ZIP Codes: The wrong tool for the job. © Avalara 2013
One zip code, four sales tax ratesDid you know?
Not all jurisdictions make rate changes at thesame time o year. This adds another researchtask to the already burdensome sales taxmanagement process.
Take Greenwood Village, Colorado. I you’re a business with a taxablesale in Greenwood Village, and you use a generic look-up tool to fndthe correct sales tax rate, you’d enter the address and then ZIP code80111. You’ll be given the sales tax rate o 7.72%.In act, Greenwood Village has one ZIP code, but our dierent sale taxrates. When a blunt instrument like ZIP codes is employed to deter-mine sales tax rates and boundaries, calculation mistakes are almostguaranteed. Unlike more accurate tools with geolocation technology,ZIP codes lead otherwise savvy business people to conclude they’vegot sales tax compliance handled, when in act they’re using the wrongrates most o the time.
ZIP codes: a relic from the past
The U.S. Postal Service developed Zone Improvement Plan, or ZIP codes,in the 1960s or the sole purpose o accurately and efciently deliveringthe mail. These zones oten overlap, or become subsets o other ZIPcodes, or represent no geographic region at all. They can also be ad- justed. In any given year, the USPS makes numerous boundary changesto ZIP code areas, making them an unstable data source.Basing sales tax rates on a ZIP code risks applying not only an incor-rect sales tax rate but remitting it to the incorrect jurisdiction. This canincrease your company’s risk o audit and associated penalties, fnes,and ees.
Multiple taxing jurisdictions within asingle ZIP code
Even though sales tax rates are typically set at the state level, somestates authorize county, city, or local taxing districts to set their ownrates and rules. With so many jurisdictions generating rates, rules, andboundaries, sales tax compliance can be a nightmare or businesses.When businesses sell into new states, they must track even more rates,rules, and boundaries.
Ted’s Fishing Gear sells tackle and rods out o a warehouse in Savan-nah, Georgia. They ship to customers in several towns includingLoganville, Georgia represented by ZIP code 30052. Using a fctitiousaddress, let’s say employee Ted Jones enters this 30052 location into ageneric look-up tool, which tells him the correct sales tax rate to chargeSam is 7%.This rate is incorrect.