A frightening number of businesses have rate tables in their ERP system with rates based on ZIP codes. This method can give you inaccurate rates, landing you in trouble with customers and taxing authorities. Here’s why:
The U.S. Postal Service developed Zone Improvement Plan (ZIP) codes in the 1960s, so mail could be delivered more efficiently. What many people don’t know is that these “zones” can not only overlap each other, they can be adjusted and, sometimes, they might not represent a geographic region at all. In any given year, the USPS makes numerous boundary changes to ZIP code areas, making them an unstable data source. Most importantly, tax jurisdictions do NOT correspond with ZIP code regions. That means basing sales tax rates on a ZIP code risks applying not only an incorrect sales tax rate, but remitting it to the incorrect jurisdiction.
Take Greenwood Village, Colorado for example: It has a single zip code, but four different sales tax rates. When a blunt instrument like ZIP codes is employed to determine sales tax rates and boundaries, calculation mistakes are almost guaranteed. Basing sales tax rates on a ZIP code risks applying not only an incorrect sales tax rate but remitting it to the incorrect jurisdiction. This can increase your company’s risk of audit and result in penalties, fines, and fees.
In the end, it’s bad for your customers, it’s bad for you and, if the state comes calling, they’re going to penalize you if they find out. Using geolocation technology to find the right sales tax rate, on the other hand, now that’s a different story.
Geo-location – the same technology that Google Maps uses to know exactly where you are – uses latitude and longitude to find exactly where a geographical location is. If you map that to tax rates you’re going to get the right rate every time.