If you sell products nationally, do you need to collect state or local sales taxes? The answer may be more complicated than you think.

In the United States sales taxes are levied at the state and local level, and normally need to be collected by you for sales in state(s) where you operate. (Fun fact: in other states they are often still due from the consumer, through what are known as consumer’s use taxes. The question becomes whether you, as a business, need to collect them at the time of sale.) As for these other states, your obligation to collect sales taxes depends on whether you have what is called nexus in these states.

Understanding nexus

The obvious case of sales tax nexus is when you have a physical, bricks-and-mortar sales presence in another state: for example, if I purchase a sweater online from Cincinnati-based Macy’s, they collect sales taxes for my home state of California because they also have physical stores here. But many other situations that can trigger nexus as well – here are some examples:

Employees and contractors. According to the Sales Tax Institute, having a “representative, agent, salesman, canvasser, or solicitor” in another state who is under your control, even temporarily, can create nexus. And in some states any telecommuting employee – selling or not – may trigger nexus.

Selling online. Laws are changing to recognize the huge shift in retail commerce from Main Street to online merchants. Thanks to a recent June 2018 Supreme Court decision, states now have the option of requiring online sellers to collect sales taxes for their states. In addition, more than 20 states now have what is known as “click-through nexus” for cases where you pay referral fees to in-state affiliates for sales via their web pages, usually triggered by a specified minimum volume of sales in that state.

Trade shows. If you sell products or solicit business at an out-of-state trade show – for example, by having a booth in the exhibitor hall that sells products or distributes literature to attendees – you may or may not be on the hook for sales tax nexus. State rulings vary widely, and while most differentiate between selling activities at a conference versus simply listening to speakers and eating mediocre banquet food, even one day of marketing activities can trigger nexus in some states.

When to bring in the pros

This brings us to an important closing point: determining your sales, local and use tax obligations isn’t a job for amateurs. If your business is large enough and does business nationally, it makes sense to contact a tax professional for guidance on where your business has nexus.

Once you have determined where you have nexus, you also need an automated tool to help you navigate a potential maze of state, local and special tax rates for each customer. Tax rates change constantly, and can literally vary from street to street within the same ZIP code, so this isn’t a do-it-yourself project for most businesses. Our DOTS FastTax service provides accurate, detailed tax rate data on an address-by-address basis, using an API interface that integrates seamlessly with major marketing or CRM platforms.

Want to learn more? Contact our experts to discuss your specific sales tax needs.

Service Objects has been returning location-based tax rates in the DOTS FastTax API since 2001. Back then, we identified sales tax rates using only zip code. Since zip codes could cross multiple city and county borders, we were returning the rate most likely to be accurate based on preferred city and county. That evolved to returning multiple results based on a zip code, with each result containing a unique city, county and state. This was more accurate, but still involved a level of human intervention as multiple rates could be returned.

The service improved further as Service Objects developed its DOTS Address Validation services, which allowed us to get even more precise in determining the right area for the tax rates. Users could now submit a full address to the API and in most cases get a single accurate result, pinpointing the result to a location that had a clear tax rate.

However, if a given address was bad – or maybe even good but too messy to validate – it would not return a result and users would need to failover to the zip code level operations. Rural addresses which fall outside of city boundaries could wreak havoc if the proper location is not identified.

Last year, Service Objects introduced a new operation, GetBestMatch, to solve these challenges.

GetBestMatch in FastTax is designed to find the best rate possible and return a clean result. It uses the latest algorithms from Address Validation – US to clean and validate the toughest addresses and failing that, validates that the other data points are valid in order to return a zip level rate.

The service can also return an address level rate through the analysis of the nearby area, even if the address is bad. If an area can be proven to have a consistent rate for a zip, city or county and we know the address would be within one of those areas with 100% certainty, it can be deduced that since any address within that area has the same rate, the rate we return would be accurate at the address level. This extra analysis means that GetBestMatch can more precisely return accurate rates more often than its predecessor operations.

