There are two unavoidable consequences in life: death and taxes. And taxes are far and away the complex of the two, particularly if you are in ecommerce or a business making sales to others. Here are some of the issues you face:
- Tax rates not only vary across municipalities, but by district or even address. For example, in one case in Arizona, one side of a particular street has a different tax rate than the other side!
- Tax rates change constantly. According to CFO Magazine, there were nearly 800 changes to sales and use tax in the US in 2014.
- Once upon a time, your concerns about collecting sales taxes ended at the state border. Not any more. In Colorado, the so-called “Amazon tax” law now compels businesses nationwide to collect sales tax from Colorado purchases. It survived a recent Supreme Court challenge, and other states are now taking similar steps: Amazon.com, for example, now collects sales taxes for deliveries to 32 US states as well as the District of Columbia.
Within a given area, the different tax rates geolocation might be using may include state, city, county, county district and/or city district taxes. The calculation of these rates can become complicated when you add ‘geography’ of the buyer/seller to the mix. Does the seller live in an unincorporated area? What tax rate(s) do you use for ecommerce? How do you know you are using the correct/current rate?
The consequences of charging incorrect sales taxes are greater than ever. And not just from the authorities, but from John Q. Public. Nowadays anyone can check tax rates on their smartphones, which has led to expensive and embarrassing class-action lawsuits accusing major firms of overcharging on tax. Suits that have reached the court system in recent years include many high-profile plaintiffs including Wal-Mart, Whole Foods, Papa John’s Pizza and Costco.
Meanwhile, state tax authorities have always asserted their authority in the case of tax errors. Since sales and use taxes represent a large portion of state revenue, states often devote dedicated resources to enforcement efforts, and can impose substantial penalties: California, for example, levies a 40 percent penalty on failures to pay sales or use tax. There are also costs associated with preparing for an audit and administering the results of these audits. Even when businesses err on the side of over-collecting sales and use taxes, the aftermath of an audit can involve time, manpower expense and costs associated with refunding sales tax over payments to customers, not to mention the customer service issues associated with the errors.
Given the complexity of sales and use taxes, as well as the sheer volume of tax jurisdictions and annual changes to tax law, automated tools are a must for most businesses – including small business. Given the diversity of these jurisdictions, it is particularly important to use tools that compute these taxes based on geolocation, rather than just coarse metrics such as ZIP codes. This includes geocoding specific addresses, and determining unincorporated areas that may fall outside normal municipal tax boundaries.
The best tax rate tools do the work for you by maintaining and updating sales and use tax databases, and integrating with your processes to determine the geolocation to apply the correct tax rates. For example, Service Objects’ DOTS FastTax takes over the hard work of tax validation and compliance, including accurate sales and use tax computation based on geolocation derived from street addresses as well as postal code information. FastTax then uses this location data to identify tax jurisdictions and eliminate problems associated with different rates in incorporated vs. unincorporated areas. The tax rates are synchronized with the states and updated in real-time throughout the year.
For geolocation accuracy, FastTax also incorporates Service Objects’ flagship Address Validation capabilities for US and Canadian addresses. Addresses are accurately resolved to provide a precise tax jurisdiction and total roll-up tax rate. DOTS FastTax is available in four ways; as a real-time API integration, PC-based list processing, automated FTP-based list processing, and web-based Quick Lookups.
We all work in a challenging and complex environment for sales tax compliance, whose rate of change continues to accelerate. By putting this task in the hands of a good automation partner, you not only reduce your own workload and labor efforts, but protect yourself from the costs, penalties and reputation issues associated with compliance problems. The end result is a process that makes an inevitable part of your sales process a little less taxing.