At least $144 million in merchant fees has been unlawfully charged by the NSW government since 2016, it admitted on Wednesday.
The surcharges on 92 million transactions occurred despite repeated legal advice stating Service NSW and Revenue NSW could not legally pass on fees.
"We are so absolutely gobsmacked, flabbergasted and beyond belief," Customer Service Minister Jihad Dib said.
"The moment we became aware of it, we've acted on this."
Customer Service Minister Jihad Dib says the government has acted as quickly as it can. (Bianca De Marchi/AAP PHOTOS)
But when residents can expect refunds remains unanswered.
Potential strategies to return wrongly collected fees were being drawn up and the government urged patience.
"We cannot just simply say 'refund that money'," Mr Dib said.
"As an example, we've had privacy layered into the way people undertake some of these transactions."
Members of the public who have been charged the fees are encouraged to register for updates.
Businesses can lawfully levy merchant fees to customers to recoup the costs of handling transactions, including bank charges.
However the common-law principle was clear that governments could not do so without specific mention in legislation, Finance Minister Courtney Houssos said.
Most charges were small, such as 71 cents on a three-year licence renewal.
Millions of people repeatedly interact with Service NSW and Revenue NSW every year, leaving the average customer about $30 out of pocket due to the over-charging.
About 80 per cent of surcharges have now been turned off.
It could take a fortnight to address the remaining 20 per cent, such as by reprogramming payment terminals in Service NSW centres.
The fees were added to fines, registrations and other government payments. (Paul Miller/AAP PHOTOS)
The state's auditor-general uncovered the issue while reviewing departmental financial statements for the past year and brought it to the attention of officials in July.
Several ministers have written to the NSW Ombudsman calling for an investigation into possible "serious maladministration" over the charges, which were levied during the term of the previous coalition government.
The matter has also been referred to the Independent Commission Against Corruption due to the apparent failure to follow advice issued in 2016 by the crown solicitor.
Former coalition finance minister Damien Tudehope said he would have acted if the advice was brought to his attention.
First and foremost, the government needed to get money illegally charged back in the pockets of residents, he said.
"The government should be taking steps today to start refunding the merchant fees which have been paid," Mr Tudehope said.
The coalition, which set up the one-stop-shop Service NSW in 2013, also expressed concerns about the agency's capacity to respond to the public after 188 full-time jobs were cut in a recent restructure.
TOTAL IMPACT OF OVERCHARGING:
* Total merchant fees since 2016: $144.9 million added to transactions worth $32.1 billion
* Service NSW average add-on in past year: $1.99
* Revenue NSW average add-on in past year: $0.92
Examples:
* Renew licence - $162 fee: $0.71 added on
* Renew registration, small private car - $438 fee: $1.92 added on
* Parking fines - longer than permitted - $136 fee: $0.60 added on
* Parking in a disabled spot without a permit - $682 fee: $3 added on
* Not stopping at a stop sign - $410 fee: $1.80 added on.
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