
the total value of credit and debit card transactions for
the same period. Combined, they show that while almost equal numbers of card transactions take place for
credit and debit cards, the total payment value for cred-
Figure 2.1
Number of Credit and Debit Card Transactions in the U.S.
(in millions), 20012005
25,000
20,000
15,000
10,000
5,000
0
2001
2002
2003
2004
Debit card
Source: CPSS (2006), Table 7 (p. 157).
2005
Credit Card
Figure 2.2
Dollar Value of Credit and Debit Card Transactions in the U.S.
(in $ billions), 20012005
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2001
2002
2003
2004
Debit card
2005
Credit Card
it card transactions were between two- and three-times

higher than the value for debit card transactions.
2.3 Non-cash Payment Instruments

Until the emergence of electronic payments, cash
payments accounted for most small transactions and
checks were used for larger value items and were the
dominant method for non-cash transactions. However,
the use of paper checks is increasingly being replaced
by electronic payment media, made possible by the
development of the Automated Clearing House (ACH)
and e-check, and credit and debit card payment networks. The various non-cash payment instruments and
trends in their use are briefly discussed next.
Paper Checks. Paper checks are the most frequently
used non-cash payment instrument in the U.S., with an
estimated 42.5 billion checks (valued at $39.3 trillion)
written during 2000. However, the number of check
payments and the number of check payments as a share
of non-cash payments have declined over time, with
data indicating a decline in check payments since 1995
(Gerdes & Walton 2002). Over the past decade, private
and public sector efforts to shift away from paper check
payments to electronic media, such as ACH and credit
or debit cards, appear to be gaining ground. The expansion of online point-of-sale terminals and the widespread acceptance of debit and credit cards at retail
establishments have presented consumers with significant payment alternatives to traditional paper checks.
The use of checks was further decreased by the Debt
Collection Improvement Act of 1996 which mandated
that most federal government payments be made electronically starting in 1999. As a result, the U.S. federal
government made 262 million check payments in 2000,
a 40% decline in check volume from the 436 million
checks the government wrote in 1996 (CPSS 2003).
Automatic Clearing House (ACH). The ACH network is a processing and delivery system that provides
for the distribution and settlement of electronic credits and debits among financial institutions. It is a batch
processing, store-and-forward system with transactions
received by the financial institutions during the day being stored and processed later in a batch mode.
ACH transactions are a common form of electronic
funds transfer used to make both recurring and nonrecurring payments. Depository institutions originated
6.8 billion ACH transactions during 2000 for themselves and their customers, twice as many as were initiated during 1995 (CPSS 2003). ACH has typically been
used for payroll direct deposits, government benefit payments, corporate payments to contractors and vendors,
mortgage and loan payments, insurance premium payments, corporate cash concentration transactions, and
payments to and from the state or federal government.
Pricing for ACH transactions is typically negotiated
between the originator and the originating financial
Table 2.1
Growth in Electronic Payment Transactions
2000
2003
Number of
payments
(billions)
Value of
payments
(trillions)
Average
value
of payment
Number of
payments
(billions)
Value of
payments
(trillions)
Average
value
of payment
6.1
$18.2
$2,984
8.9
$24.6
$2,766
Debit card
8.3
$0.3
$42
15.6
$0.6
$40
Credit card
15.6
$1.3
$82
19.0
$1.7
$89
Type of payment
ACH
Source: Gerdes et al. (2005) from the 2001 and 2004 electronic payment surveys (Dove Consulting 2004).
institution. Individual transaction origination and receipt fees can vary from $0.029 to $0.10, depending
on volume and compensating balances (NECCC 2005).
While the costs of ACH payments compare favorably
with credit and debit cards and checks, ACH does not
afford citizens and consumers the same protection from
fraud as are afforded credit card users.
Total ACH consumer debit volume (both commercial
and government) increased by 53% between 2000 (2.7
billion transaction) and 2003 (4.2 billion). This growth
rate is slightly higher than the overall 45% growth rate
for ACH volume (6.9 billion in 2000 and 10.0 billion
in 2003), and also represents just under half of the total
ACH transaction volume increase (Nelson 2004). NACHA recently announced, in its Payments 2007 conference, that 16.0 billion ACH payments were made in the
U.S. in 2006, representing a 14.5% increase from 14.0
billion payment transactions in 2005.1
Electronic Check (e-check). More recently, electronic checks (e-checks) have become a popular ACH
transaction. An e-check is an electronic debit to a
checking account that can be initiated at the point-ofsale, on the internet, over the telephone, or via a bill
remittance sent through the mail. An e-check is processed using the ACH network. If payment has been
negotiated (i.e. the check is presented for payment),
the process of changing the paper check document into
an electronic transaction is referred to as truncation.
Otherwise, the electronic transaction is referred to as
check conversion. Check truncation is covered by
check law while check conversion is covered by Regulation E, which was issued by the Federal Reserve as
part of the Electronic Funds Transfer Act and contains
more explicit consumer protection that is stronger than
the check law (NECCC 2002). ACH operating rules
limit e-check transactions only to consumer payments.
Between 2000 and 2003, e-check transactions account for nearly all the growth in ACH consumer debit
volume. The cumulative 1.9 billion consumer debit
transaction increase from 2000 to 2003 is more than
accounted for by the 2.0 billion e-check transactions
over that period (Grant 2004).
Credit Cards. The credit card industry began in

1914, when Western Union, department stores, oil
companies and hotels began offering cards for customers to pay for their services. Since then, the industry has
grown rapidly, and consumers today can pay for a wide
range of goods and services, from major purchases like
cars and appliances to everyday requirements like food
and gasoline.
Originally, credit cards were used by consumers
to spread payments on large ticket items. In the mid
1990s, however, the pattern of credit card use has
changed such that credit and debit cards are used for
all types of purchases. This accelerated use of credit
and debit cards can also be attributed to the rise in mail
order and internet purchasing.
Credit cards are the most frequently used electronic
payment instrument in the U.S. They combine a pay-
Figure 2.3
Number of Credit and Debit Cards in the U.S.
(in millions), 20012005
1,400
1,200
1,000
800
600
400
200
0
2001
2002
2003
2004
Debit card
2005
Credit Card
ment instrument with a credit arrangement. Bank credit

cards are generally issued by a bank under a license from
a national organization, such as Visa or MasterCard,
and typically involve a revolving credit agreement. In
addition to bank-issued cards, other credit cards are issued directly to businesses and consumers such as Discover Card, American Express, and limited-use proprietary cards (e.g. those issued by retail stores and oil
companies). A 1998 survey of consumers indicated that
68% of U.S. households had at least one general purpose credit card, a 21% increase since 1989. In 1998,
limited-use cards issued by retail stores and oil companies were held by 50% of U.S. households compared
to only 19% of U.S. households in 1989 (CPSS 2003).
Debit Card. Debit cards are also known as check
cards. They look like credit cards or automated teller
machine (ATM) cards, but operate like cash or personal
check. Debit card transactions involve the transfer of
funds from a cardholders transactions account (typically a checking account) at an issuing bank. There
were 9.5 billion debit card transactions processed during 2000, valued at $419 billion. Cardholders authorize
debit card transactions either by entering a personal

identification number (PIN) directly into a merchants
online terminal or by a written signature. An estimated
2.8 million online debit terminals were available at
U.S. retail locations in 2000 and involving approximately 4 billion PIN-based transactions and 5.5 billion
signature-based transactions (CPSS 2003).
Unlike a credit card, funds are withdrawn directly
from the purchasers checking or savings account at a
bank when a debit card is used. While a credit card is a
way to pay later a debit card is a way to pay now. Because debit card transactions are directly subtracted from
the consumers related bank account, debit card transactions are limited to the amount in the bank account.
Figure 2.3 summarizes the total number of debit and
credit cards held by consumers in the U.S. from 2001
through 2005. This chart shows that the number of
credit cards has reached a plateau at just under 1.3 billion. The number of debit cards has seen steady growth
over the past five years, but the total amount still comprises less than a quarter of the number of credit cards.
Chapter 3
Electronic Payment of Government Taxes and Fees

Electronic payments offer government agencies the opportunity to automate accounting, banking and reconciliation functions and processes. Electronic payments can also speed up the
receipt of tax and fee payments from citizens and taxpayers.
3.1 Benefits and Costs to State Governments

of Accepting Electronic Payments
Citizens have, for decades, been using cash and
check to pay taxes and registration fees and to reimburse states for services. Meanwhile, ACH transactions
have primarily been used for payment of state taxes and
fees, especially large payment amounts made by corporations and other major employers. Credit and debit
cards, while being a payment option for some government agencies, are still not as prevalently accepted as
other payment media.
Electronic payments for government taxes and
feeswhether in the form of ACH, credit card, or debit
cardoffer many benefits to government agencies and
citizens. These include:
Reduced processing costs associated with cash
and check payments;
Reduced transaction processing time and costs;
Improved payment verification and auditing
through real-time authorization and verification;
Reduced accounts receivables and payment delinquencies, and fewer need for debt collection activities;
Improved fund availability by reducing check float
and enhancing cash flow;
Added convenience for citizens.
Beyond these benefits, electronic payments offer
government agencies the opportunity to automate accounting, banking and reconciliation functions and
processes. Electronic payments can also speed up the
receipt of tax and fee payments from citizens and taxpayers.

While electronic payments
provide several benefits and
cost savings, the acceptance
of electronic payments also
involves several costs. If decisions are made to accept
electronic payment, policies
must be established to address how and by whom such
costs will be covered. The
costs associated with electronic payments include:
Equipment expenses including specialized software, keypads, computers, etc.;
Electronic payments for government

taxes and fees offer reduced
processing costs for government
agencies and added
convenience for citizens.
Administrative expenses including employee

training, process streamlining, and marketing activities and user education
programs; and
Social costs associated with electronic payment

media such as lack of access to electronic payment
options by certain categories of citizens or misuse
of electronic payment options such as increased
debt burden due to increased use of credit cards.
The costs associated with electronic payments vary
both according to the type of payment media and the
9
payment channel. These payment channels are:
ciated with developing and maintaining an internet payment system include software, hardware,
licenses, and maintenance costs.
Point-of-sale. Point-of-sale systems allow the

public to pay for government services with debit
cards and credit cards, checks and cash over the
counter at walk-in service centers. It provides citizens with a cost-effective and convenient way of
paying for government services while allowing
for quick and efficient updates to payment records. For credit card transactions, the point-ofsale is a location where the credit card payment is
performed with the cardholder present. The credit
card is read magnetically, and the cardholders signature is generally obtained as insurance against
the transaction. This is the most secure form of
credit card payment.
Acceptance of electronic payments through the different payment channels offers a variety of benefits to
government agencies and citizens. The combinations of
electronic payments and payment channels have different costs associated with them and some types of electronic payments are even limited to certain payment
channels. Table 3.1 provides a matrix of payment channels and payment types and describes the level of transaction fees that are faced by the government agency for
each combination of payment type and payment channel.
Pay by Telephone. Interactive voice response

(IVR) is a telephony technology in which consumers use a touch-tone telephone to interact with
a database to acquire information from or enter
data into the database. IVR or pay-by-phone systems eliminate the inconvenience and costs associated with postage and check-writing. Studies have
shown that electronic bill payment reduces these
costs by 60% by eliminating the cost of stamps
and paper checks and by reducing consumers exposure to late fees and bounced checks (NECCC
2005). The costs associated with a pay-by-phone
system will depend on the hardware and software
needed to implement the system.
While credit and debit card acceptance as a payment

method has become virtually universal within the private sector, credit card use for payment for government
services has lagged behind credit card usage in the consumer market. To allow government agencies to benefit
from the cost advantages of electronic payments and to
permit citizens to realize the benefits of credit card payments, government leaders and citizens have encouraged policy changes that permit greater acceptance of
credit card payments by government agencies and encourage greater use of credit cards by citizens to pay
their taxes and fees. The system or structure for credit
or debit card payment of government taxes and fees are
not very different from that of the private sector.
Pay by Internet. Internet payment systems allow

government agencies to accept electronic payment via the web. An internet payment system
reduces the costs associated with traditional (and
often inefficient) paper-based payment methods,
and allows citizens to pay taxes and fees when and
where it is convenient for them. This significantly
improves access to government services and increases the potential for on-time payments and
fewer delinquent payments. The many costs asso-
Government agencies have two primary options for

accepting credit card payments, as shown in Figure 3.1.
The primary difference between the two systems is the
use of a financial intermediarya third party service
providerthat can perform multiple functions for the
government agency, including accepting and processing
the credit card transaction. In the first option (top panel
of Figure 3.1) the credit card transaction begins with
payment accepted directly by the government agency.
The bank issuing the credit card transfers funds to the
3.2 Credit Card Payments for Government Services
Table 3.1
Transaction Fees by Payment Channels and Payment Types
Type of payment
Transaction fees
charged to
government agency
Cash or check
None
Credit card
High
Signature debit card
High to Moderate
PINless debit card2
Moderate
PIN-based debit card
Low
ACH
Low
Payment Channels
Point-of-sale
Telephone
Internet
Varies
Source: National Electronic Commerce Coordinating Councils E-Payments Primer (NECCC 2005).
10
government agencys processing bank. Subsequently,