Additional Returns Offer More Insight

To add even more accuracy to the service, GetBestMatch also does boundary analysis to ensure the most accurate location is used in the tax calculations. The main piece of information returned to users here is the “IsUnincorporated” note. IsUnincorporated helps users identify locations that might be considered part of the city but actually are not. This example shows what that might look like:

823 Holiday Dam Rd, Honea Path, SC, 29654

This is a partial return of the operation including the Note IsUnincorporated. This notifies the user that the CityRate, if it exists, should not be used in the final TaxRate. We have decided not to modify the original found result (TaxRate and CityRate) but return the IsUnincorporated result so that the user can handle it however they wish. In an upcoming release we will be adding a new return “UnincorporatedTaxRate” to simplify all of this.

The improved rates of return for address level checks also come with a few new challenges. Since we can return accurate rates even if the address is extremely messy, there might be times when we do not always have an accurate city or county to return. We know the rate is accurate but not necessarily exactly where the location is located. For example:

11900 Hunting, Pickerington, OH, 34147

This is a bad address. However, through extra validation we know the other parts of the address are good. We know the zip code and county are good, but it’s possible for multiple cities to fall within these boundaries. Analysis shows the rates would be the same regardless so while we are not able to accurately tell what city is attached to the address, we still know every address in the potential area would have the same rate, so we can confidently say the rate would be good for the address. Another example shows an even more obvious reason why we might not have a value:

8538 Smith Street, Wales, MI, 48027

Again, the address is bad, but this one is easy. Michigan only has a state rate, which means that all addresses within Michigan will have the same state rate. The analysis of city, county and zip shows a consistent city and zip, but the county could be multiple results. So, we can display city and zip code but not county. FastTax is not intended to be an address validation service, but a helpful tip is to look at the Zip return. If the Zip is 5 digits, it meant something happened during validation and the address did not pass inspection.

The latest GetBestMatch updates also added support for the US Territories (Guam, Micronesia, American Samoa etc.) Here is an abbreviated example of an address in Guam:

Bldg 30 Farenholt, Tutahan, 96910

In addition, we already supported military locations within the United States, but now there is support for all of the remote bases around the world as well. An abbreviated example of that can be seen here:

Unit 28103, USAG Graf Chaplain, APO, AE, 09002

Since all of these locations, even the ones abroad, had US assigned postal codes; making sure we could return results was of utmost importance. We now have a complete list of results covering all areas associated with the United States.

Finally, the latest operation also now supports JSON responses as one of our last services to be converted. This operation was also created to be more dynamic, information components outputs allow us to add new results on the fly without breaking any client integrations, like those using SOAP. Fields such as CountyFIPs have already been added, and the new field UnincorporatedTaxRate will also be added here. These fields allow us to work with our clients to add custom logic or results that might not otherwise be available.

Is there a custom logic you’d like to see in FastTax? Reach out and let us know, or get your free trial key and start testing today.

For businesses engaged in commerce, it is a real challenge to stay on top of ever changing sales and use tax rates. One minor tax rate change can have a direct impact on your customers, costing your business significant time, money and resources.

In addition, the complexity of tax laws continue to increase every year, with constant changes in tax rates, and tax jurisdictions that often go beyond simple measures such as ZIP codes or municipality. And the risks to businesses for non-compliance are potentially severe.

The result from charging customers the wrong rate can have a significant impact on a business. Unhappy customers cause customer service issues, can have a negative impact on employee morale and have a substantial financial impact from processing refunds or collecting outstanding money owed.

All this means that maintaining tax compliance – particularly in today’s business environment, with everything from multiple distribution channels to e-commerce – requires planning and processes to become a smooth-running, cost effective part of your business.

Learn more about this important topic. Register for our upcoming webinar on May 23, 2017 and hear Geoff Grow, CEO and Founder of Service Objects, as he discusses:

• What sales and use taxes are and how they are calculated
• The concept of Nexus and when an out-of-state business is liable for collecting sales or use taxes
• What the Streamlined Sales and Use Tax Agreement is and why it doesn’t work
• Recent legal rulings that can affect your business
• The important role geo-location plays in calculating rates
• The impact on your business when your customers are charged the wrong rate
• The benefits of leveraging a third party data provider who is an expert in providing the most accurate and up-to-date rates in the US and Canada

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.

