Overview

Does your bank or business provide services to help businesses pay state and local taxes electronically? If so, you know that there is a wide range of ACH credit (and debit) payment initiation services that must conform to taxing authority routing/format requirements. The problem is that tax authorities sometimes enact changes (e.g., add a new tax type) to these requirements, and then only notify affected businesses about the changes. The lack of direct communication to banks and payment processors about these changes adds risk, costs, and inefficiencies to the process.

The State Tax Change Portal - by NACHA - was developed to:

  • Improve the timeliness and quality of communications between states and service providers regarding changes that affect ACH payments for business taxes
  • Provide more lead-time for banks and service providers to implement changes
  • Reduce risk and cost associated with misdirected payments and returns

Banks, payment processors, and businesses can enroll to receive email notifications from state tax authorities that affect ACH payments for state business taxes. The portal's listserv function allows state tax authorities to reach all subscribers through a single site.

Background

Many businesses initiate non-federal tax payments (e.g., state, local, and municipality) electronically through bank provided services. Banks and non-banks (collectively referred to as "service providers") offer business taxpayers a wide range of ACH credit payment initiation services, which must conform to the agency routing/format requirements in order to be successfully processed and applied to the taxpayer account at the agency. In general, these service providers, through their software, hard-code a taxing authority’s account number, transit-routing number, addenda and other information to properly format and route the payments according to the taxing authority requirements.

When non-federal tax authorities enact changes that affect the ACH payment routing or information requirements for electronic tax payments (e.g., routing/account number changes, adding new tax types), they communicate the changes only to the taxpaying businesses, typically by US mail. The service providers are not typically notified directly by the tax agencies, either due to the authorities' inability to determine their taxpayers' providers or because they do not attempt to notify them. Instead, service providers find out about a change when taxpayers contact the service providers with customer service issues (e.g., investigating why a payment was not received by an agency).

The lack of communication between tax authorities and service providers regarding the ACH payment format changes creates inefficiencies and risk for these payments, and adds cost as well.

  • Businesses rely on service providers to route payments correctly, and to include the necessary data in the required format. However, when a service provider is unaware of routing/formatting changes, tax payments may be misrouted – or otherwise be rejected - until the service provider can update code to incorporate the necessary change. Meanwhile, a tax authority may assess late fees and penalties against the business, causing disputes and aggravating customer relations between the business taxpayer and service provider.
  • When a tax authority enacts these types of changes, typically service providers will receive numerous customer inquiries seeking clarification and/or remediation as warranted. This in turn leads to numerous calls between the service providers and the tax authority to verify information as it is not always clear who at the tax authority should be contacted. In some cases, it could take 2-4 months for a service provider to release the update necessary to support the enacted tax authority change (i.e., the time required for information verification, coding, update release, testing, and installation).

The scope of this issue can affect every service provider that originates payments to a given tax authority, and any business that wants to send an electronic payment to the given tax authority. For example, one leading service provider estimates that it maintains over 2,000 state tax “applications,” which means they have a hard coded process for originating business tax payments via the ACH to all 50 states, plus multiple taxing authorities within each state. Changes within any of the “applications” need to be tracked to update the service provider’s system code. In cases where a bank relies on a service provider to offer payment services, then there could be an extended requirement to provide and install the code within the bank platform. It is not known how many business tax payment originators are affected by a change enacted within a state tax authority, but the number could be large.

This issue can also affect debit tax payment service providers. For example, some states that offer a debit payment option allow a business to authorize a third party - like a payroll company - to initiate a debit on behalf of the business for a tax payment. Another example is that the payroll company can register its business clients in a state’s debit program, and can designate that the payroll company be debited for the tax payment (vs. having the business’ bank accounts being debited). In either of these cases, the state would rely on the contact information obtained from the debit registration process to communicate information about payment changes. The risk is that states have found that the contact information obtained through the registration process (whether obtained by the business or third party) is often outdated; or, the businesses fail to followup with their service provider regarding the state’s notification (similar to the credit model).

The main concern for the service providers is obtaining timely notification about a tax authority change. This avoids the problems cited when notification is not timely because changes negatively impact customer service and costs.

Why choose EBIDS? Trust EBIDS to lower costs and extend the reach to customers. Some benefits to Financial Institutions are: Transaction Revenue, Extended ACH Services, Increased Reach, Reduced Costs, Accelerated Time to Market.
Transaction Revenue, Extended ACH Services, Increased Reach, Reduced Costs, Accelerated Time to Market. Trust EBIDS to lower costs and extend the reach to customers. Some benefits to Financial Institutions are: