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Virginia Outsources Taxpayer Refund System, Private Companies Profit

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"Virginia Outsources Taxpayer Refund System, Private Companies Profit"

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In 2012, Virginia’s Republican-controlled legislature enacted a budget provision that effectively forced the state’s tax department to outsource its refund system to a debit card company, claiming it would save the government hundreds of thousands of dollars annually. But the state’s deal with Xerox to replace tax refund checks with Comerica-issued debit card has meant headaches and fees for taxpayers and raised concerns about excessive outsourcing.

When the Virginia General Assembly passed its 2012 budget, largely along party lines, it included a requirement that “beginning January 1, 2013, the State Comptroller shall issue individual income tax refunds only through debit cards, direct deposits, or other electronic means unless the Tax Commissioner determines that a check is more appropriate for a transaction or class of transactions.” Gov. Bob McDonnell (R) signed the bill and his Department of the Treasury contracted with a division of Xerox to replace refund checks with MasterCard debit cards. Xerox agreed to provide the Comerica Bank-issued cards “at no cost to the Commonwealth,” but retained the right to impose a litany of fees on the users.

Weeks after the first tax refund debit cards were issued, the problems started. While the recipients were promised one free online transfer, anyone attempting to do so was informed that there would be a $2 fee. While Xerox acknowledged the IT problem, there were unable to immediately fix it. Worse, calls to the toll-free number were capped at two free calls per month, with a $2 fee for each additional call, making it risky for consumers to even ask for help — and access to a live human being to address problems was not easily determined on the voice activated phone system number provided with the debit cards. One Virginian, who encountered this Xerox system error and successfully got his fees refunded, told the Richmond Times-Dispatch that his efforts were “a lot of headache for a couple bucks,” adding, “I am concerned this … ‘programming issue’ might be taking advantage of other Virginians who are not stubborn or maybe stupid enough to spend an entire evening to fight through this system.”

In response to a Virginia Freedom of Information Act request by ThinkProgress, the Virginia Department of Taxation provided a summary of other problems taxpayers had reported with the debit cards. They included Xerox incorrectly assessing fees on 14 debit card accounts “due to an algorithm that used card number sequences to apply fees to these accounts,” cards sent with a placeholder phone number (888-555-1212) on the printed version of the cardholder statement, and confusion with the interactive voice response phone system. Additionally, some MasterCard member banks improperly refused to process cash withdrawals and turned away non-account-holders. The department claims these problems have been remedied or will be.

State Senator Adam Ebbin (D) told ThinkProgress that he has heard from multiple constituents who have been charged exorbitant fees to access their refund money. “Government needs to be customer-friendly and in this case, taxpayer-friendly. Tax refunds are a core function of government.” While he conceded that there may be some instances where outsourcing to the private sector might be appropriate, he said, “When [Virginia] outsources a government function — particularly a core function — we need to analyze it carefully and make sure it makes sense not just for government savings, but for the taxpayer.” Noting that the Commonwealth of Virginia accepts checks for tax payments, he said taxpayers should be able to receive a refund check if they like one. “Why shouldn’t taxpayers have the convenience of receiving their refunds in the form they prefer? Last time I checked, checks weren’t obsolete. Clearly this needs to be revisited by the General Assembly, so we will have to do so.”

This comes amid a broader move to outsource tax functions to for-profit companies, both in Virginia and nationally. In 2011, McDonnell and the state legislature replaced a popular free online state tax filing system with an industry-sponsored non-free system. And recently the U.S. Treasury outsourced its payments to federal beneficiaries — to Comerica.

Delegate Betsy Carr (D) agreed that there is no reason for this core government function to be privatized. “It’s misguided,” she told ThinkProgress. While the tax department said the service would be free to the Commonwealth, she noted, “There are no free lunches. [Xerox and Comerica are] making up for it with all these fees… and it’s not saving money for the state if they have to answer these extra calls and headaches.”

Carr added that she is also concerned about the privacy of the information obtained by the outside vendors. “Where’s all this information going?” she asked, when “they become business records, rather than government records, and they’re not private.” A spokesman for the Virginia Department of Treasury told ThinkProgress that the state contract with Xerox has explicit privacy protections and prohibits any sale or distribution of the data by the contractor.

Carr unsuccessfully proposed legislation and a budget amendment in this year’s House of Delegates session to restore to taxpayers the option of receiving refunds by check. It was defeated, mostly along party lines, on a 29-63 vote.

A spokesman for Comerica told ThinkProgress that as it does not contract directly with Virginia and does not set the fees, “it would be inappropriate to comment” on the arrangement. He referred questions to Xerox.

Jennifer A. Wasmer, director of services PR for Xerox, said in an email that the Virginia Department of Taxation had shared with them ThinkProgress’ freedom of information request and felt that the Department’s response was sufficient to answer all questions.

Joel Davison, public relations manager for the Virginia Department of Taxation, said in an email that the program saves the state government $200,000 annually and that both the tax and treasury departments “are continuing to address other programmatic issues that have been identified.”

Asked why he shared the inquiry with an outside contractor, Davidson wrote, “Xerox is a business partner of the state and when Xerox informed me that you were asking questions of both Xerox and Comerica about the same issues you came to me with, I forwarded them your request and our response as a courtesy. Both Virginia Freedom of Information Act requests and responses are public information.”

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