An estimated $144 million in merchant fees were unlawfully charged on 92 million transactions since 2016, the state government said on Wednesday.
That was despite repeated legal advice advising the charges on Service NSW and Revenue NSW transactions were unlawful.
The state's auditor-general uncovered the issue while reviewing departmental financial statements for the past financial year and brought it to the attention of government officials.
Merchant fees can be levied to recoup the costs of handling transactions, including to cover bank charges.
The individual charges were small, such as a 30 cent surcharge on a one-year licence renewal.
The NSW Labor government says it has set up an incident management task force and is carrying out urgent work to stop the charging of any unlawful merchant fees.
Members of the public who have been charged the fees are encouraged to register for updates.
NSW minister Jihad Dib said the immediate priority was to stop the unlawful charges. (Bianca De Marchi/AAP PHOTOS)
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 legal advice issued in 2016 by the crown solicitor.
Merchant fees had since been stopped for most transactions, including more than 80 per cent of payments handled through Service NSW.
Customer Service Minister Jihad Dib said the immediate priority was to stop the charges as quickly as possible.
"It is deeply concerning that this practice has been ongoing, despite legal concerns being raised," he said.
"While the individual amounts typically charged may appear to be small, they have been charged unlawfully."
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