funds are deposited into the government agencys account. Note that the issuing bank must transfer payment
to the processing bank prior to collecting payment from
the taxpayer. In this first option, the government agency
is typically responsible for the fees associated with the
credit card transaction.
The same process is mirrored in the second option
(bottom panel of Figure 3.1). However, depending on
the functions undertaken by the third party service
provider, the payment for government services can be
made either to the government agency or to the third
party service provider. In addition to possibly accepting
the credit card payment, the third party service provider
also replaces the functions of the processing bank.
Government agencies have two primary options for
accepting credit card payments, as shown in Figure 3.1.
The primary difference between the two systems is the
use of a financial intermediarya third party service
providerthat can perform multiple functions for the
government agency, including accepting and processing the credit card transaction. In the first option (top
panel of Figure 3.1) the credit card transaction begins
with payment accepted directly by the government
agency. The taxpayer transfers funds to the bank issuer of his/her credit card, which in turn transfers the
funds to the government agencys processing bank.
Once the payment is settled, funds are deposited into
the government agencys account. In this situation, the
government agency is typically responsible for the fees
associated with the credit card transaction. The same
process is mirrored in the second option (bottom panel
of Figure 3.1). However, depending on the functions
undertaken by the third party service provider, the payment for government services can be made either to the
government agency or to the third party service provider. In addition to possibly accepting the credit card
payment, the third party service provider also replaces
the functions of the processing bank.
Benefits of Accepting Credit and Debit Card Payments
for Government Taxes and Fees
Many of the benefits credit and debit cards offer
government agencies are the same as those offered by
other electronic payments. However, credit cards offer
an additional benefit to citizens and taxpayers in the
form of short-term credit. This credit option offers additional taxpayer relief by providing the opportunity
Figure 3.1
Two Primary Credit Card Payment Systems for Government Agencies
Processing Bank
Credit Card Issuing Bank
Citizen/Taxpayer
Transaction
Third-Party Service Provider
Credit Card Issuing Bank
Citizen/Taxpayer
Government Agency
Transaction
Government Agency
Source: Developed by the research team.
11
for payment spreading and cash flow management for

those who may otherwise face difficulties in paying
large tax or fee payments at a particular point of time
but who could otherwise manage payments spread over
time. Debit cards also offer further advantages over
credit cards. Because anyone with a checking account
can obtain a debit card, accepting debit cards as a payment option serves a larger pool of potential users. In
addition, canceling services or returning goods paid for
with a debit card is typically treated as if they were
made with cash or check, allowing for a less complicated and less costly return or cancellation process.
Challenges to Accepting Credit and Debit Card Payments
for Government Taxes and Fees
However, accepting credit and debit card payments
also poses several challenges to government agencies.
These include legal and legislative challenges, cost
challenges and technology challenges. From a legal or
legislative perspective, issues that affect the acceptance
of credit and debit card payments include:
Credit and debit card transactions impose certain
costs (transaction fees), which may conflict with
legislation requiring that government agencies
collect 100% of the amount due;
Credit card transactions may violate public funds
handling laws; and
Legislative issues regarding protection of financial
data from public records laws and technology issues related to data and information security need
to be addressed.
The primary costs associated with credit and debit
card payments are the start-up costs (initial equipment,
training, marketing and education) and the recurring
per transaction fees. The fees paid by government agencies for credit card processing are determined by their
contractual relationship with their bank and/or service
provider, and are based on a number of factors, including total and average volume, total and average dollar
amount, association fees, processor fees, card types,
12
and processing timeframe. States have used two principal ways to pay for such fees associated with credit and
debit card transactions including the use of surcharges
and convenience fees.
Transaction Surcharge. A transaction surcharge
is an additional charge that is added to the transaction
amount by the merchant if the customer chooses to pay
by card, either credit or debit. The surcharge tends to be
a fixed amount but varies with the transaction amount.
Use of surcharges is strictly prohibited by Visa, MasterCard and Discover. However, a very small number of
merchants were grandfathered by the debit networks to
surcharge on PIN debit transactions (Webster 2005).
Convenience Fees. A convenience fee is an additional charge that is added to the transaction amount
by the merchant if the customer chooses to pay the
merchant in a non-traditional environment, such as via
a website or an interactive voice response (IVR) telephony system. The convenience fee amount can take
the form of a flat fee or a percentage-based fee, but the
type of fee varies widely across government entities
and third party service providers. American Express
allows convenience fees if the transaction is related
to: (1) federal, state, provincial or municipal government mandatory revenue payments; (2) public utility
payments; and/or (3) mandatory fees at public higher
education institutions. Furthermore, under the American Express convenience fee policy, convenience fees
(1) can only be charged when the payment is made
through a more convenient payment method; and (2)
cannot be higher than the fees imposed on other payment instruments. For Visa and MasterCard, the convenience fee must be applied equally to all payment types
offered through the same environment. However, Visa
also states that the convenience fee cannot be charged
for over-the-counter or face-to-face transactions. The
merchant must also state up-front that a convenience
fee will be charged to the cardholder, specify the fee
amount, and allow the cardholder to either decline or
proceed with the transaction and the assessed fee.
Chapter 4
Findings of Previous Studies on Government Tax

and Fee Electronic Payments
The analysis included in this chapter is based on five major
studies and research efforts. These other studies include an assessment of the acceptance of credit card payment by a federal
agency, a survey of state and local government agencies, a survey by the Federation of Tax Administrators (FTA), and a public
opinion survey regarding internet-based government services.
While some studies have examined the acceptance

and management of electronic tax and fee payments,
there have been limited empirical studies that focused
on the broader issues relevant to state governments accepting electronic payments for state taxes and fees.
Combined, however, information from existing studies
can be used to develop preliminary answers to the following research questions:
card?
credit card payments? How are they paid?
5. What is required for state agencies to accept credit
card payments?
4.1 Overview of Previous Studies

The analysis included in this chapter is based on five
major studies and research efforts. These other studies
include an assessment of the acceptance of credit card
payment by a federal agency,

a survey of state and local
government agencies, a survey by the Federation of Tax
Administrators (FTA), and
a public opinion survey regarding internet-based government services. These are
discussed below.
One reason driving government

acceptance of tax and fee payments
by credit card is citizen preference
for credit card payment.
Credit Card Survey of

State and Local Government
Acceptance by the District
of Columbia Treasurers
Office and the Office of the
City Administrator. In 1991,
staff from the District of Columbia Treasurers Office
and the Office of the City Administrator contacted treasury and finance officials in the 20 largest U.S. cities,
the 17 jurisdictions making up the Washington metropolitan area, and the seven states known to accept
credit cards. Altogether, 45 state and local governments
were surveyed, along with 23 federal-level government
agencies (Kuhn 1992). The purpose of this survey was
to determine the prevalence of credit card payment acceptance among state and local governments.
13
Table 4.1
Trends in Credit Card Payments of Federal Income Taxes
Year
Number of
payment transactions
Dollar volume of
($ in million)
1999
53,300
$184
$3,445
2000
216,500
659
3,044
2001
284,800
891
3,130
2002
313,400
781
2,494
2003
559,600
878
1,569
Average
transaction value ($)
Source: Mitchell (2004) from IRS data.
Case Study of the U.S. Postal Service (USPS) Acceptance of Credit and Debit Cards for Payment of
Postal Services (GAO 1994, Green 1997, Beyer 1999).
The USPS first began accepting credit card payments
at some post offices in 1981. In 1991, then Postmaster
General Anthony Frank established a task force to make
recommendations on the future direction of credit card
acceptance. The task force arranged for Arthur D. Little
to undertake a feasibility study in 1991 of the extent of
market demand for credit and debit cards at postal retail windows and vending machines. Postmaster General Marvin Runyon then decided in 1992 that USPS
should begin accepting credit and debit cards and soon
as possible. Implementation of the credit card acceptance program, to be launched in three phases, began in
June 1993 with 550 pilot test sites. The only restriction
on credit card acceptance was that money orders and
collect-on-delivery services could not be paid for via
credit card. Later, the USPS added the policy that credit
cards could not be used for payment of bulk mailings.
Texas Electronic Government Survey (Strover &
Straubhaar 2000a, 2000b). The Texas Electronic Government Survey is a public opinion survey to assess a
variety of issues related to public access necessary to
use e-government service. Research addressed specific
questions: (1) Would people use government services if
they were available on the internet? How much would
they pay? (2) What are the privacy and security concerns of Texans with respect to e-government application? (3) What are citizen opinions with respect to
financially supporting e-government services?
Federation of Tax Administrators (FTA) Credit
Card Survey (FTA 2003). A survey conducted by the
FTA in 2003 on how states use credit cards to facilitate
the payment of taxes or fees. Thirty-three states (including the District of Columbia and New York City)
responded to the survey. The survey also focused on
the use of debit card and e-check for payment of taxes
14
or fees. The survey examined issues such as: (1) acceptance of credit card, debit card or e-check for tax or
fee payment, (2) types of taxes or fees that can be paid
by credit card, debit card or e-check, (3) transaction
volume, (4) payment of the merchant discount fee, (5)
satisfaction with electronic payment processing programs, and (6) proposed changes to these programs.
While these studies may be somewhat datedmostly from the mid-1990s and early 2000sthe information they provide remain useful as starting points for
the current investigation into policies and practices regarding state government acceptance of electronic payments for taxes and fees. The studies findings may no
longer be current or relevant in todays environment,
but they do provide interesting insights into how government agencies have dealt with the issues and challenges of accepting electronic payments.
4.2 How Extensive is the Acceptance and Use of Credit

Card Payment for Taxes and Fees?
Acceptance of Credit Card Payment for Taxes
and Fees. There is evidence, as far back as the early
1990s, that federal, state, and local government agencies have been accepting credit card payments for taxes
and fees. In the 1991 survey by the District of Columbia government, 65% of the government organizations
surveyed accepted credit card payments, with another
20% having recently issued RFPs for credit card programs or conducting feasibility studies (Kuhn 1992).
In addition, a Public Investor survey conducted in 1993
found that 30% of state and local governments in the
U.S. accepted credit card payment for user fees, parking
tickets, utility bills and taxes (Michel & Carter 1996).
Mitchell (2004) cites a 2003 survey of 419 counties
by the National Association of Counties which found
that 28% and 29% of respondents indicated that their
agencies had enabled residents to pay taxes and fees
with credit cards on-line and over the telephone, respectively. This represented an increase from 18% and
26% of respondents the previous year. A 2003 survey
by the National Center for State Courts (NCSC) of 84
courts in 30 states found that 77% of the responding
courts accepted credit card payments. Most of these
courts had begun accepting credit card payments within the previous five years.
Of the state revenue agencies responding to the 2003
FTA survey, all but one had the necessary legal authority to accept credit cards for payment of taxes or other
fees. Results of this survey showed that 91% (30 out of
33) of the responding states had programs in place to
accept credit card payments. They further found that
most states were planning to expand their electronic
payment programs. These included adding more payment types via the Internet, expanding the program to
include more types of taxes or fees, and adding direct
debit or e-check capabilities.
Citizen Use of Credit Cards to Pay Taxes or Fees.

