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1210-1216 Payment Processing: Electronic Fund Transfer Payment

1210. COLLECTIONS BY ELECTRONIC FUND TRANSFER (EFT)
"Electronic Fund Transfer" means any transfer of funds other than a transaction originated by check, draft, or similar paper instrument, that is initiated through an electronic terminal, telephonic instrument, or computer/magnetic tape so as to order, instruct, or authorize a financial institution to credit or debit an account (Rev. and Tax. Code §2503.1).

Pursuant to Revenue and Taxation Code section 2503.2(a), electronic fund transfers may be accepted in payment of any tax or assessment, or for redemption of property. The tax collector may, at his/her discretion, require any taxpayer, or any paying agent of a taxpayer or taxpayers, who has made an aggregate payment of fifty thousand dollars ($50,000) or more on the two most recent regular installments on the secured roll to make subsequent payments by EFT (Rev. & Tax. Code §2503.2(b)). Any taxpayer or paying agent making an EFT payment shall provide any supporting documentation and electronic information requested by the tax collector. Such a payment shall be made to the bank account designated by the tax collector (Rev. & Tax. Code §2503.2(c)).

Any costs incurred by the tax collector as a result of acceptance of an EFT payment shall be considered administrative costs of tax collection. If, for any reason, a transfer is not completed, those costs shall be recovered by charging the person attempting the transfer a fee not to exceed the costs of processing the transfer, of providing a notice of non-acceptance to that person, and of making the required cancellations on the tax roll (Rev. & Tax. Code §2503.2(d)). The amount of the fee shall be set by the governing body of the relevant city, county, or city and county, and it may be added to the tax bill and collected in the same manner as costs recovered according to Revenue and Taxation Code section 2621 (Rev. & Tax. Code §§2503.1-2503.2).

1211. ADVANTAGES OF ELECTRONIC FUND TRANSFER (EFT)
The primary advantage of electronic payment is that it eliminates the "float" of the paper check environment. When a paper check is sent through the mail, it may take several days for the check to reach the tax department, and it may take several more days for the check to clear the banking system so the funds are actually available to the county. For a tax payment mailed on the statutory due date, the county may not have access to the funds for a number of days after the due date.

With EFT, the mail and check-clearing times are eliminated. Electronic payments settle or are finalized on the specified date (e.g., the statutory delinquent dates, December 10 and April 10), and the funds can be made available to the county either on the day a transaction is initiated or the day after, depending on the method of payment. This can improve the investment earnings of the county.

EFT has other advantages over a paper check environment. In particular, EFT is less labor intensive and, therefore, less expensive than paper check processing for both taxpayers and counties. A transaction can move from a taxpayer's place of business through the banking system to the point of being updated into the tax agency's computer system without manual intervention or physical handling. This can eliminate a significant amount of processing, sorting and physical handling at the taxpayer level, in the banking system, and at the tax agency. In addition, EFT transactions should be less prone to error because the data involved need not be re-keyed by either the banking system or the tax agency.

1212. AUTOMATED CLEARING HOUSE TRANSACTIONS
The Automated Clearing House (ACH) system was established specifically to facilitate the processing of electronic payments. Federal Reserve Banks and private processors operate the ACH network, and electronic transactions can be accomplished on a nationwide basis through the ACH.

The ACH system is widely used for a number of common EFT applications. A large majority of ACH members are banking institutions, but some credit unions and savings and loan institutions are also network participants.

1213. AN AUTOMATED CLEARING HOUSE (ACH) CREDIT TRANSACTION
The taxpayer notifies his/her financial institution (termed the originating depository financial institution, or ODFI, in ACH parlance) of the need to make one or more tax payments. The taxpayer specifies the amount of the payment, the bank and account number of the county being paid, and the date the transaction is to be finalized; i.e., when the payment is to be transferred to the payee. The taxpayer includes such information as the type of tax being paid, the taxpayer identification number, and the tax period covered. This information can be transmitted to the ODFI via computer tape, disk or diskette, direct computer communications, or on paper, depending on the capabilities of the taxpayer and the ODFI.

The ODFI combines this transaction or batch of transactions with those from other customers and transmits the entire "file" of transactions to its ACH operator. This transmission takes place electronically or via magnetic tape. The ODFI charges the taxpayer's account for the transaction at an agreed-upon time.

The ACH operator sorts all transactions it receives and sends the tax payment transaction to the ACH operator of the county's member bank. The ACH operator also informs the Federal Reserve System of the transactions it processes so the reserve account of the ODFI may be debited for the amount of any payments made and the reserve accounts of the receiving banks may be credited for the payments.

The ACH operator prepares information for the county's financial institution (called the Receiving Depository Financial Institution or RDFI) on each payment involving that bank and its customers and provides it to the RDFI either electronically or on tape or paper.

The RDFI credits the county's bank account for the amount of the transaction and presents the county with the other information (e.g., tax type, taxpayer ID number, etc.) accompanying the payment. This information may be supplied electronically or on paper or tape; it is used to update the taxpayer accounting and other systems.

1214. AN AUTOMATED CLEARING HOUSE (ACH) DEBIT TRANSACTION
An ACH debit transaction follows much the same course as a credit transaction except that, instead of the taxpayer notifying his/her financial institution to initiate the payment, the taxpayer notifies the county.

The county, through its bank, then initiates the transaction through the ACH network to debit the taxpayer's account and credit the county's account in a like amount.

Both ACH credit and debit transactions require a minimum of 24 hours or one day for processing. That is, a credit or debit transaction cannot "settle" or be credited to the account of the county until the day following the day it was initiated into the ACH system. Unless there is a problem with a transaction, the taxpayer's account will be debited and the county's account will be credited on the specified date.

1215. FEDWIRE TRANSACTIONS
Another method of making electronic payments is through the Fedwire system. In a Fedwire transaction, the information regarding the transaction is communicated directly through the electronic communications network linking all Federal Reserve district banks and their 25 affiliated branches.

In a typical Fedwire transaction, a taxpayer notifies his/her financial institution to transfer a specified amount to the county for a particular tax payment. The taxpayer's bank then contacts the appropriate Federal Reserve bank (via telephone or computer communication) and instructs the "Fed" to transfer the requisite amount to the county's financial institution. The Fed then communicates with the county's bank (via telephone or computer) regarding the transfer. The Fed also debits the reserve account of the originating institution and credits the reserve account of the receiving institution to accomplish the actual transfer of funds. These institutions debit and credit their customer's accounts accordingly. The receiving financial institution notifies the county of receipt of the payment. Fedwire transactions can be initiated and settled on the same day.

Acceptance of Fedwire payments is at the discretion of the tax collector (Rev. & Tax. Code §2505).

1216. NOTICE TO TAXPAYERS
Revenue and Taxation Code section 2503.2 does not require the tax collector to send specific notice to qualifying taxpayers requiring them to make subsequent tax payments by Electronic Fund Transfer (EFT), but the tax collector should notify the taxpayer of future requirements. The tax collector may choose whatever method is acceptable to the county.

There are several notification options, such as enclosing a notice with the tax bill, sending a notice by separate mailing (can be regular mail), or adding the notification statement to the tax bill. If a second notice is necessary, it should be mailed using certified mail.

Forms SCO 1-09 and SCO 1-10 were designed as guides for providing notice to taxpayers.