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State to Revamp Online Tax Filing

Computers: Software companies that charge for the service are upset by the free competition.


SACRAMENTO — The software industry lost a round Tuesday when the state tax agency reversed itself and voted to upgrade California's free electronic tax-filing system.

To the dismay of a small band of high-tech industry lobbyists, the board voted to revamp the state's file-by-computer system so that it does simple arithmetic for taxpayers and automatically calculates taxes owed.

The vote escalates a dispute between public service providers and private firms. State tax agencies including California's Franchise Tax Board say they are trying to help taxpayers by letting them file free by computer. Private companies that make tax preparation software, and typically charge $5 to $30 to file, call it an unnecessary intrusion on their turf.

One businessman complained that Tuesday's vote would eventually kill his electronic tax-filing company. "We can't compete with the enormous resources of the Franchise Tax Board," said C.C. Chen, president of C&S Technologies Inc. in San Jose. His firm planned to charge $5 to $10 to file a tax return next year.

In March, protests from the computer industry and concerns by some lawmakers about privacy stalled the tax board's effort to create a Web site that would calculate income taxes for residents using the 540 "2EZ" form, the state's simplest tax form. Roughly 4.3 million people who earn less than $50,000 as individuals or $100,000 as married couples are eligible to use it.

Sen. Steve Peace (D-El Cajon) and Assemblyman Robert Hertzberg (D-Sherman Oaks) said they feared that tax auditors would be able to track keystrokes and use that information to target taxpayers for audits.

State Controller Kathleen Connell, who heads the Franchise Tax Board, began meeting with representatives of Intuit Inc., H&R Block, IBM, and the Computer & Communications Industry Assn.

They agreed that the state would not provide math calculations or a tax-table search on its Web form for the 2001 tax season. Instead, taxpayers would have to download a form, print it, fill it out using a pen and calculator, then log back in, enter the data and hit "send."

The tax board launched such a system two weeks ago. Nine taxpayers who had received extensions have so far used it to file their 2001 taxes.

The board surprised the software industry Tuesday by suddenly abandoning the March agreement and voting unanimously to enhance the form 540 "2EZ" online filing system, available online at

The board members said they wanted to make the system more practical for taxpayers so as not to lag behind the 23 states that already offer electronic tax filing.

"This is about customer service," Connell said. She dismissed fears that the tax agency would violate taxpayer privacy as "camouflage" intended to slow progress, and Peace said Tuesday that the tax board staff had allayed his concerns in a demonstration of how the system would work.

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