Testimony on development of electronic funds transfer programs for the payment of state taxes before the Federation of Tax Administrators.

Testimony on Development of Electronic Funds Transfer Programs for the Payment of State Taxes

Introductory Remarks

Good morning. I am William M. Burk, Director, Domestic Tax and Audits for CPC International Inc. in Englewood Cliffs, New Jersey. I am here today in my capacity as President of Tax Executives Institute (TEI). The Institute is the principal association of corporate tax executives in the United States and Canada; its 4,300 members represent more than 2,000 of the leading corporations in North America.

TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting uniform and equitable enforcement of tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayer and government alike at both the state and the federal level. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is both administrable and with which taxpayers can comply.

TEI is very pleased to be present today to discuss the very important issue of electronic funds transfer (EFT) for the payment of state taxes. Just a month ago, TEI held its first-ever liaison meeting with the Federation of Tax Administrators (FTA), and we view this meeting as a manifestation of a continuing and productive relationship between the Institute and the FTA. Although taxpayers and tax administrators are often viewed as "adversaries," there are numerous areas where we share common interests and where we can -- and should -- work together. The Institute hopes that this meeting is the first in a series of forums to develop specific recommendations to the states. For example, TEI strongly believes that a similar meeting should be expeditiously scheduled to develop recommendations in respect of an administrative "bill of rights" for taxpayers.

In our comments today, we focus on certain policy issues that we believe merit special emphasis. Administrative and technology-related implementation issues are discussed in an appendix to this statement and, we understand, will be addressed in detail by representatives of the Committee on State Taxation (COST) and the other organizations represented here today. From our prior work on EFT issues (and as a consequence of the cross-membership of TEI and COST), we can say with confidence that COST's specific comments are generally in accord with those of the Institute. Obviously, Tax Executives Institute would be pleased to respond to any questions the FTA may have about the issues discussed in the appendix or commented on by other witnesses.

EFT: The Need for Uniformity

Turning to the subject at hand, TEI commends the Federation of Tax Administrators for its leading role in the development of uniform EFT standards. The discussion draft prepared in connection with this meeting identifies the full range of issues that the States must address in developing their EFT programs, and although TEI and individual taxpayers may disagree with FTA's (and individual States') ultimate resolution of some of the issues, we believe the process that has been followed bodes well for the implementation of fair and efficient EFT systems.

Of paramount concern to TEI is EFT uniformity. Currently, the rules and requirements vary from State to State. Disparate EFT requirements among the States stand as a veritable Tower of Babel -- confusing taxpayers, increasing their compliance costs, and generally denying them the benefits offered by electronic data interchange (EDI) technology.

For example, some States limit EFT to the remittance of severance or withholding taxes; others impose the requirement in respect of corporate income taxes as well; and still others require EFT remittances of all taxes (including excise and environmental levies). In addition, whereas some States accord taxpayers an option to use EFT, other States have sought to make EFT procedures mandatory. More fundamentally, the States that have imposed EFT requirements have established different data formats for the remittance of data and many States that are planning EFT systems are developing their own proprietary data formats.

Taxpayers, regardless of size, cannot reasonably be expected to establish more than one internal system to electronically transfer tax payments to the States. Lack of uniformity would exacerbate the administrative burdens on corporate taxpayers that EFT will spawn. Thus, if there is one message TEI wishes to deliver today, it is this: the States that choose to adopt EFT rules and procedures should hew closely to a set of uniform and consistent guidelines concerning EFT payments and procedures.

In developing these guidelines, States should realize that uniformity among the States on technological and administrative, as well as policy, issues will benefit not only taxpayers but the States themselves. Moreover, although States may ultimately choose to encompass different types of taxes within the scope of their EFT programs or impose different thresholds for the imposition of EFT requirements, (*1) disparate resolution of those two issues should not detract from the overall goal of uniformity.

EFT: The Need for Simplicity

Administering the technical aspects of 50 different state tax systems is difficult enough without the additional burden of 50 complex payment systems. For an EFT system to be efficient for both States and taxpayers, it must be characterized by simplicity as well as uniformity. For example, a standard ACH format should be adopted for the transmission of payment data. This will simplify the identification and payment application processes, thereby facilitating the State's posting of payments to the proper accounts.

Choice of EFT Methods

There are essentially three primary EFT methods that have been developed. The first is the Automated Clearing House (ACH) credit method, under which the taxpayer initiates a transfer of money the day before the due dta from its bank to the State's bank. The second method of payment is the Fed Wire method, under which the taxpayer initiates a transfer from its bank's wire room to the wire room at the State's bank. The third option is the ACH debit method, under which a subcontractor of the State's authorized bank collects the payment transactions called in by taxpayers, consolidates and reformats payment data for the bank, and provides payment and remittance data to the Department of Revenue.

Taxpayers generally prefer the ACH credit method and strongly object to the ACH debit method. The ACH credit method is less expensive than wire transfers; minimizes the possibility of late payment penalties through record-of-payment notification to the State; and enables the taxpayer to maintain the integrity of and control over its bank accounts (i.e., precludes the State's employees from directly accessing the taxpayer's normal bnak accounts).

In contrast, the Fed Wire method deprives the taxpayer of control over the actual time funds are transferred once a transfer is requested and is comparatively more expensive than the other methods. (According to one estimate, an ACH credit method transfer costs $.15, whereas a Fed Wire method transfer costs approximately $5.00.)

Even more objectionable to taxpayers, however, is the ACH debit method which accords the State direct access to the taxpayer's general bank funds. To place taxpayer misgivings about the ACH debit method into perspective, consider whether the States would accept such a method in respect of amounts owed to taxpayers as refunds. The lack of control that a taxpayer would have over its own accounts under the debit method, coupled with the attendant difficulty the taxpayer would experience in reconciling its liability with State-initiated transactions (including obtaining proper credit in respect of erroneous debits), make the ACH debit method generally unacceptable to taxpayers.

TEI recommends that taxpayers be given the option of making tax payments by the ACH credit, ACH debit, or Fed Wire method or by certified check received on or before the due date. This would facilitate the transition from a paper-based to an EFT system by giving recognition to differences in taxpayer capabilities and experience levels. If a single method is to be prescribed, we recommend that it be the ACH credit method. The payment of taxes by EFT should not be required, however, where the amount being paid falls below a specified threshold.

Policy-Related Administrative Issues

TEI believes that, regardless of the EFT method used, there are certain administrative issues with significant policy overtones that should be addressed. As previously suggested, the principal goal should be uniformity among the States. In addition, we urge the FTA to recommend the adoption of a reasonable transition period for implementing EFT as well as an equitable approach toward penalizing noncompliance.

* The Need for Reasonable Transition Period. EFT rules and procedures should reflect an appreciation for the considerable time required to successfully implement an EFT program. The States should approach the task of developing and implementing EFT guidelines with a healthy respect for the limits of technology -- the States' as well as industryhs -- as well as the challenge of marrying the promise of EDI to the reality of today's practices and procedures.

Thus, not only should the "start date" for EFT payments be set sufficiently far in advance to permit taxpayers to make (and test) required systems changes, but not penalties should be imposed during a transitional grace period where the taxpayer makes a good faith effort to initiate the required EFT payment on a timely basis.

*Penalties. TEI supports the enactment of a reasonable cause exception in respect of late EFT payments. Thus, even after the expiration of the transition period, no penalty should be imposed where the taxpayer has made a good faith effort to comply with the State's EFT procedures.

A taxpayer should not be penalized where its bank account is charged on or before the due date for the payment. Moreover, if the taxpayer initiates the EFT payment on a timely basis but events beyond its control prevent the timely receipt of funds by the state's bank or fiscal agent, no penalty should be imposed.

Conclusion

Tax Executives Institute appreciates this opportunity to present its views on the very important subject of electronic funds transfer procedures for the payment of state taxes. Once again, we wish to stress the need for the development of rules and procedures that can be consistently and uniformly applied among the States, and we commend the FTA for its leadership in this area.

We should be pleased to respond to any questions the FTA may have about our position.

(*1) In this regard, TEI submits that a viable EFT program must provide that EFT requirements will not be imposed if a taxpayer's payments fall beyond a reasonable dollar threshold; such a threshold, of course, may reasonably vary depending on the type of tax involved and frequency of payment.