In 1997, the first year the credit and debit card program
was fully implemented, the USPS had more than $1.2
billion in credit and debit card transactions alone. More
than 18 months after the complete rollout, transaction
numbers and volume had more than doubled (Beyer
1999). In 1998, the Postal Service had 5.5 million debit
card transactions totaling $332 million and 42.6 million credit card transactions totaling $1.4 billion.
A similar growth was experienced by the Internal
Revenue Service (IRS) when it began accepting credit
cards for payment of federal income taxes in 1999. Table 4.1 summarizes the growth in both number of transactions and dollar volume of transactions between 1999
and 2003. The number of transactions increased tenfold over this period and the dollar volume increased
more than four-fold. In the early years of the credit
card acceptance program, the most avid users of the
program were those with large tax balances (average
transaction value of $3,445) but over time the program
became more widely used and the average transaction
value dropped to $1,569.
In the FTA survey, almost $700 million was collected from credit card, debit card and e-check payments
in FY 2003. This was a significant increase compared
to the $190 million collected by the states just two
years earlier (FY 2001). Credit card payments alone
amounted to almost half of these transactions, comprising slightly over 40% of the transaction amounts.
As shown in Table 4.2, credit card payments for state
taxes and fees show a trend similar to that of the IRS.
Between 2001 and 2003 both the number and dollar
volume increased while the average transaction value
decreased.
4.3 What Taxes or Fees Can be (and are) Paid by Credit Card?
Early research has shown that federal, state, and local governments accepted credit card payments for a
variety of taxes and fees. For example, Kuhn (1992)
mentioned parking fines, motor vehicle service fees,
recreation and leisure services, taxes, court fines and
airport parking as the most frequently cited applications
of credit card acceptance at the state and local levels.
She further noted that at the state level, all seven states
surveyed (California, Indiana, Maryland, Montana,
Missouri, Oregon, and Vermont) accepted credit cards
for payment of taxes, motor vehicle licenses, registrations, recreation fees or parking violations. For taxes,
five states accepted credit card payments for delinquent
taxes only, while two of the states accepted credit cards
for both current and delinquent taxes.
The FTA survey of state revenue agencies found
that an overwhelming majority (90%) of the responding states accepted credit card payments for individual
income taxes. Slightly over half of the states accepted
credit card payments for corporate income tax and sales
and use tax.
4.4 Why Should Government Agencies Allow Payment

of Taxes and Fees by Credit Card?
One reason driving government acceptance of tax
and fee payments by credit card is citizen preference
for credit card payment. The literature suggests that
citizen preferences for credit and debit card usage are
driven by factors such as convenience, flexibility, speed
of transaction, security and ability to reduce the volume
of cash carried. Credit cards provide citizens with a secure, reliable and convenient means of payment. They
are also a flexible payment method that allows citizens
to avoid late payment fees while stretching their payments out as a means of managing their cash flows.
Frequent-use awards and access to credit at the pointof-sale further encourages credit card use.
Benefits to government agencies for allowing payment of taxes and fees by credit card can be divided
into three categories: (1) collections, (2) processing,
and (3) administrative. From a collections perspective,
acceptance and use of credit cards may result in more
timely payments, in addition to an increased certainty
of tax and fee payments and the potential for increased
collections. The increased certainty of collection is primarily due to immediate, real-time fund verification that
ensures the credit card payment is valid. Greater use of
credit cards to replace checks, therefore, is expected to
reduce the occurrences of returned or defective funds.
Credit card acceptance may also yield greater collections by improving collections of delinquent payments
and increasing the consumption of government goods
and services by citizens as credit cards allow illiquid
consumers or those paying with future income to consume and pay for goods and services (Chakravorti 2003).
Payment processing is also affected by the acceptance and use of credit cards. The most commonly cited
reason for government to accept credit card payments
is the accelerated fund availability associated with
credit card payments. Credit card transactions provide
the government agency with good funds typically within 48 hours of the government agency submitting the
transaction. This reduction in float improves fund availability and allows government agencies to get money
into interest-bearing accounts sooner. Credit card payments also result in staffing efficiencies, as they require
less extensive physical handling (in terms of paper- and
personnel-intensive activities) compared to checks and
cash.
From a transactions perspective, credit card use improves the transaction efficiency, such as by increasing
the speed of check-out (reducing transaction time) and
reducing cashiering and other transaction costs. Beyond the actual tax or fee payment transaction, credit
card payments can simplify administrative recordkeeping and improve the paper trail and accountability.
There is some anecdotal and empirical evidence supporting these claims of credit card benefits. For example,
15
the Washington, DC survey found that allowing citizens

to use credit cards to pay by mail or by telephone was
a major factor in reducing delinquent tax payments for
some local and state governments. Among the benefits
of credit card use cited by the cities, counties, states,
and the federal government included increased sales of
merchandise, more timely payments than conventional
methods, reduced interest and penalties for some taxpayers, reduced mail and processing float, improved
fund availability, lower administrative costs, and less
risk associated with defective checks (Kuhn 1992).
The experiences of the U.S. Postal Service also evidenced some of the benefits of credit card acceptance
previously discussed. The Arthur D. Little consultants
contracted by the USPS found that 27% of households
and 15% of small businesses surveyed expressed an
interest in using credit and debit cards at post offices.
MasterCard, in cooperation with the USPS, conducted a
survey of customers buying characteristics and opinions
regarding credit card payments at pilot test sites. Survey
responses from 4,000 respondents showed that 64% felt
that the USPS acceptance of credit and debit cards made
it more like a retail establishment; 30% said credit card
acceptance added convenience; and 5% said it provided for better customer service. Results of both surveys
suggested support for the citizen preferences argument.
Time and motion studies at USPS pilot test sites during the early stage of credit and debit card acceptance
showed that credit or debit card transactions were processed more quickly than cash or check transactions,
thus saving customers and postal workers time. At post
office windows, a credit card transaction was processed
in an average time of 52 seconds and a debit card transaction was processed in an average 32 seconds. In comparison, average processing times were 80 seconds for
check and 43 seconds for cash. The credit/debit card
program allowed postal clerks to complete transactions
more quickly and made them feel safer and more secure as they no longer had to carry as much cash in
their drawers (Green 1997). A follow-up study by Coopers and Lybrand found that the card program produced
significant financial benefits. The average handling and
processing cost for a debit card transaction was determined to be 1.5 cents per dollar spent by the consumer
and for a credit card transaction this cost was 4.0 cents
per dollar. In comparison, the handling and processing
cost for cash and check transactions were 4.8 cents and
2.7 cents per dollar, respectively.
As a result of the debit and credit card program, the
USPS has also been able to consolidate its cash management banking arrangements from more than 5,000
accounts down to 30 accounts. As Terrell Carter, as-
Figure 4.1
Responsible Party for Paying Fees Associated with Tax Payments
Fee paid by state

Fee paid by taxpayer
Combination of state and taxpayer
Source: FTA (2003) Credit Card Survey.
16
sistant treasurer of payment technologies for the USPS

states, We have been able to significantly reduce our
cash-handling time, costs, and the risk associated with
it. Customers using credit cards also tend to buy up. Our
average transactions have increased (Beyer 1999).
The 2003 NCSC survey found that state courts experiences with credit card acceptance has been that allowing credit card payments (1) increased the amount
of fines actually collected, (2) accelerated payment receipt, and (3) simplified recordkeeping.
4.5 Who Pays the Transaction Fees Associated

with Credit Card Payments? How are they Paid?
One of the most significant obstacles to accepting
credit card payments for government taxes is the per
transaction cost of credit card use. Most public agencies are required by law to collect 100% of the tax or
fee amount owed by the taxpayer. As a result, public
agencies cannot pay the merchant discount fee that
acquirers charge merchants for processing credit card
payments. For example, the 2003 NCSC survey found
that the most commonly cited reason for state courts
for not accepting credit card payments was the transaction fees charged by the banks for processing credit
cards. The fee charged by banks to process credit card
payments has typically been based on a formula that
includes the interchange rates, anticipated sales volumes, average transaction amounts, and the method of
authorization and settlement. In the 1991 Washington
DC survey, most government agencies (69%) were
charged a discount rate (a percent based on the dollar
volume of credit card transactions) ranging from 1.4%
to 5% (Kuhn 1992). Other agencies, using a third party
processor, paid a sliding scale of fees ranging fro $3 to
$60, depending on the amount of the payment being
processed.
Private sector merchants can typically hide or bury
the fees associated with accepting credit card payments
into the price of the goods and services. Some government agencies have taken an approach similar to the
private sector in absorbing the credit card transaction
fees as part of the cost of doing business, but without an
across-the-board rise in tax rates or fee structures.
Many other agencies, however, are constrained by
statute to collect 100% of what is owed. Most government agencies have passed on the transaction fee to
those taxpayers paying by credit card. Visa and Master
Card, however, had bylaws prohibiting merchants from
directly passing along the transaction fees to credit card
users. In 1993, they began enforcing these bylaws, ordering member banks to cut off service to those government agencies passing along the transaction fee. Despite
extensive discussions with representatives of state and
local governments, Visa and MasterCard were reluctant
to change their position prohibiting passing along the
transaction fees. As a result, government agencies have
adopted various means for addressing the problem of

passing on credit card fees to taxpayers.
We examine two issues relevant to credit card transaction fees. The first is who pays the feethe government agency or the credit card payor? and the second
is how are these fees paid? Both issues will be addressed in the following subsections.
Who Pays the Fee? The NCSC survey found that
state courts have dealt with credit card fees in three
ways: (1) absorb the fee as a cost of doing business; (2)
pass the fee through to the party paying the fee or fine;
and (3) negotiate with the bank to waive the fee. Absorbing the transaction fee as part of the cost of doing
business was the most common approach, but required
that the courts obtain statutory authorization to do so.
California and Michigan were two states whose courts
absorbed the credit card fees. The NCSC cited a threefold argument for doing so: (1) the increase in collections will offset credit card costs; (2) the cost of collecting court fines and fees via credit is no more than, and
may actually be less than the combined fees, staffing
costs, security expenses, and costs for handling, holding, and transferring cash and checks; and (3) the public prefers paying via credit card without any additional
fees attached.
The second option, adopted by Georgia and Louisiana, involved passing on the fee to the party paying the
fee or fine by imposing a surcharge, transaction fee, or
convenience fee (justified such that they meet Visa and
MasterCard restrictions) to parties who wish to pay by
credit card. This charge may either be a fixed amount
or a small percentage of the amount being paid. The
advantage of this option is that it allows the state court
to collect the full amount of the fine or fee.
The final option involved the state court negotiating with its bank to waive credit card fees. Florida and
Massachusetts, for example, had gone this route, and
negotiated with their banks to waive credit card fees
in exchange for having the court, local government, or
state government deposit some of its funds in that bank.
The 1991 Washington DC survey uncovered two
methods for addressing credit card fees. The first was
for the government agency to directly bill the payor for
the credit card fees in the form of a surcharge which was
added to the transaction amount at the time the payment
was made. Thirty-eight percent of responding agencies
reported using this surcharge approach. However, since
this survey was undertaken before the crackdown by
VISA and MasterCard on credit card surcharges, it
is unlikely that this practice continued much beyond
1993. The second approach was for the government to
absorb the cost of credit card fees and paying this cost
by allowing the processing bank interest-free use of a
pre-specified balance for a pre-specified duration. This
practice, called compensating balances, was used by
62% of the state and local governments responding to
the survey.
17
Figure 4.2
Citizen Willingness to Pay for Online Government Services
Building or other
sorts of permits
Obtain fishing or
hunting license
Pay traffic or
vehicle tickets
Over $10
Renew
drivers license
Up to $10
Under $3
Nothing at all
File and pay taxes

0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Source: Strover & Straubhaar (2000a, 2000b).
In the 2003 FTA survey, states were asked to identify

the party responsible for paying the transaction fees associated with tax payments made by credit cards. Responses to this question are presented in Figure 4.1.
Slightly fewer than 20% of the states actually absorbed
at least some of the credit card fees directly. The cost to
the state for merchant discount fees in FY 2003 ranged
from $70,000 to $1.4 million, and totaled close to $2
million. In the remaining states credit card fees were
paid by the taxpayer, either as an extra fee added to
the transaction amount (10% of the states) or through a
third party processor that then charged a service fee to
cover the credit card fees (74% of the states).
Charging Taxpayers a Convenience Fee for Credit Card Use. In order to address credit card fees, some
states passed permanent or temporary legislation mandating credit card surcharges (e.g. Virginia, California,
Montana and Florida). Absent legislation, some state
and local governments have made policy decisions to
pass all or some credit card processing costs trough to
users in the form of a surcharge. For example, in the
early 1990s, the state of Massachusetts ruled that, in
the case of recreational fees or services, an expenditure
of public funds for the private benefit of an individual
paying with a credit card is unlawful, and therefore a
charge, however nominal, should be assessed to the
credit card user to cover the cost of providing this service (Kuhn 1992).
Michel and Carter (1996) proposed charging convenience fees for different payment options as a means
for covering the cost of credit card fees. This involves
presenting citizens with a menu of payment options in
which credit card users are not singled out and penal18
ized. The agency can then assign fees to different payment methods (phone, mail, walk-in service), instead
of assigning fees to different payment means (cash,
check, credit card). This allows the government agency
to associate the convenience fee with a benefit beyond
paying by credit card, such as paying by telephone to
avoid long waits in line. They cited the example of the
Wisconsin Department of Transportation (WisDOT),
which offers residents three ways to pay for vehicle licensespayment by mail via a bank lockbox (no fee),
payment in person at a customer service center ($3
fee), or payment using an automated telephone system
($2.50 fee). In return for the $2.50 telephone payment
fee, residents received fast service from the comfort of
their own home by dialing a toll-free number. A computerized system asks for an identification number and
a credit card number to be used to pay the licensing fee.
In the 1990s, several state agencies adopted this convenience fee for different payment options approach,
while others have adopted a third-party convenience
fee approach.
As the more recent FTA survey indicates, the latter
has gained overwhelming popularity among the states.
A large majority of the states use a third party service
provider to process payments, with the taxpayer paying
a convenience fee directly to the third party for using
the credit card payment service (FTA 2003).
Kuhn (1992) found that officials in jurisdictions
where surcharges were in place noted that credit card
users were satisfied with the convenience and float afforded them, and did not consider surcharges a deterrent. However, convenience fees did not always resolve
the issue of government agencies collecting 100% of
what is owed, as is often required by law. Glen B. Gainer III, State Auditor General for West Virginia, pointed
out that a posted flat fee assessed to the consumer
may not entirely cover the agencys cost if the agency
has a percentage-based acceptance pricing plan with
its acquirer (Mitchell 2004, p. 22). In addition, while
taxpayer complaints regarding convenience fees is still
the most common among all complaints regarding the
credit card payment program, Iowas revenue officials
found that the percentage-based convenience fee was
much more acceptable to the public than the flat-rate
convenience fee (FTA 2003).
Survey evidence from the Texas e-Government project (Strover & Straubhaar 2000a, 2000b) also suggests
that citizens are willing to pay for the convenience of
paying by credit card. In this survey, citizens indicated
their willingness to pay for on-line access to different
types of government services (see Figure 4.2). It is reasonable to expect that this same willingness to pay is
exhibited when it comes to paying for the convenience
of on-line credit card payments for taxes and fees.
How do States Pay Credit Card Fees? Kuhns
1991 survey determined that in situations where the
state was responsible for paying the credit card fees,
the most dominant way of doing so was by using a

compensating balance. This involves the government
agency paying credit card fees using the value derived
from interest-free use of specified balances by the financial institution. In 1991, 68% of respondents in the
Washington DC survey of state and local governments
had adopted this approach. A similar approach, identified by the NCSC survey, involved government agencies (in the NCSC case, state courts) negotiating with
their financial institutions to waive credit card fees in
return for the agency depositing some of its funds in
that bank.
Table 4.2
Credit Card Payment Transactions for State Taxes and Fees
Year
Number of
Total transaction
volume
($ in million)
Average
transaction value ($)
2001
543,980
$168
$877
2002
313,400
220
835
2003
559,600
285
632
Source: FTA (2003).
4.6 What is Required for State Agencies to

