California E-Tax Filing System Irks Software Makers

Until this tax season, taxpayers in California who wanted to file electronically had to use tax-preparation software for a fee ranging from $5 to $30. But now, Californians can use a state-supported system that allows them to send in their taxes for free and private companies aren’t happy about it.

Software companies, such as Intuit and H&R Block, insist that the new system infringes on their territory and that the government is trying to replace private industry. More than 20 other states allow taxpayers to file electronically but with 14 million taxpayers, California is the largest in terms of wealth and size.

Proponents of the new system argue that the state’s free Web site has limited features. The new system does simple arithmetic and calculates taxes. They contend that tax-preparation software is still needed because it offers more advanced calculators and provides assistance for complicated tax filings.

"There's still plenty of room for the private companies to flourish alongside the government," former California Controller Kathleen Connell told the Wall Street Journal in January.

Industry lobbyists have fought long and hard against the state’s program for years. They raise concerns on a number of issues, including taxpayer privacy. They argue that it’s inappropriate for a tax collection agency to be engaging in tax preparation. They also contend that the state’s move could put software companies out of business.

California implemented a limited-use system for the 2001 tax season. In November 2003, the state’s Franchise Tax Board voted to put a new system in place. The system is being phased in with the state’s easiest tax form, the 540 2EZ, being available first. The state hopes to have all tax forms on file by June. The state estimates initial costs of $100,000 per tax form and will reach a breakeven point when 125,000 taxpayers file electronically.

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