In a recent blog we discussed how to identify Incorporated and Unincorporated places. There are a number of reasons this is important, one of them being to determine accurate area tax rates. As mentioned in that earlier post, boundaries of a place do not always have clean lines. On the same street block there could be neighbors living side-by-side, who fall on different sides of that boundary. Therefore, they would be subject to a different local tax rate.

Our DOTS FastTax API is designed to calculate sales and use tax rates for a given address input. Our newest operation, GetBestMatches, now has the capabilities to determine this boundary data and return the most accurate tax rates for a given address. Leveraging additional resources available in our DOTS US Address Validation and Geocoding, we can better understand the nuances of these places, their unusual boundaries, and tax rate differences.

For example, in Service Objects’ hometown of Santa Barbara, there is an area between Santa Barbara and the nearby city of Goleta, affectionately known as “Noleta.” Although most of the inhabitants of this area consider themselves Santa Barbara residents, Noleta is considered Unincorporated when it comes to determining city tax rates.

Let’s look at another example in Phoenix, AZ.

Phoenix has a city tax rate of 2.3 percent city tax rate within the city’s boundaries. Per the image below, all locations in blue in this area are considered Incorporated and subject to the city’s 2.3 percent tax rate. However, any building within the unshaded block which includes “5601 W. Buckeye Rd. Phoenix, AZ 85043” is considered Unincorporated and therefore not subject to the city’s tax rate.

Yet another example located in nearby Mesa, Arizona — “901 N. 96th St., Mesa, AZ 85207”:

96th Street happens to be a street where boundaries differ depending on which side of the street you are on. In this case the even-numbered side of the street is incorporated and the odd-numbered side is unincorporated. The town of Mesa, Arizona has a 1.75 percent city tax rate. Therefore locations on the odd side of 96th Street actually have lower taxes because that side of the street is unincorporated and not subject to Mesa’s city tax.

These examples highlight only a few challenges businesses can experience when determining tax rates for their customers. Here at Service Objects we’re always looking for ways to help businesses provide the most accurate data. With the help of our latest FastTax operation, GetBestMatch, it’s no longer necessary to be a local in order to understand the nuances of places, their unusual boundaries, and tax rate differences like the ones above.

Contact us to learn more

Colorado is a very difficult state to accurately calculate sales tax in. We estimate there are thousands of tax rates that vary based on location. As with most states, sales tax rates in Colorado are a mix of state, county, city, and special district tax rates. Thus, someone in Denver, Colorado pays a different sales tax rate than someone in Boulder or Fort Collins. To further complicate the sales tax situation in Colorado, some communities also impose a use tax and/or a service fee — and a host of exemptions exist.

Plus, sales tax rates fluctuate all the time. Tax rate changes in several Colorado communities such as Dillon, Johnstown, Grand Lake, Steamboat Springs, and Grand County (too name just a few) will become effective January 1, 2017.

As if all of the above weren’t enough to make calculating sales taxes in Colorado challenging, the U.S. Supreme Court just upheld a controversial law in Colorado that pressures online retailers to collect sales tax in the state. New sales tax rates and the upholding of the so-called “Amazon tax” law might make sales taxes even more difficult for some retailers and/or consumers.

So, what is this Amazon tax and what does it mean to out-of-state retailers? The 2010 law gets its nickname from the online retailer because it compels out-of-state retailers such as online businesses to collect sales taxes on purchases from Colorado residents. Typically, these businesses are exempt from collecting sales taxes in states in which they do not have a sufficient physical presence or “nexus.”

For example, if you run an online business in California with a physical store and a warehouse in the state and sell goods to customers in California, you’d be required to collect sales tax from your Californian customers due to your physical presence. Meanwhile, you would not need to do the same for your customers in other states (unless you have a physical presence in those states). The Colorado law, however, complicates transactions for customers in Colorado.