Accept Credit Card Payments?
According to Michel and Carter (1996), the primary
costs of accepting credit cards are the credit card transaction fee and the cost of acquiring the equipment and
software necessary to accept credit cards. In addition to
equipment and software, there are also the costs associated with training personnel to ensure the credit card
payment programs are implemented correctly. Kuhn
(1992) suggests further that the primary disadvantage
of credit card acceptance cited by public officials was
that they wished more taxpayers would use these programs. However, virtually none of the officials who
accepted credit cards cited an aggressive marketing or
public awareness campaign. As such, accepting credit
card payments also require an investment in marketing
and advertising to get word out and to encourage taxpayer use of credit cards for payment of taxes and fees.
The case of the USPS credit and debit card program

illustrates the magnitude of investments required for
government agencies to accept credit and debit cards.
The debit card component of the USPS card acceptance
program alone required at least a $60 million dollar investment including the training of more than 100,000
clerks and the more than 70,000 PIN-pads needed to
authorize the transactions (Beyer 1999, Green 1997).
However, customer awareness of the credit and debit
card options was initially low. Marketing and advertising the new payment options included adding decals
on post office doors and an employee communication
campaign to help promote card usage. The latter included training employees to offer the credit or debit
card option to the customer. In addition, USPS also
worked with the various cards on promotional tie-ins
and sponsorships.
19
Chapter 5
State Taxes and Fees E-payment Survey Findings

This survey (included in Appendix A) was sent to the states in
October 2006 and was responded to by 37 states.
Our review of existing studies suggested a need for

further research to (1) address current and future policies regarding electronic payments, (2) identify agency
procedures for accepting and processing electronic
payments, (3) determine how states currently address
(or plan to address) transaction fees, (4) document and
quantify benefits from electronic payments, and (5)
identify effective practices for credit card acceptance
and processing. Phase 2 of this study addressed these
issues through a comprehensive survey of the states.
This survey (included in Appendix A) was sent to the
states in October 2006 and was responded to by 37
states. The responding states are shown in Figure 5.1.
5.1 Survey Overview and Methodology

A survey instrument was constructed to gather information on the acceptance and use of electronic payment and credit cards for taxes and fees. The primary
objective of the survey instrument was to investigate
five key questions:
card?
card payments?
The survey questions were written after considering
the prior studies discussed in the previous chapter. The
draft survey was reviewed by the Study Advisory ComAcceptance and Use of Electronic Payments for State Taxes and Fees
mittee, a working group

of state officials working
with the Council of State
Governments, and subsequently revised to incorporate their feedback. The final survey contained questions addressing issues in
six categories: (1) acceptance and use of electronic
payments; (2) acceptance
and use of credit and debit
cards; (3) credit and debit
card payment procedures
and charges; (4) processing procedures and cost
efficiencies; (5) effective
practices for credit card
payment of taxes and fees;
and (6) transaction and
payment volume for electronic payment. The survey
instrument is included in
Appendix A.

taxes and fees offer reduced processing
costs for government agencies and
added convenience for citizens.
The appropriate survey respondents for each state

were identified with the help of the advisory committee
and Council of State Government resources. The appropriate contact person was identified and the contact
information verified through telephone follow-up.
A letter to potential respondents was sent in early
October from the Executive Director of the Council of
State Governments to introduce the study. The survey
was distributed via email a few days later. Respondents were originally asked to respond by November
4, 2006. Twenty-four surveys had been received by the
21
Figure 5.1
States that Responded to the E-payments Survey*
Responding state
Non-responding state
*
Louisiana responded to the survey indicating that state-level data is not available.
Table 5.1
Forms of Electronic Payments Accepted
for State Fees
Licenses
or permits
Agency
user fees
end of November. The

non-responding states
were contacted and encouraged to complete the
survey. In the end, a total
of 37 states responded to
the survey by February
2007.
The results and findings

of the e-payment
Credit card
57%
41%
survey are discussed next
Debit card
32%
24%
and are organized into
Source: State Taxes and Fees E-payment Survey (Question 1).
three broad categories:
(1) acceptance and use of
electronic payments; (2)
benefits of and challenges to accepting electronic payments; and (3) policies and practices for accepting and
processing electronic payments.
ACH
51%
38%
The complete survey instrument is included in Appendix A. Survey questions were grouped into six categories: (1) acceptance and use of electronic payments;
(2) acceptance and use of credit and debit cards; (3)
credit and debit card payment procedures and charges;
(4) processing procedures and cost efficiencies; (5) effective practices for credit card payment of taxes and
fees; and (6) transaction and payment volume for electronic payment.
22
5.2 Acceptance and Use of Electronic Payments

Acceptance of Electronic Payments. Electronic payments are accepted and used for various state taxes and
fees. Of the 37 states that responded to the survey, ACH
was the most commonly accepted for business-related
taxes (business/corporate taxes and excise, sales or usage taxes), while credit cards were the most commonly
accepted form of electronic payment individual income
taxes and for fees such as licenses or permits and agency user fees (see Figure 5.2 and Table 5.1).
Tables 5.2 and 5.3 summarize survey findings regarding the dollar volume and percent of tax payment transactions for the various forms of electronic payments.
They show that credit and debit cards are not widely
used for payment of state taxes and fees. Rather, ACH
is the predominant electronic payment option used for
taxes paid by corporations and businesses. Individuals
mostly use cash and check for payment of individual
income taxes. Combining both tables also suggest that
ACH is used for large payments (smaller percentage
of transactions but larger percentage of payment dollar
volume) while cash and check are used more frequently
but for smaller payment amounts.
Acceptance of Credit Card Payments. The survey
also asked whether residents in the state could use credit or debit cards to pay state taxes or fees. Thirty-five
states (95%) provide state residents with the option of

using credit card and 20 states (54%) provide the option of paying state taxes and fees by debit card. Survey
results also indicate that states have offered credit card
payment options as far back as the 1970s. Wisconsin,
for example, began accepting credit card for payment
of some taxes and fees since the late 1970s. Other states
have only recently begun accepting credit and debit
card payments. Tennessee began accepting credit card
payments in 2006 and Michigan is expecting to begin
accepting debit card payments for licenses, permits,
and agency user fees in 2007. Figure 5.3 shows the percentage of respondents that began accepting credit or
debit card payments beginning in the 1970s.
States accept credit and debit card payments for different types of taxes (see Table 5.4). Overall, credit cards
were accepted more often than were debit cards, which
is to be expected given that debit cards have only more
recently become a mainstream payment instrument.
Table 5.5 summarizes the accepted channels and
methods of credit card payments. Credit card payments
are most accepted for internet and telephone payments.
For fees such as licenses or permits and agency user
fees, credit cards are accepted more equally across the
different payment methods and channels, compared
with tax payments where credit cards are mostly accepted for telephone and internet payments and through
third party service providers. Table 5.5 also shows that
the states accept credit card payments made through
third party service providers, ranging from 49% of the
states accepting payment through third party providers
for individual income tax payments and 23% for business or corporate taxes and agency user fees. A similar
survey question was asked regarding accepted methods and channels for debit card payments. Responses
to this question are similar to that shown in Table 5.5,
with the exception that debit cards were less extensively accepted.
Another interesting aspect of credit and debit card
payments of state taxes and fees is the average value of
payments made by credit and debit card. For the different tax categories, Figures 5.4 and 5.5 summarize the
states categorization of the average payment amount
for credit card and debit card payments, respectively.
Table 5.2
Percent of Tax Payment Dollar Volume
by Different Payment Options
ACH
Credit/
debit card
Cash
and check
Corporate/business
income tax declarations
40.0%
.2%
59.8%
Income tax
withholding transfers
64.5%
.3%
35.2%
Sales tax collection

remittance
63.3%
.3%
36.5%
2.5%
.6%
97.0%
Individual income tax
Table 5.3
Percent of Tax Payment Transactions Made
by Different Payment Options
ACH
Credit/
debit card
Cash
and check
Corporate/business
15.4%
.2%
84.4%
Income tax
48.1%
1.0%
51.1%

remittance
30.9%
1.4%
67.7%
2.8%
1.3%
95.8%
Figure 5.2
Form of Electronic Payments Accepted for State Taxes
100%
90%
80%
5.3 Benefits of Accepting Electronic Payments

There are many reasons that states cite for their acceptance of electronic payments. The e-payments survey specifically asked the state agencies to identify
the reasons for their accepting electronic payments for
state taxes and fees. These reasons and the frequencies
with which they were selected are shown in Table 5.6.
States largely agree that ACH payments expedite
deposits of payments, improve fund availability, and
reduce the cost of collecting and processing payments.
The most frequently cited reason for accepting credit
70%
60%
50%
40%
30%
20%
10%
0%
Individual Income Tax
Business/Corporate Tax
ACH
Excise, Sales or Usage Tax
Debit card
Credit Card
23
Table 5.4
Credit or Debit Card Acceptance
by Tax Category
Credit/
Cash
debit card and check
Corporate/business
Income tax
remittance
Personal payment of
sales and use tax
Property tax
Vehicle sales or
usage tax
50.0%
28.6%
53.1%
23.1%
64.7%
82.4%
35.7%
38.5%
64.3%
36.4%
36.4%
15.4%
47.4%
41.2%
Source: State Taxes and Fees E-payment Survey

(Questions 11 and 22).
Figure 5.3
Initial Acceptance of Credit or Debit Card for Tax or Fee Payment
1970s
1980s
1990s
2000s
0%
10%
20%
30%
40%
50%
60%
Debit card
70%
80%
Credit Card
Source: State Taxes and Fees E-payment Survey (Questions 10 and 21).
cards was taxpayer preferences, followed by improved

fund availability and reduced costs of payment processing. The respondent from Florida, for example,
wrote that the public expects this service and the next
generation will be totally electronic-based. The age of
pure checks or cash for most government services is in
the decline.
States often mentioned cost savings as a reason for
accepting electronic payments, particularly credit and
debit cards. Table 5.7 summarizes, for different tax categories, the types of cost savings that states have realized from their acceptance of credit and debit card
payments.
The electronic payment survey also asked states to
estimate the net savings realized from accepting credit
and debit card payments. However, the majority of the
states responded stating that cost savings data was not

available or not collected at the state level. Only eight
respondents provided actual cost savings amounts and
the estimated annual dollar amount of net savings from
accepting credit and debit card payments varied widely
across the states. The mean and median net savings
were $2.18 million and $250,000 respectively. The
breakdown of these net savings by different cost categories are summarized in Table 5.8.
The states were asked whether or not they had undertaken any studies to assess the cost savings from
accepting electronic payments for state taxes or fees.
The response to this question was overwhelmingly
negative, with only five states answering affirmatively.
Texas and Wisconsin provided links to their assessment
studies, which involved a cost-benefit study of govern-
Table 5.5
Accepted Methods of Credit Card Payment
Individual
income tax
Business/
corporate tax
Excise Sales
or usage tax
11%
9%
17%
40%
29%
6%
3%
9%
26%
20%
Payment by internet
63%
51%
63%
60%
43%
Payment by phone
49%
34%
43%
37%
29%
Payment completely by
third-party vendor
49%
23%
37%
26%
23%
Credit card not accepted
6%
23%
20%
20%
17%
Made in person (swipe)

Payment by mail
Licenses
or permits
Agency
user fees
24
ment online services3 and a guide for implementing

applications to accept credit or debit card and/or ACH
payments.4
Challenges to Accepting Electronic Payments

