How PayPal, GoDaddy are transforming tax payments

"Venmo-ing" the government may seem like an odd expression, but it's really not that far off from how people are financially engaging with each other in the real world, says ACI Worldwide's Sanjay Gupta.

"It's a way to pay taxes in line with how consumers are paying for things," said Gupta, head of the biller segment for the Miami-based ACI, which has connected Venmo and PayPal directly to the U.S. government for tax payments.

E-commerce web hosting firm GoDaddy and PayPal both took recent steps to streamline different types of tax transactions. PayPal has integrated its Venmo P2P app with the Internal Revenue Service through ACI for income tax payments. And GoDaddy added sales tax calculations to its core web hosting service. Both companies are trying to make tax transaction processing similar to other payment types, and could pressure banks to make similar moves.

As part of the ACI partnership, Venmo and PayPal appear as a payment option for the Internal Revenue Service, with a user experience similar to electronic bill payment and presentment. Taxpayers receive a QR code to scan using the Venmo app and select their preferred payment method of a Venmo balance, credit or debit card. PayPal is also an option, with taxpayers directed to their PayPal login. The integration does not cover refund disbursement, though Venmo and PayPal separately offer a direct deposit service that can accept refunds.

More than 90% of tax payments made through ACI's payment portal are made via mobile browsers or desktop browsers, and Gupta said adding Venmo and PayPal gives consumers a familiar route to pay the government.

The automation of tax transactions is also an attempt to streamline at least one part of the overall tax filing system, which is fraught with delays since most of the processing is still manual or paper based.

While sales taxes are different from income taxes, there's also an opportunity to improve the user experience by automating parts of tax billing and calculation for businesses, according to Liz Armbruester, senior vice president of global compliance for Avalara, a Seattle-based tax software company.

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"What's happening in taxes is compressing time. It's about getting information about the transaction as close to the time of the transaction as possible, whether it's the direct tax for sales or income taxes," Armbruester said.

Avalara recently partnered with GoDaddy to automate sales tax compliance to help small businesses reduce the work involved in managing sales taxes. Avalara, which has similar deals with Shopify and BigCommerce, calculates sales tax rates for more than 12,000 jurisdictions based on local regulations and product-specific tax codes.

GoDaddy is embedding Avalara's digital tax system into a newly launched portal that manages payments, website hosting, marketing, sales and appointment management. The tax feature digitizes a process in which sellers manually track transaction thresholds for different jurisdictions to know if or when they owe sales taxes, log sales tax rates for each state and keep track of when those rates change.

State sales tax codes change regularly and can present a challenge for small businesses that sell online. The U.S. Supreme Court's 2018 decision in South Dakota vs. Wayfair allows states to collect sales tax for out-of-state businesses. And firms that sell internationally are often subject to value added tax, which is calculated differently than sales taxes in the U.S.

That can give e-commerce businesses dozens of different and fluid tax codes to manage.

"Taxes are always changing and it's rife for automating the calculation and transfer of tax data directly to the invoice," Armbruester said. Like PayPal, GoDaddy is positioning the tax calculations as a user experience benefit as much as a compliance tool.

"Dealing with the nuances of differing sales tax regulations as you grow can be a major headache. Commerce Plus is designed to solve this and other challenges that get in the way of taking a small business to the next level” said Greg Goldfarb, vice president of commerce products at GoDaddy, in an email.

PayPal called the IRS integratio a "continuation of our efforts to provide PayPal and Venmo customers convenient ways to digitally manage their taxes," the company said in an emailed statement.

Block, the former Square, did not return a request for comment on how its Cash App is used for tax transactions in relation to the IRS, though Cash App does offer tax filing and refund services. A spokesperson for the bank-led Zelle said the P2P app's Disbursements feature is not used for tax payments or refunds.

The user experience for tax payments is generally poor for both businesses and consumers compared to other payment types, according to Karen Oakland, an Orange County, California-based vice president of financial services marketing for Smart Communications, which offers customer experience consulting, among other services.

"There's a lot of stuff that's happening through mobile apps now, [buy now/pay later] financing, installments and general payments," Oakland said. "That's creating pressure to automate other processes."

As sales or income tax management and payments become more automated through technology deployments, there will be pressure on banks to offer similar capabilities, according to Oakland. "Banks are going to need to offer the same level of digital customer experience that consumers are getting from mobile apps."