E-Commerce: Calculating the Right Sales Tax

“Tax complexity itself is a kind of tax.” ~Max Baucus

Since the beginning of the year, 25 different cities or counties in the state of Arkansas have had changes in their sales & use tax rates. In Texas, the state tax rate is 6.25%, but many cities and counties in the state may add up to 2% to that for a total maximum combined rate of 8.25%. Washington State has over 350 different tax districts. In fact, take a look at any U.S. state or Canadian province and you’ll find a host of tax-rate fluctuations and variations.

How do ecommerce sites handle the complexity of so many local tax rates and keep up with the continual tax changes that occur throughout the year?

How to keep up with changing local sales & use tax rates

Unless their shopping carts are customized, more than likely, they aren’t. Many people using standard shopping carts are not calculating the local-level sales tax rates. Instead, they use their shopping carts’ built-in state-level sales & use tax tables. Many people might not know that standard shopping carts do not calculate local sales tax rates. They provide single tax rates per base region (State).

Pros and cons of using a standard shopping cart:

  • Pro: Easy integration; low initial setup costs.
  • Con: May leave a company with a hefty tax bill at the end of the quarter.

By only charging standard state sales tax rates, and not specific tax rates based on the locations of sales, it means that at the end of each quarter, companies must account for the missed local revenues and remunerate each tax jurisdiction within each state in which they have sold goods.

Adding customization

One way around the problem of standard shopping carts that only calculate single sales tax rates per state is to customize it to include location-based tax calculation.

  • Pro: Your cart is set up to handle US and Canadian local sales & use tax rates
  • Con #1: Setup is time-consuming and tedious. Customizing a shopping cart to calculate local taxes is no trivial task. It requires searching each state’s individual tax districts and then creating tables to include all of the various city and county sales & use tax rates.
  • Con #2: Sales & use taxes rates often fluctuate throughout the year, and new tax districts are often added as cities grow or become incorporated. This means that ongoing research and updating of your tax tables are required.

Opting for automation

The better solution? Use a tax lookup Web service that provides the current sales & use tax rates without requiring any further effort from you. A Web service is simply a software system that supports machine-to-machine communication over a network: your shopping cart and a remote server that hosts the service.

With a tax lookup Web service in place, each time a customer makes a purchase, the Web service invokes an operation to calculate the most current tax rate based on the customer’s location. It’s a no-muss-no-fuss solution that allows e-commerce companies to focus on their products and sales rather than committing IT resources to build and continuously update a system that can often be had for a minimal monthly fee.

DOTS FastTax is one such system. It’s one of the leading tax lookup Web services because for pennies per transaction, it offers the most current tax information for every county, city and state/province in the United States and Canada; and once a month, the FastTax development team is hard at work updating the FastTax database with the most current tax rates, painstakingly gathered from disparate resources.

What makes FastTax stand out is the developers behind it that are committed to accuracy, and their experience in dealing with contact verification issues. FastTax is designed to calculate sales tax based on customers’ exact locations which is preferred over a simple ZIP/Postal Code lookup, since postal codes may run across more than one tax district. FastTax does provide a ZIP/postal code lookup operation that can be used if an address is not available to you, or as a failover, if the given address is invalid.

Having an automated system in place to calculate sales tax in your shopping cart is a smart solution for e-commerce companies because, more than just saving time and money, it saves you from the aggravation of having to deal with the complexities inherent in calculating and keeping current with all North American sales & use tax rates.

FastTax is the Web service of choice for many online companies because it provides the most current sales taxes per customer locations, with an available ZIP/postal code lookup. So, while tax complexity itself is a kind of tax, by using FastTax, you can free yourself from those imposed by your shopping cart.