Most states surveyed (95%) reported accepting credit card payments for at least some taxes and fees. For
those states that did not accept credit or debit cards,
survey questions probed the reason for not accepting.
The states primarily mentioned credit card transactions fees as the primary reason for not accepting credit
cards for payment of taxes and fees. Another state also
cited the required investment in equipment and internet technology as the primary challenge to acceptance.
Table 5.9 summarizes the reasons cited by the states for
not accepting debit cards. The most commonly cited
reason, apart from the other category was that the tax
collection or remittance process was not conducive to
debit card payments.
As Table 5.9 shows, the challenges faced by states
to accepting electronic payments are two-fold. The first
challenge is that there are legal or legislative restrictions
to electronic payments. The second is the cost of accepting electronic payments. Credit card fees pose challenges
to state agencies, and there are steep initial investments
required to initiate electronic payment acceptance.
One of the initial legal barriers to accepting electronic payments is that state agencies are sometimes unable
to determine electronic payments as acceptable forms
of payments. Twenty-four of the 37 states (65%) that
responded to the survey were allowed agency or departmental discretion in determining acceptable forms
of payments, including electronic payments. In other
Table 5.6
Reasons for States Accepting Electronic Payments
ACH
Credit/
debit card
Expedite deposits of payment/

improve fund availability
97%
77%
65%
Reduce payment delinquencies
65%
60%
60%
Reduce the costs of collecting/

processing payments
92%
74%
70%
Taxpayer preference
73%
89%
65%
Other
14%
17%
10%
Source: State Taxes and Fees E-payment Survey (Questions 6, 12 and 23).
Table 5.7
Cost Savings Realized from Accepting Credit and Debit Cards,
by Tax Type
Reduced
Quicker
Reduced
delinquencies
collection and
processing costs
29%
26%
3%
Income tax withholding

transfers
17%
34%
31%
6%

remittance
23%
40%
40%
6%
26%
43%
40%
3%
Improved paper trail

and auditability........................................................... 4.7%
Tax collection/remittance
process is not conducive
for debit card payments ............................................ 11%
Lack of legislative authorization ................................ 8%
Interest income from improved

fund availability ....................................................... 11.1%
Lack of administrative approval

and support ................................................................. 3%
Reduced cost of bad checks.................................. 17.5%
Lack of consensus on who pays the

merchant fee for credit card payments ....................... 3%
Reduced costs of handling

and holding cash ........................................................ 9.3%
Reduced costs of handling checks ........................... 17.4%
Other ........................................................................ 16.6%
Other
9%
Table 5.9
Reasons for Not Accepting Debit Cards for
Payment of Taxes and Fees
Reduced costs of collecting

and processing payments ......................................... 13.3%
fund
availability
Corporate/business
Table 5.8
Breakdown of Net Savings from
Credit and Debit Card Acceptance
Increased payment collection/

reduced delinquent account balances ....................... 10.2%
Cash
and check
Not cost effective ....................................................... 3%

Lack of taxpayer interest ............................................ 3%
Other ........................................................................ 16%
Total ..........................................................................100%
25
payments.5 Fifteen states also reported having had recent (within the past two years) legislative activities
regarding acceptance of electronic payment for taxes
and fees.
Figure 5.4
Average Credit Card Payment Transaction Amounts
by Tax Category
Furthermore, states are also often required, by law,

to collect 100% of the payable tax or fee amount. For
mandatory taxes such as business or corporate taxes and
individual income taxes, 81% of the responding states
were required to collect 100% of the payable amount.
A smaller percentage24% and 10%was required
to collect the full payable amount for mandatory fees
and discretionary fees, respectively.
$1,000.01
or more
Between $500.01
and $1,000.00
$500.00 or less
0%
10%
20%
30%
40%
50%
60%

Sales tax collection remittance
Income tax withholding transfers
Corporate/business income tax declarations
Credit card payments also involve specific fees related to processing the credit card transactions. These
fees include interchange fees, authorization fees, settlement fees, chargeback fees and statement fees. Different fees that states are required to pay for accepting and
processing credit card payments are shown in Figure
5.6. Most states report paying interchange fees, either
as a percentage of the transaction amount (49%) or as a
flat fee per transaction (43%).
Figure 5.5
Average Debit Card Payment Transaction Amounts
by Tax Category
$1,000.01
or more
Between $500.01
and $1,000.00
0%
$500.00 or less
0%
0%
0%
10%
20%
30%
40%
50%
60%
70%
From a cost perspective, there are two categories of

costs that states must consider when accepting credit
card payments. The first involves the initial and ongoing costs associated with infrastructure, marketing,
staffing and training. The second involves the fees associated with credit card transactions, including merchant
fees, authorization fees, and settlement fees. The initial
and on-going costs of infrastructure, marketing, staffing, and training vary widely across the states. Table
5.10 provides examples, from 3 states, of these costs.
80%
90%
Given the many types of fees associated with accepting credit card payments, some states charge citizens
or taxpayers convenience fees and/or transaction surcharges for payments made by credit card. Table 5.11
shows, for different types of taxes, the percentages of
states that have adopted different fee or surcharge approaches. For most tax types, more states address the
problems of credit card fees by levying a fee through
the third party service provider that accepts or processes the credit card payment. If the state itself charges a
fee or surcharge, they are more likely to take the form
of percentage-based fees or surcharges.

states, acceptable forms of payments were determined

by legislation (68%) and/or administrative regulations
(46%). Therefore, without legislation or administrative
regulations, most state agencies lack the authorization
to make the decision to accept electronic payments.
In fact, 34 of the 37 states had enacted some form of
statutes or policies requiring or permitting electronic
26
5.4 Electronic Payment Policies and Practices

Third Party Service Providers
An interesting policy and practice aspect of credit
card payment (and other electronic payments) of state
taxes and fees is the use of third party service providers. Only 14% of the states reported not using a third
party provider. Table 5.12 shows that the use of these
service providers varies by the type of tax or fee. Contracts with third party providers were most common for
payment of individual income tax (71% of the states)
and the least commonly used for payment of agency
user fees (29%).
Of the states that contract with third party providers

for credit card acceptance and processing, most have an
exclusive contract with only one provider (63%), compared to 37% that have non-exclusive contracts with
multiple third party service providers. Many states cited
having a central state agency responsible for negotiating with and selecting the third party service provider.
These agencies included the department of administration or administrative services; office of the treasurer or
treasury department; department of finance or financial
services; or office of the comptroller.
The survey contained a question regarding the criteria for awarding contracts to third party service providers. This question was intended to identify those factors that states felt were most important in determining
which service provider to work with. Responses to this
question are summarized in Figure 5.7. The types of
services provided was the number one reason cited by
60% of the states, followed by the timing of fund availability, the reconciliation process, and fees or charges
levied by the service provider on the state agency or
department.
Satisfaction with Electronic Payment Programs

and Proposed Changes
Despite the newness of credit card payment programs, most states expressed satisfaction with their existing credit card payment programs (Figure 5.8). Similar responses were provided by the states when asked
about their satisfaction with the existing debit card payment programs. The median response on the satisfaction rating was 4.00 on a 5-point scale or somewhat
satisfied for both the credit card program and debit card
program.
Figure 5.6
Fees Paid by States for Accepting Credit Card Payments
Interchange fee
(percentage-based)
Interchange fee
(flat fee per transaction)
Authorization fee
Chargeback fee
Batch and/or
settlement fee
Reporting and/or
statement fee
Monthly
minimum fee
0%
10%
20%
30%
40%
50%
60%
50%
60%
Figure 5.7
Criteria Cited by States as Basis for Awarding
Third-Party Provider Contracts
Services provided
Timing of
fund availability
Reconciliation process
Fees/charges paid by
the state or department
Fees/charges paid
by the taxpayer
Because of such high satisfaction levels with these

electronic payment programs, some states are looking
to make changes to further enhance their credit and/or
Other
0%
10%
20%
30%
40%
Source: State Taxes and Fees E-payment Survey (Questions 38).
Table 5.10
Required Initial and Annual Investments in Infrastructure, Marketing, Staffing and Training:
Examples from Three States
State A
Cost Categories
Infrastructure
Initial
Investment
Annual
Investment
Initial
Investment
Annual
Investment
Initial
Investment
Annual
Investment
$ 50,000
$5,000
$ 50,000
$ 5,000
$200,000
$ 50,000
150,000
25,000
60,000
50,000
50,000
30,000
100,000
70,000
25,000
10,000
5,000
1,000
100,000
40,000
$125,000
$45,000
$555,000
$176,000
Marketing
Staff
Training
State C
State B
5,000
3,000
Other
1,000
1,000
Total
$114,000
$61,000
27
debit card payment programs. Eighteen states

mentioned having future plans to change policies or procedures for accepting credit card
payments and twelve states mentioned plans to
change policies or procedures related to debit
card payments.
Table 5.11
States Use of Convenience Fees or Transaction Surcharges
No fee
or surcharge
Fee through
third-party
provider
Percentagebased fee
or surcharge
Fixed dollar
amount fee
or surcharge
Corporate/business
14%
20%
17%
3%
Income tax withholding

transfers
14%
26%
17%
3%

remittance
11%
23%
29%
0%
11%
37%
23%
3%
When asked to specify the proposed changes, most states mentioned expanding their current payment programs to accept credit or debit
card payments for additional taxes and fees.
They also mentioned proposed changes to their
policies regarding convenience fees and transaction surcharges. Some states are looking to
make changes to policies and procedures related to the use of third party service providers.
Table 5.13 summarizes the states responses
regarding proposed changes to their card acceptance policies or procedures.
As Table 5.13 shows, 9% of states were

considering eliminating flat-rate fees or surcharges and 6% were considering eliminating
percentage-based fees or surcharges associated with their credit card programs. However,
Figure 5.9 shows that states perceive taxpayers
to be mostly willing to pay a fee or surcharge
for the opportunity to use credit cards to pay
state taxes or fees.
Table 5.12
States Use of Third-Party Provider by Tax Type
Individual
income tax
Use of third-party
service provider(s)
Business/
corporate tax
Excise, sales
or usage tax
Licenses
or permits
51%
63%
40%
71%
Agency
user fees
29%
Figure 5.8
States Satisfaction with Existing Credit Card
Payment Programs
Extremely
satisfied
Figure 5.9
States Perceptions of Taxpayer Willingness to
Pay Convenience Fees or Transaction Surcharges
Extremely
dissatisfied Somewhat
dissatisfied
6%
Extremely
willing
7%
6%
Somewhat
willing
24%
Extremely
unwilling
7%
Somewhat
unwilling
17%
28%
Satisfied
35%
Somewhat
satisfied
Willing
29%
41%
28
Policies and Procedures
1. Marketing the credit and/or debit card payment

option and educating citizens and taxpayers on the
availability and use of these payment options.
Given the importance of fees on both the decision

to accept credit card payments and subsequently the
adoption of policies regarding convenience fees and
transaction surcharges, the survey also focused on
how state agencies dealt with payment of merchant
fees and/or bank fees. Specifically, one survey question asked states to identify the funding source they use
for paying merchant fees and/or bank fees. Most states
use convenience fees or transaction surcharges to offset
the fees associated with credit card transactions. Others use appropriated funds or compensating balances.
Others primarily absorb credit card fees as part of the
cost of doing business. Many states use a combination
of funding sources. Florida for example, responded that
primarily, agencies absorb the costs; however some do
appropriate funds in their annual budgets. A few agencies charge a convenience fee to cover the cost of the
program.
2. Refraining from charging convenience fees or

transaction surcharges. Some states perceived
convenience fees or surcharges as detracting from
the use of credit and debit cards. Avoiding convenience fees and surcharges increases citizens
use of the credit and debit card payment options.
3. Using a third party service provider, and especially having one primary contract with a third party
service provider, has also been key to some states
successfully launching their credit and debit card
programs.
4. Having a standardized payment processing system or platform contributed to the success of some
credit and debit card payment programs.
5. Providing citizens and taxpayers with the option
to pay for government services online using credit
or debit cards can also increase the use of credit
and debit card payment programs.
The final point of emphasis of the survey and this

study in general was to identify effective policies and
practices for the acceptance of credit or debit cards for
payment of state taxes and fees. Two questions were included in the survey to determine what the states felt were
critical factors contributing to the success of their credit
and debit card programs. The specific questions were:
1. Please explain any policies or practices that have
contributed to the success of the credit/debit card
program for payment of state taxes and fees.
2. Please describe any insights regarding the credit/
debit card program that, if adopted, would enhance
the efficiency, effectiveness, and other benefits of
the credit/debit card program.
Responses to the first question revolved around six
basic ideas. These ideas, in order of most commonly
mentioned, are:
6. Finally, making credit and debit card payment options available across a variety of taxes and fees
is key to having a successful electronic payment
programs.
When asked to describe any insights that might
enhance their credit or debit card programs, respondents primarily offered ideas related to credit card
fees. These included removing convenience fees and
surcharges, modifying policies regarding convenience
fees, working with credit card associations to modify
interchange fees, and adopting statewide contracts with
service providers to leverage transaction volumes and
reduce fees.
Table 5.13
Proposed Changes to Credit and Debit Card Policies or Procedures
Credit card
Accepting credit/debit card payments for additional taxes and fees
Debit card
46%
55%
9%
6%
3%
3%
10%
5%
5%
5%
Charges to third-party service provider

Replacing the current third-party service provider
Initiating use of a third-party service provider
Eliminating use of a third-party service provider
11%
3%
3%
10%
10%
0%
Other
14%
0%
Changes to convenience fee or transaction surcharge

Eliminating fixed dollar amount convenience fee or transaction
Eliminating percentage-based convenience fee or transaction surcharge
Replacing percentage-based convenience fee with fixed dollar amount fee
Replacing fixed dollar amount convenience fee with percentage-based fee
Source: State Taxes and Fees E-payment Survey (Questions 1 and 30).
29
Chapter 6
Summary and Conclusions

This survey (included in Appendix A) was sent to the states in
October 2006 and was responded to by 37 states.
There has been a rapid expansion of electronic payments in both the retail and business sectors as well as
by federal, state and local governments. The rapid replacement of traditional cash and check payments by
electronic means including ACH, and credit and debit
cards has been driven by citizen and consumer preferences as well as by the benefits realized by governments and business firms and corporations. Among the
customer or taxpayer benefits associated with electronic payments are convenience, flexibility, security, and
efficiency of these payment options. Government and
business benefits of electronic payment methods and
processes are reducing processing costs, accelerating
funds availability and reducing delinquent payments.
The increased utilization of the various forms of
electronic payments as accepted payment mechanisms
for state taxes and fees is a rapidly emerging trend for
state governments. The use of electronic payments
provides cost savings and efficiency-based benefits
for state governments. These emerging payment options are also well received by citizens and taxpayers.
This study provides an update on current state policies and practices regarding electronic payments and
identifies issues the states are advancing as innovative
approaches to encourage greater use of electronic payments. Finally, the results of the current research may
provide insights and guidance to state policy makers
and administrators who may be contemplating accepting electronic payment mechanisms or expanding use
of these efficient payment processes.
The advantages of electronic payments for citizens
and taxpayers, combined with the cost and efficiency
advantages realized by businesses and governments,
has led to a rapid expansion of electronic payment
systems. In fact, the economy-wide shift towards elecAcceptance and Use of Electronic Payments for State Taxes and Fees
tronic payments continues

to gain momentum. In December 2003, the Federal
Reserve announced that epayment transactions had,
for the first time, exceeded
the number of check payments (NECCC 2005). For
the year 2003, e-payment
transactions (credit cards,
debit cards, and ACH
transactions) totaled 44.5
billion, compared to 36.7
billion check transactions.
In 2000, research by the
Federal Reserve showed
check payments exceeding electronic transactions
by 42 billion to 31 billion.
This change represents an
average annual growth rate
for electronic payments of
13.2% from 2000 to 2003.

taxes and fees offer reduced processing
costs for government agencies and
added convenience for citizens.
Given these trends, this study focused on determining how states were reacting to these process changes
including (1) policies regarding the acceptance of electronic payments and the enactment of policies to encourage expanded use of such payments; (2) processes
to manage financial issues associated with electronic
payments including convenience fees; and (3) the identification of best practices employed by state governments to maximize the benefits of electronic tax and
fee payments.
The study had two major components including
(1) a review and analysis of limited previous studies
31
of government related tax and fee payment processes

and policies; and (2) a national 50 state survey of current electronic tax and fee payment policies and processes. In the first phase of this study, previous studies
indicated that citizens will take advantage of electronic
payment options if state government agencies accept
electronic payments and establish policies and procedures which encourage and facilitate such payments.
Second, there are several sources of cost savings resulting from accepting electronic payments, including
reducing processing costs, accelerating funds availability, and reducing delinquent payments. Other studies
and research suggested that further expansion of the
use of electronic payments would be facilitated if new
approaches could be found to manage the transactions
costs associated with electronic payments. Currently,
states have two principal options for addressing transaction fees, including direct state payment for such fees
or passing the fees to taxpayers via a convenience fee
or surcharge (directly or through a third party). Because states are typically required to collect 100% of
the taxes owed, electronic transaction fees may have to
be paid by the taxpayer while fees for services (such as
licenses, permits and registrations) may be absorbed by
the respective state agency.
With the support of CSG and an advisory committee comprised of state government officials, the second
phase of this study involved the design and administration of a national survey of current state government
electronic tax and fee payment policies and procedures.
Thirty-seven states responded to the survey which focused on the several key issues:
card?
card payments?
The major findings related to these questions are
summarized next.
How extensive is the acceptance of electronic payments

for state taxes and fees?
Electronic payments are accepted for various state
taxes and fees. ACH is the most commonly accepted
for business-related taxes (86% of responding states
accept ACH for business/corporate taxes and 92%
accept ACH for excise, sales or usage taxes). Credit
cards are the most commonly accepted form of electronic payment for individual income taxes (78% of the
32
states) and for fees such as licenses or permits (57%)

and agency user fees (41%).
Which taxes and fees are paid by different forms of electronic payments?
Credit and debit cards are not yet widely used for
payment of taxes and feescomprising typically less
than 1% of payment dollar volumes and less than 1.5%
of the total number of payment transactions. Instead,
ACH is the predominantly used electronic medium for
payment of state taxes and fees, especially by corporations and businesses.
What benefits are being realized by state governments

as a result of taxpayer and citizen use of electronic payments rather than payments in traditional forms?
The states mentioned cost savings as one reason for
accepting electronic payments, and particularly credit
and debit cards. These cost savings largely result from
reduced collection and processing costsincluding reduced costs of bad checks, reduced costs of handling
cash and checks, and reduced overall costs of collecting and processing payments. In addition, electronic
payments also resulted in savings due to improved fund
availability.
What are the policy and process issues associated with

receiving electronic payments, including the payment
of transactions fees?
There are two primary policy and process issues
related to states accepting electronic payments. First,
there are legal or legislative restrictions that states must
address before they can accept any form of electronic payments. Thirty-four of the 37 states had enacted
some form of statutes or policies requiring or permitting electronic payments, with 15 also reporting having
had recent legislative activities regarding acceptance
of electronic payments. States are also often required,
by law, to collect the full amount of the payable tax
or fee amount. For mandatory taxes such as individual
income taxes, 81% of states were required to collect
100% of the payable amount.
Second, states must address policies and practices
associated with the costs of accepting electronic payments. There are two categories of these costs: (1) the
initial and on-going costs associated with infrastructure, marketing, staffing and training; and (2) fees associated with credit card transactions, including merchant fees, authorization fees, chargeback fees, and
settlement fees.
States have adopted two approaches to addressing
both the legal requirements that states collect the full
payable tax or fee amount and the transaction costs
for accepting electronic payments, especially credit

and debit card payments. The first approach involves
charging taxpayers a convenience fee or transaction
surcharge for paying by credit or debit card. In the survey, only less than 15% of the states reported not having any convenience fees or transaction surcharges in
place. The second approach involves using third party
service providers to accept and/or process credit and
debit card transactions. This approach is as prevalent as
the first, as only 14% of the states reported not using a
third party service provider. Most states had exclusive
contracts with only one service provider (63%), compared to 37% states that had non-exclusive contracts
with multiple service providers.
actually used electronic payment options to pay for

government services. More importantly, this research
identified key issues related to electronic payments and
determined effective policies and practices that may be
of use to state (and possibly local) governments as they
consider (1) introducing electronic payment options
for paying taxes or fees; or (2) expanding or improving
their existing electronic payment programs.
What changes in electronic payment policies are being

considered?
Most states were satisfied with their existing credit and debit card payment programs. However, some
states are looking to make changes to these programs.
Mostly, the changes in policies being considered involved expanding the programs to accept credit or debit card payments for additional taxes and fees. Some
states are also considering changes to their policies regarding convenience fees and transaction surcharges,
and the use of third party service providers.
Endnotes
1
See NACHA News Release dated April 16, 2007: NACHA Reports Nearly 16 Billion ACH Payments in 2006.
Available on the Web: http://www.nacha.org/News/news/
pressreleases/207/Pr041607/pr041607.htm
2
PINless debit is a debit card transaction that has only recently been introduced. PINless debit transactions are debit
card transactions conducted online without a personal identification number.
3
Are there policies and procedures which might be considered best practices that might be adopted by other
states?
The survey determined six basic policies and practices that the states identified as best or effective
policies. These include: (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 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 taxes and fees.
The Texas Cost-Benefit Study of Online Services was prepared by the Department of Information Resources for the
TexasOnline Authority in 2003. This study is available on the
Web: http://www.dir.state.tx.us/pubs/txo/2003costbenefit.pdf.
4
The State of Wisconsin eReceipting Guide details a 2002
cost study by the State Controllers Office of eReceipting
practices (acceptance of payments for taxes and fees by credit
card, PINless debit card and ACH) in three state agencies:
Health and Family Services, Natural Resources, and Agriculture. This study is available ont he Web: http://www.doa.
state.wi.us/docs_view2.asp?docid=1062.
5
Colorado and New Jersey are the two states that have not
enacted any statutes or policies regarding acceptance of electronic payments.
The statistics presented in Chapter 2 and survey findings discussed in Chapter 5 clearly indicate that there is
a growing trend toward increased acceptance and use of
different forms of electronic payments. It comes as no
surprise, therefore, that the issue has caught the attention
of state government officials and administrators, alike.
This report was intended to provide an overview of
electronic payment policies and processes. Specifically,
it examined the extent to which state government agencies accept electronic paymentsparticularly credit
and debit cardsand also the extent to which citizens
33
References
Beyer, Leslie. 1999. A stamp of approval for the Post Office. Credit Card Management. 12(1): 121124.
Mitchell, Richard. 2004. Rumblings from the public sector. Credit Card Management. 17(2): 1822.
Chakravorti, Sujit. 2003. Theory of credit card networks:

A survey of the literature. Review of Network Economics
2(2): 5068.
National Automated Clearing House Association (NACHA). 2005. Federal Reserve studies confirm electronic payments exceed check payments for the first time. Electronic
Payments Journal 4(3): 56. http://www.nacha.org/newsletter/Vol4%20Issue3%20Jan!Feb.pdf
Committee on Payment and Settlement Systems (CPSS).

2006. Statistics of Payment and Settlement Systems in Selected Countries: Figures for 2005 (Preliminary Release).
CPSS Publications No. 75. November 2006. Basel, Switzerland: Bank for International Settlements.
Accessed March 29, 2007. http://www.bis.org/publ/cpss
75.pdf
-----. 2003. Payment and Settlement Systems in Selected
Countries (Red Book). CPSS Publications No. 53. April 2003.
Basel, Switzerland: Bank for International Settlements.
Accessed March 29, 2007. http://www.bis.org/publ/cpss
53.pdf
Dove Consulting. 2004. 2004 Electronic Payments Study:
Study Methods and Results. Report to the Retail Payments
Office at the Federal Reserve Bank of Atlanta. Accessed
March 29, 2007. http://www.frbservices.org/Retail/pdf/2004
EPStudy.pdf
Federation of Tax Administrators (FTA). 2003. Results of
2003 FTA Credit Card Survey. FTA Bulletin B-27/03. Accessed October 9, 2006. http://www.taxadmin.org/fta/rate/b2703.html
Gerdes, Geoffrey R., Jack K. Walton II, May X. Liu &
Darrel W. Parke. 2005. Trends in the use of payment instruments in the United States. Federal Reserve Bulletin. Spring:
180201.
Gerdes, Geoffrey R. & Jack K. Walton II. 2002. The use of
checks and other non-cash payment instruments in the United
States. Federal Reserve Bulletin. Summer: 360374.
Grant, Nancy. 2004. eCheck boosts ACH consumer debit
volume. Electronic Payments Journal 3(7). Accessed February
18, 2007. http://www.nacha.org/newsletter/Vol3%20Issue7%
20Nov!Dec.pdf
Green, Jeffrey. 1997. A stamp of approval: Retailers might
be a hard sell for on-line debit, but not the U.S. Postal Service. Credit Card Management. 10(5): 2021.
Kuhn, Patricia. 1992. Charge it: Credit and debit cards come
to the public sector. Government Finance Review. 8(3): 1316.
Michel, R. Gregory & Ellen M. Carter. 1996. Analyzing the
costs of credit cards. Government Finance Review June: 6163.
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National Center for State Courts (NCSC). n.d. Are Courts

Accepting Payments of Fines and Costs via Credit Cards?
Accessed October 9, 2006. www.ncsconline.org/WC/FAQs/
ColFinFAQ.htm
National Electronic Commerce Coordinating Council
(NECCC). 2005. E-Payments Primer (3rd Edition). Lexington, KY: National Electronic Commerce Coordinating Council. Accessed February 18, 2007. http://www.ec3.org/Downloads/2005/e-payments.pdf
-----. 2002. Electronic Payments Primer (2nd Edition).
Lexington, KY: National Electronic Commerce Coordinating Council. Accessed February 18, 2007. http://www.ec3.
org/Downloads/2002/epayments_primer.pdf
Nelson, Bill. 2004. Inside the NumbersHow Costs/
Benefits Impact the Growth of ACH Payments. Electronic
Payments Journal 3(7): 12. Accessed April 23, 2007. http://
www.nacha.org/newsletter/Vol3%20Issue7%20Nov!Dec.pdf
Osborne, David & Peter Hutchinson. 2004. The Price of
Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis. New York: Basic Books.
Strover, Sharon & Joseph D. Straubhaar. 2000a. Assessing citizen utilization of e-Government services: A survey of
issues and attitudes in Texas. Government Finance Review.
October: 2731.
-----. 2000b. E-Government Services and Computer and
Internet Use in Texas: A Report from the Telecommunications and Information Policy Institute. Accessed October 9,
2006. www.utexas.edu/research/tipi/reports2/dir_final3.pdf
U.S. General Accounting Office (GAO). 1994. U.S. Postal
Service Proposed Policy to Accept Credit and Debit Cards
Makes Sense Conceptually. GAO Report GAO/GGD-94-154.
Report to the Chairman, Subcommittee on Federal Services,
Post Office and Civil Service, Committee on Governmental
Affairs, U.S. Senate.
Webster, Mark K. 2005. Innovative Payment Techniques.
Presented at the 9th Annual Conference of the NECCC. November. Boston. Accessed March 29, 2007. http://www.ec3.
org/Conferences/2005/presentations/CS15%20Webster.zip
Appendix A: Survey Instrument

