UPDATED 2/19/13 11 a.m.

Hawaii tax officials have backed off on plans to charge an extra fee to residents who file their taxes electronically after tax preparers used to doing so for free raised a big stink.

The Hawaii Department of Taxation notified tax preparers last week that it had halted plans allowing a private contractor, Hawaii Information Consortium, to charge a $75 annual subscription fee to those wanting to file their taxes online. Users would also have to pay an additional $1 for each successful filing.

The money would go towards paying the web developers, according to Mallory Fujitani, spokeswoman for the tax department.

“The state did not pay for any development of the e-filing system, so how the company [HIC] gets paid back is through the fees it charges,” said Fujitani.

But that didn’t sit well with e-filers who have been filing their Hawaii taxes online for years free of charge.

“As a retired business person, I know that it is more expedient [to] file online — no one has to open an envelope, it doesn’t get lost in the mail,” said Evelyn Pacheco, a retired tax-preparer who has filed taxes for individuals and businesses in Hilo for over 40 years. “We are doing the state a favor by efficiently transmitting our taxes, we shouldn’t have to pay additional money to do that.”

The Department of Commerce and Consumer Affairs offers discounts to businesses who register online, so the tax department should also offer discounts to people who file their taxes online, Pacheco told Civil Beat.

UPDATE

HIC President Russell Castagnaro contacted Civil Beat after this article was published and said that the filing fee is intended to help the company recover $500,000 in startup costs. Once they’ve made back their costs, Castagnaro said additional revenue will be used to pay for costs of other state services HIC says it provides for free, including business registrations and licensing.

“There’s no doubt that e-filing is the way to go,” said Castagnaro, citing that this system offers residents a faster and easier refund while keeping costs down for the tax department. “This was more of a communication problem, [it] came as a surprise to a lot of people which is not what anybody wanted… We’re still trying to get feedback and figure out the sweet spots for all this.”

The lack of communication created a backlash from tax preparers throughout the state. Last week, individuals and organizations bombarded the state tax department with calls and emails opposing the new fees. The National Association of Computerized Tax Processors, a nonprofit association that represents a number of tax and payroll processors, sent an e-mail to tax preparers throughout the state noting that not even the federal government charges for filing online:

“Neither the IRS, nor any other State, charges for electronically filing tax returns, since government agencies save money by receiving and processing tax returns electronically…Electronic filing programs are a public service and should remain as such.”

Because so many people opposed the proposal, Hawaii officials decided to suspend the fees, at least until the end of this tax season. State Deputy Director of Taxation Joshua Wisch wrote in an email to NACTP Vice President Fluffy Cazalas last week:

“The fees are off the table for the foreseeable future, which means until at least April 30th. As discussed, the state will need room and time to determine precisely what happens after that point. Until then at least, the transmitters will not need to pay anything, and will not have to sign anything. In essence, business will proceed and electronic filing can occur without charge or interruption.”

When asked to explain what he meant by a “foreseeable future,” Wisch did not elaborate. Nor did he answer questions about whether there was a cap on how much HIC could charge in fees to recoup its costs for developing the new e-filing portal.

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