The largest card payment network in the USA will now accept tax payments on credit cards. Official Payments Corporation announced last week that it has received authorization from VISA USA to accept VISA cards for payment of federal and state income taxes. The firm currently takes MasterCard, American Express, and Discover cards. VISA has largely been a holdout in the tax payments via credit card market. VISA regulations prohibit merchants from charging a fee to cardholders for acceptance. OPC generally charges consumers a fee of approximately 2.5% for each transaction since most government entities will not pay a merchant fee for such transactions. Currently, OPC has agreements to collect and process credit card payments with the IRS, 21 state governments, and more than 1,200 counties and municipalities. In 2001, OPC collected and processed more than one million transactions totaling $1.2 billion in federal, state, and local government payments.
However, is charging taxes on a credit card a good move for most consumers?
The bottom line: For most consumers charging tax for air miles or other rewards does not make sense (or cents).
Most reward programs pay back between 1% and 2% of the transaction amount in rewards such as rebates, cash, or air miles. As a matter of fact, most air miles have a nominal value of 2.5 cents per mile.
Therefore paying a 2.5% service charge generally wipes out the credit card reward.
However, there are exceptions. For example, the General Motors MasterCard offers a 5% reward. If you were getting ready to buy a new GM car or truck you could charge taxes and come out ahead. For example, charging $10,000 in taxes would earn a $500 rebate towards the purchase of a GM car or truck. The service fee for a tax payment is about $250. So you are up by $250!
The other exception is how you redeem air miles. For example, if you fly an upgraded, roundtrip business class seat to London it will cost you about $1,000 cash and 20,000 air miles. The regular price for a business class seat to/from London is about $5000. Therefore, redeeming 20,000 miles to save $4,000 in air fare means each mile is worth 20 cents instead of the nominal 2.5 cents. But since you paid for a coach fare and upgraded with air miles, you still earn miles for the flight. The trip to London will earn 7,500 miles. Therefore, the net cost of the biz class seat to London is $1,000 cash and 12,500 miles. So if you charged $12,500 in taxes to get 12,500 air miles the value of each air mile in this scenario would be 32 cents per mile, minus the net cost of the $125 service fee.
If a consumer is simply trying to earn miles for a free domestic ticket, then charging taxes will have little benefit. A free domestic ticket generally requires 25,000 air miles and is worth about $600.
Pull out the calculator before charging taxes.