The Council of State Governments Survey of Electronic Payments of State Taxes and Fees
September 2006
This survey is part of a study sponsored by the Council of State Governments Financial Services Working
Group of credit card and other electronic media for payment of state taxes and fees. In this survey, we request
current data and information on the acceptance, use, and processing of state tax and fee payments via credit card
and other electronic media. Your responses will help us inform state policy makers and administrators about electronic tax and fee payment policies and practices as well as the financial implications of these alternative payment
media. We emphasize that we are not interested in your states use of credit card and electronic media for procurement purposeswe are interested only in your states acceptance of electronic payments of state taxes and fees.
This survey is divided into sections which focus on (1) acceptance and use of electronic payments, (2) acceptance and use of credit and debit cards, (3) credit and debit card payment procedures and charges, (4) processing
procedures and cost efficiencies, (5) effective practices for credit card payment of taxes and fees, and (6) data
request on electronic payment transactions.
The questions have been structured so that you can respond for your states overall policies and practices. We
encourage you to answer as many questions as you can and request that you solicit input from others as needed
to complete the survey. Most questions include multiple response options to reduce the time and effort required
to respond to this survey. As the list of such possible responses may not be exhaustive, we have provided the
opportunity to indicate your states specific policies by marking the other response. In those cases, we would
appreciate if you could clarify that response in the space provided.
The information you supply will provide valuable insights into the use of credit cards and other electronic tax
and fee payment processes and will be beneficial to state legislators and administrators contemplating the use or
expanded use of alternative payment mechanisms.
If you have any questions regarding the survey or need assistance with responding to the survey, please contact
Dwight Denison at dwight.denison@uky.edu.
Thank you for participating in this survey.
35
Glossary of Terms
ACH (Automated Clearing House): ACH is a nationwide electronic funds transfer system that provides for
inter-bank (bank-to-bank) clearing of electronic payments for participating financial institutions. In the context of
this survey, ACH includes e-check transactions.
Convenience Fee or Transaction Surcharge: Convenience fees or transaction surcharges are fees charged by
the state agency or third party service provider for accepting an electronic payment, especially payments using
credit/debit card. This fee or surcharge is in addition to the payment amount due.
Credit Card: A credit card is a plastic card bearing an account number assigned to a cardholder with a credit
limit that can be used to pay taxes or fees on credit, for which a cardholder is subsequently billed by an issuer for
repayment of the credit extended, at once or on an installment basis.
Debit Card: A debit card is a plastic card with which a customer may withdraw funds on deposit in the customers account. A debit card transaction pays the merchant (in this case the state) by withdrawing funds already
on deposit in the buyers account, as opposed to a credit card transaction in which funds are loaned to the buyer
by the card issuer.
Third Party Service Provider: A third party service provider is a vendor, contractor or bank that accepts
and/or processes credit/debit card payment transactions for a government department or agency. This third party
provides a variety of services including billing, reporting, customer service, authorization and settlement.
36
Respondent Identity
Responding State: _____________________________________________________________________________________
Department Name: ____________________________________________________________________________________
Contact Information:
Name: _______________________________________________________________________________________
Title: ________________________________________________________________________________________
Mailing Address: ______________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
E-mail Address: _______________________________________________________________________________
Phone Number: ________________________________________________________________________________
37
I. Acceptance and Use of Electronic Payments

1. What forms of payments does your state accept for taxes or fees? (Check all that apply)
ACH (automated clearing house)

Cash
Credit Card
Debit Card
Check
Individual
Income Tax
Business/
Corporate Tax
Excise, Sales
or Usage Tax
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Licenses
or Permits
o
o
o
o
o
Agency
User Fees
o
o
o
o
o
2. How are the acceptable forms of payment determined?
o Administrative regulations
o Agency or department discretion
o Legislation
o Other ______________________________________________________________________________________________
3. For which of the following tax or fee payments is your state required to collect 100% of the payable amount? (Check all that apply)
o Mandatory taxes
o Mandatory fees
o Discretionary fees
o Other ______________________________________________________________________________________________
4. Has your state enacted any statutes or policies requiring or permitting electronic payments?
o No
o Yes. Please describe.
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
5. Has there been any recent (within the last 2 years) legislative activity with regard to the acceptance of electronic payment media
for state taxes and fees?
o No
o Yes. Please describe.
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
38
Acceptance and Use of ACH

6. What are the reasons for accepting ACH payments? (Check all that apply)
o Not applicable (do not accept ACH payment)

o Expedite deposits of payments/improve fund availability
o Reduce payment delinquencies
o Reduce the costs of collecting and processing payments
o Taxpayer preference
o Other ______________________________________________________________________________________________
7. If your state does not accept ACH payments, why not? (Check all that apply)
o Not applicable (ACH payment accepted)

o Lack of administrative approval and support
o Lack of consensus on who pays the transaction costs for ACH payments
o Lack of legislative authorization
o Lack of taxpayer interest
o Not cost effective
o Tax collection/remittance process is not conducive for ACH payments
o Other ______________________________________________________________________________________________
8. Does your state have a payment amount ceiling or limit beyond which only ACH payments are accepted?
o Not applicable (do not accept ACH payment)

o No
o Yes. What is this limit? $______
39
2. Acceptance and Use of Credit and Debit Cards

Acceptance of Credit Cards
9. May residents in your state use credit cards for the payment of state taxes and fees, including through the use of third party service
providers?
o No
o Yes
10. In what year did your state first begin accepting credit card payments? _________________
o Do not accept credit card payment

11. Does your state accept credit card payments for the following state taxes or fees? (Check all that apply)
Yes
No
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Tax or revenue collection from corporate/institutional payments

Alcohol or liquor license
Other excise tax ________________________________________
Other _________________________________________________
Tax or revenue collection from individual payments
Driver licensing fee
Fishing or hunting license
Park admission and recreational fee
Park lodging fee
Personal payment of sales and use tax
Property tax
Vehicle registration fee
Vehicle sales or usage tax
Other _________________________________________________
12. What are the reasons for your states accepting credit card payments for taxes and fees? (Check all that apply)
o Not applicable (credit card not accepted)

o Other ______________________________________________________________________________________________
40
13. If your state does not accept credit card payments, why not? (Check all that apply)
o Not applicable (credit card accepted)

o Lack of consensus on who pays the merchant fee for credit card payments
o Tax collection/remittance process is not conducive for credit card payments
o Other ______________________________________________________________________________________________
14. What methods of credit card payment does your state accept for the following taxes and fees? (Check all that apply)
Individual
Income Tax
Business/
Corporate Tax
Excise, Sales
or Usage Tax
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Payment made in person

(credit card swipe)
Credit card payment by mail
Credit card payment by internet
Credit card payment by telephone
Payment handled completely
by third party vendor
Credit card not accepted
Licenses
or Permits
Agency
User Fees
15. Which of the following transaction amounts characterize the average credit card payment received for each of the tax or revenue
categories below?
Not applicable
(credit card
$100.00
not accepted)
or less
Average Transaction Amount

Between
$100.01 and $500.00
Between
$500.01 and $1,000.00
$1,000.01
or more
Tax or revenue collection from corporate/

institutional payments
Other excise tax _____________________
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Tax or revenue collection from

individual payments
Park lodging fee
Property tax
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
41
16. For the following taxes or fees, please estimate the percentage of total transactions where credit cards are used for payment.
Not applicable
(credit card
not accepted)
Estimated percent
or transactions

Other excise tax ________________________________________
Other _________________________________________________
o
o
o
o
o
o
____________
o
o
o
o
o
o
o
o
o
o
____________
____________
____________
____________
____________
____________

Park lodging fee
Property tax
Other _________________________________________________
____________
____________
____________
____________
____________
____________
____________
____________
____________
17. On a scale from 1 to 5, with 1 being extremely dissatisfied and 5 being extremely satisfied, how would you rate your states overall
satisfaction with the existing credit card payment program for state taxes and fees?
Extremely
Dissatisfied
Somewhat
Dissatisfied
Satisfied
Somewhat
Satisfied
Extremely
Satisfied
Please explain. _________________________________________________________________________________________

______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
18. Does your state have any future plans to change policies or procedures for acceptance of credit card payments for taxes and fees?
o No
o Yes
42
19. What is the nature of the changes being considered? (Check all that apply)
o No planned changes
o Accepting credit card payments for additional taxes and fees
o Eliminating the percentage-based convenience fee or transaction surcharge
o Eliminating the fixed dollar amount convenience fee or transaction surcharge
o Replacing the percentage-based convenience fee or transaction surcharge with a fixed dollar amount fee or surcharge
o Replacing the fixed dollar amount convenience fee or transaction surcharge with a percentage-based fee or surcharge
o Eliminating use of a third party service provider
o Replacing the current third party service provider with another
o Initiating use of a third party service provider
o Other ______________________________________________________________________________________________
Please describe the changes being considered. ________________________________________________________________
______________________________________________________________________________________________________
Acceptance of Debit Cards

20. May residents in your state use debit cards for the payment of state taxes and fees, including through the use of third party service
providers?
o No
o Yes
21. In what year did your state first begin accepting debit card payments?
____________
o Do not accept debit card payment

22. Does your state accept debit card payments for the following state taxes or fees? (Check all that apply)
Yes
No
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o

Other excise tax ________________________________________
Other _________________________________________________
Park lodging fee
Property tax
Other _________________________________________________
43
23. What are the reasons for your states accepting debit card payments for taxes and fees? (Check all that apply)
o Debit card not accepted

o Other ______________________________________________________________________________________________
24. If your state does not accept debit card payments, why not? (Check all that apply)
o Debit card accepted

o Lack of consensus on who pays the merchant fee for debit card payments
o Tax collection/remittance process is not conducive for debit card payments
o Other ______________________________________________________________________________________________
25. What methods of debit card payment does your state accept for the following taxes and fees? (Check all that apply)
Individual
Income Tax
Business/
Corporate Tax
Excise, Sales
or Usage Tax
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Payment made in person

(debit card swipe)
Debit card payment by mail
Debit card payment by internet
Debit card payment by telephone
Payment handled completely
by third party vendor
Debit card not accepted
Licenses
or Permits
Agency
User Fees
26. Which of the following transaction amounts characterize the average debit card payment received for each of the tax or revenue
categories below?
Not applicable
(credit card
$100.00
not accepted)
or less

Other excise tax _____________________
Other ______________________________
44
o
o
o
o
o
o
o
o
o
o
o
o
Average Transaction Amount

Between
$100.01 and $500.00
o
o
o
o
o
o
Between
$500.01 and $1,000.00
o
o
o
o
o
o
$1,000.01
or more
o
o
o
o
o
o

individual payments
Park lodging fee
Property tax
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
27. Please estimate the percentage of total transactions where debit cards are used for payment of the following taxes or fees.
Not applicable
(debit card
not accepted)
Estimated percent
or transactions

Other excise tax ________________________________________
Other _________________________________________________
o
o
o
o
o
o
____________
o
o
o
o
o
o
o
o
o
o
____________
____________
____________
____________
____________
____________

Park lodging fee
Property tax
Other _________________________________________________
____________
____________
____________
____________
____________
____________
____________
____________
____________
28. On a scale from 1 to 5, with 1 being extremely dissatisfied and 5 being extremely satisfied, how would you rate your states overall
satisfaction with the existing debit card payment program for taxes and fees?
Extremely
Dissatisfied
Somewhat
Dissatisfied
Satisfied
Somewhat
Satisfied
Extremely
Satisfied
Please explain. _________________________________________________________________________________________

______________________________________________________________________________________________________
45
29. Does your state have any future plans to change policies or procedures for acceptance of debit card payments for state taxes and
fees?
o No
o Yes
30. What is the nature of the changes being considered? (Check all that apply)
o No planned changes
o Accepting debit card payments for additional taxes and fees
o Eliminating the percentage-based convenience fee or transaction surcharge
o Eliminating the fixed dollar amount convenience fee or transaction surcharge
o Replacing the percentage-based convenience fee or transaction surcharge with a fixed dollar amount fee or surcharge
o Replacing the fixed dollar amount convenience fee or transaction surcharge with a percentage-based fee or surcharge
o Eliminating use of a third party service provider
o Replacing the current third party service provider with another
o Initiating use of a third party service provider
o Other ______________________________________________________________________________________________
Please describe the changes being considered. ________________________________________________________________
______________________________________________________________________________________________________
Differences in Acceptance of Credit and Debit Cards

31. If your state accepts both credit and debit cards, please explain any differences in policies regarding the acceptance of credit and
debit cards.
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
32. Please discuss differences between the processing of credit and debit cards. For example, are there differences in terms of processing procedures, costs, reconciliation, etc?
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
33. Which of the following characterize differences between the processing of credit card and debit card payments for taxes and fees?
(Check all that apply)
o Credit and debit card not accepted

o Debit card accepted only for point-of-sale transactions
o Debit card accepted for PIN-based authorization only
o Payment processing
o Processing costs
o Reconciliation
o Settlement/collection from the bank
o Other ______________________________________________________________________________________________
46
3. Credit Card Payment Procedures and Charges

Use of Third Party Service Provider
Third party service providers include those vendors, contractors or banks that accept or process credit card payment transactions on
behalf of a state department or agency.
34. Does your state use a third party service provider to accept and handle the processing of credit card transactions for payment of
state taxes and fees?
No
Yes
Not applicable
Individual
Income Tax
Business/
Corporate Tax
Excise, Sales
or Usage Tax
o
o
o
o
o
o
o
o
o
Licenses
or Permits
o
o
o
Agency
User Fees
o
o
o
35. Does your state have an exclusive contract with a single third party service provider or does your state contract with multiple service providers?
o Do not use third party service provider

o Exclusive contract with only one third party service provider
o Non-exclusive contract with multiple service providers
36. How frequently does your state negotiate contracts with the third party service provider(s)?

o Every year
o Every two years
o Every three years
o Every four years or more
o Other ______________________________________________________________________________________________
37. Is a central state agency (e.g. Administrative Division or Department of General Services) responsible for negotiating with and
selecting the third party service provider(s)?

o No
o Yes. Please identify this agency. _________________________________________________________________________
38. What criteria does your state use in negotiating and awarding the contract to the third party service provider? (Check all that apply)
o Do not user third party service provider

o Fees and charges paid by the state or department
o Fees and charges paid by the taxpayer
o Timing of fund availability
o Reconciliation process
o Services provided (quality or range of services, etc.)
o Other ______________________________________________________________________________________________
47
39. If your state uses a third party service provider, how do you ensure privacy and security while facilitating information exchanges
with these service providers? For example, how does your state protect sensitive personal information and tax data while providing
access to this data and information?
______________________________________________________________________________________________________
______________________________________________________________________________________________________
Costs Associated with Accepting Credit Card Payments

40. Accepting credit card payments for state taxes and fees requires certain investment in training, staffing, and infrastructure. For
each of the following cost categories, please estimate the dollar costs required to enable your state to accept credit/debit card payments.
Cost Categories
Initial
Investment ($)
Annual
Investment ($)
Infrastructure
____________
_____________
____________
Marketing
____________
_____________
____________
Staff
____________
_____________
____________
Training
____________
_____________
____________
Other ___________________________________________
____________
_____________
____________
Total
____________
_____________
____________
41. How does your state acquire the necessary peripheral hardware to process electronic payments? For example, do you lease or
purchase the PIN-pad for debit card transactions?
o Lease hardware
o Purchase hardware
o Hardware provided by vendor on a fee basis
o Other ______________________________________________________________________________________________
42. The following types of fees are typically associated with accepting credit/debit card payments. Which of the following costs or
charges are paid by your state?
o Authorization fee
o Batch and/or settlement fee
o Chargeback fee
o Merchant discount fee (interchange fee as a percentage of the transaction amount)
o Monthly minimum fee
o Reporting and/or statement fee
o Transaction fee (interchange fee as a flat rate per transaction)
o Other ______________________________________________________________________________________________
43. What is the funding source through which your state reimburses merchant fees or bank fees associated with processing credit/debit
card payments? For example, do you use a compensating balance account, appropriated funds, or charge a taxpayer convenience
fee or transaction surcharge?
______________________________________________________________________________________________________
______________________________________________________________________________________________________
48
44. Has your state recently negotiated innovative contract provisions with your bank or third party service provider regarding merchant
fees and/or other costs associated with accepting credit/debit card payments?
o No
o Yes
Please explain. _________________________________________________________________________________________
Convenience Fees and Transaction Surcharges

45. For the following taxes or fees, does your state currently charge convenience fees or transaction surcharges for payments made by
credit/debit card? If yes, please indicate the fee or surcharge amount or percent in the last column.
No fee
or surcharge
Fee or surcharge
through thirdparty provider
Percentagebased fee
or surcharge
Fixed dollar
amount fee
Fee or
or surcharge surcharge amount

Other excise tax _____________________
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
___________
___________
___________
___________
___________
___________

individual payments
Park lodging fee
Property tax
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
___________
___________
___________
___________
___________
___________
___________
___________
___________
___________
46. In your opinion, on a scale from 1 to 5, with 1 being extremely unwilling and 5 being extremely willing, how do taxpayers feel
about paying a convenience fee or transaction surcharge?
Extremely
Unwilling
Somewhat
Unwilling
Willing
Somewhat
Willing
Extremely
Willing
47. Please elaborate on any support for or opposition to convenience fees or transaction surcharges for credit/debit card payments. Has
your state had any experiences introducing or eliminating these fees or surcharges?
______________________________________________________________________________________________________
49
4. Processing Procedures and Cost Efficiencies

48. What types of cost savings has your state realized from acceptance of credit/debit card payments for taxes or fees? (Check all that
apply)
Reduced
delinquencies
Reduced collection
and processing costs
Quicker fund
availability
Other*
(please identify below)

Other excise tax _____________________
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o

individual payments
Park lodging fee
Property tax
Other ______________________________
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
For other, please explain. _________________________________________________________________________________
49. Please indicate the estimated annual dollar amount of net savings for your state from accepting credit/debit card payments for taxes
or fees? $_________________________________
50. Please estimate the net savings from question 47 into the following categories. (Must add up to 100%).
Improved paper trail and auditability
________%
Increased payment collection and/

or reduced delinquent account balances
________%
Interest income from improved fund availability
________%
Reduced costs of bad checks
________%
Reduced costs of collecting and processing payments
________%
Reduced costs of handling and holding cash
________%
Reduced costs of handling check
________%
Other _____________________________________
________%
Total
100%
51. Has your state undertaken any studies to assess the cost savings from accepting electronic payments for state taxes or fees?
o No
o Yes. We would appreciate if you could provide electronic copies or web links of these studies.
50
5. Effective Practices for Credit Card Payment of Taxes and Fees

52. Please explain any policies or practices that have contributed to the success of the credit/debit card program for payment of state
taxes and fees?
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
53. Please describe any insights regarding the credit/debit card program that, if adopted, would enhance the efficiency, effectiveness,
and other benefits of the credit/debit card program.
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
54. Please indicate the extent to which your state has made the transition from paper-based to electronic transactions.
All paper-based
All electronic
(no transition to electronic)
(complete transition from paper)
55. Please rate the impact that credit/debit card acceptance has had on your states transition from paper-based transactions to electronic transactions.
No
impact
Minimal
impact
Some
impact
Strong
impact
Very strong
impact
56. Does your state have any comments about the acceptance, use, and processing of credit/debit card payments that have not been
addressed in this survey? If so, please provide your comments.
______________________________________________________________________________________________________
______________________________________________________________________________________________________
______________________________________________________________________________________________________
This completes our survey. We would, however, like to collect data and information about your fee or tax payment transactions. We
greatly appreciate if you can respond to the following data request.
51
6. Data Request
57. What is the estimated total dollar value by tax or fee classification for payments made to your state in fiscal year ending 2005?
Estimated Total Dollar
Value of Payments ($)

________________
________________
________________
________________
Other excise tax _________________________________________
________________
Other _________________________________________________
________________

________________
________________
________________
________________
Park lodging fee
________________
________________
Property tax
________________
________________
________________
Other _________________________________________________
________________
58. What estimated percent of the tax or fee payment dollar amounts reported in question 57 fall into the following payment categories.
52
ACH
Credit/
Debit Card
Check
Cash
Total

Other excise tax
Other ______________________________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
100%
100%
100%
100%
100%

individual payments
Park lodging fee
Personal sales and use tax payments
Property tax
Other ______________________________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
59. What is the estimated total number of payment transactions by tax or fee classification for payments made to your state in fiscal
year ending 2005?
Estimated Number
of Payment Transactions

__________________
__________________
__________________
__________________
Other excise tax _________________________________________
__________________
Other _________________________________________________
__________________

__________________
__________________
__________________
__________________
Park lodging fee
__________________
__________________
Property tax
__________________
__________________
__________________
Other _________________________________________________
__________________
60. What estimated percent of the transactions reported in question 59 fall into the following payment categories.
ACH
Credit/
Debit Card
Check
Cash
Total

Other excise tax
Other ______________________________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
100%
100%
100%
100%
100%

individual payments
Park lodging fee
Personal sales and use tax payments
Property tax
Other ______________________________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
53
ELECTRONIC PAYMENTS
Prepared for:
Sharing capitol ideas.

Eastern Office
National Office
Southern Office
New York
Lexington, Ky.
Atlanta
Alan V. Sokolow, Director

(212) 482-2320 www.csgeast.org
Daniel M. Sprague, Executive Director

(859) 244-8000 www.csg.org
Colleen Cousineau, Director

(404) 633-1866 www.slcatlanta.org
Midwestern Office
Washington, D.C.
Western Office
Lombard, Ill.
Michael H. McCabe, Director

(630) 925-1922 www.csgmidwest.org
Jim Brown, General Counsel and Director

(202) 624-5460 www.csg.org
Sacramento, Calif.
Kent Briggs, Director

(916) 553-4423 www.csgwest.org
April 25, 2007

Acceptance and Use of Electronic Payments For State Taxes and Fees

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Acceptance and Use of Electronic Payments For State Taxes and Fees

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Verfügbare Formate

Acceptance and Use of

Sharing capitol ideas.

Alan V. Sokolow, Director

Daniel M. Sprague, Executive Director

Colleen Cousineau, Director

Michael H. McCabe, Director

Jim Brown, General Counsel and Director

Kent Briggs, Director

April 25, 2007

Acceptance and Use of

Foreword and Acknowledgements

The Council of State GovernmentsFinancial Services Working Group

Introduction and Overview ..............................................................................................................3

Evolution of Payments and Growth in E-payments ......................................................................5

Chapter 3: Electronic Payment of Government Taxes and Fees......................................................................9

Findings of Previous Studies on Government Tax and Fee Electronic Payments.................... 13

State Taxes and Fees E-payment Survey Findings.......................................................................21

Chapter 6: Summary and Conclusions ............................................................................................................31

Responsible Party for Paying Fees Associated with Tax Payments..................................................16

Citizen Willingness to Pay for On-line Government Services..........................................................18

States that Responded to the E-payments Survey .............................................................................22

Form of Electronic Payments Accepted for State Taxes ...................................................................23

Average Credit Card Payment Transaction Amounts by Tax Category ............................................26

Average Debit Card Payment Transaction Amounts by Tax Category .............................................26

Fees Paid by States for Accepting Credit Card Payments ................................................................27

States Satisfaction with Existing Credit Card Payment Programs ..................................................28

States Perceptions of Taxpayer Willingness to Pay Convenience Fees

Growth in Electronic Payment Transactions ......................................................................................7

Transaction Fees by Payment Channels and Payment Types ...........................................................10

Trends in Credit Card Payments of Federal Income Taxes...............................................................14

Credit Card Payment Transactions for State Taxes and Fees............................................................19

Forms of Electronic Payments Accepted for State Fees ...................................................................22

Percent of Tax Payment Dollar Volume by Different Payment Options ...........................................23

Percent of Tax Payment Transactions Made by Different Payment Options ....................................23

Credit or Debit Card Acceptance by Tax Category ..........................................................................24

Accepted Methods of Credit Card Payment .....................................................................................24

Reasons for States Accepting Electronic Payments.........................................................................25

Breakdown of Net Savings from Credit and Debit Card Acceptance...............................................25

Required Initial and Annual Investments in Infrastructure, Marketing, Staffing

States Use of Convenience Fees or Transaction Surcharges ...........................................................28

States Use of Third-Party Provider by Tax Type .............................................................................28

Proposed Changes to Credit and Debit Card Policies or Procedures ...............................................29

The Council of State GovernmentsFinancial Services Working Group

In fact, the economy-wide shift towards electronic

cause states are typically required to collect 100% of

The major reasons cited for accepting electronic

The Council of State GovernmentsFinancial Services Working Group

Introduction and Overview

One way to maximize net revenues is to enhance the

As credit card acceptance has become

1.1 Research Objective

the use of electronic payments for state taxes and fees,

1.2 Research Approach

5. Determine policy changes that might enhance use

1.3 Report Structure

The Council of State GovernmentsFinancial Services Working Group

Evolution of Payments and Growth in E-payments

2.1 Evolution of Payments

2.2 Growth in E-payments

the public sector. However

ness, and government-initiated electronic payments.

Source: CPSS (2006), Table 7 (p. 157).

Source: CPSS (2006), Table 8 (p. 158).