According to an article in the Denver Post, Colorado’s sales tax law gives “…businesses a tough choice: either collect the sales tax or deal with more red tape, including additional paperwork and the requirement they remind Coloradans that they owe sales tax to the state.”

Colorado’s 2010 tax law was immediately challenged by the Direct Marketing Association (now the Data & Marketing Association), which filed a lawsuit. Now that the Supreme Court has upheld the law, some believe that other states may follow Colorado’s lead and impose their own “Amazon” taxes.

So, for now, Colorado is likely the most challenging sales tax state in the nation, but these challenges could spread to other states. You have a choice when selling to customers in Colorado: navigate the complexities of calculating sales tax in Colorado — a tough task made much easier with Service Objects’ FastTax real-time sales tax API — or comply with Colorado’s use tax notification requirements (for businesses with at least $100,000 in gross annual sales).

With every new year, tax season quickly approaches. Rates change all the time across the United States and Canada. Every month brings new tax rates across cities, counties, states, provinces, and even smaller local districts. There are even more changes each quarter, with January bringing the most tax rate changes of them all.

In addition to new tax rates, boundaries and borders are constantly changing. New ZIP codes are formed, and boundaries of ZIP codes, cities, and counties change monthly. All of these changes can wreak havoc on retailers and businesses who must calculate, collect, and disperse sales and use taxes. An address that was in one jurisdiction on one day could be in another the next day — and it’s your responsibility to calculate and collect the correct taxes despite all of these changes.

With myriad local, state, and provincial sales and use tax jurisdictions, applying the correct tax rates is challenging for businesses of all sizes. It’s virtually impossible for the average business to keep on top of ever-changing tax rates affecting them and their customers without some sort of assistance. For companies that do business across the United States and Canada, sales tax software is an absolute must due to the sheer volume of tax jurisdictions involved and the constant changes. Even small businesses can benefit from a sales tax API as local sales tax rates can fluctuate from one city to the next — and even within a given city if special districts have been created.

First, it’s not just about getting the most current sales tax rates each year, quarter, or month. It’s important to have a system that is collecting the most current address data as least once a month. Even if your customers do not move, their ZIP codes may have changed, or a new special district may have been formed in their area. By having the most accurate address information for your customers, you will be better able to comply with sales and use tax requirements. Not only does our address validation service validate your address data, we are constantly updating our database to reflect the latest tax changes including ZIP code, boundary, and rate changes.

The team at Service Objects anticipates these changes each month and quarter. We knew January would bring a host of changes, as the new year always does. We worked extremely hard incorporating the new changes for January 2016 into our system. 15 different states — Alabama, Arkansas, Arizona, California, Colorado, Georgia, Florida, Illinois, Montana, Minnesota, New Mexico, Ohio, Oklahoma, Nevada, and South Dakota — had new tax rates. In all, over 350 cities and over 60 counties across the United States had new rates. This could mean that hundreds of thousands, perhaps even millions, of addresses now have new tax rates.

If you don’t have sales tax software or current, validated addresses, how will you know if you’re applying and collecting the correct rates? The short answer, you won’t know.

Our address validation and sales tax software solutions solve this problem every month. Sign up for a free trial today.

In most cases, selling physical products in the United States also means calculating, collecting, reporting, and paying sales tax. If you have multiple stores, operate a delivery service, or ship products to customers, this can quickly become complex due to sales tax requirements at the state, city, special district, and county level. Not only that, frequent tax rate changes at any of these levels can affect how much you must collect.

 

Basic Sales Tax Collection

Let’s say you run a general store in a small community and that you do not ship items. In this simple case, you’d have to collect sales tax for the state, county, and local municipality. If your store is located in a special city or county tax district, you may have to collect tax for that district as well. You’d also need to keep track of the sales tax collected for each entity and report and pay those taxes on a monthly or quarterly basis. So, that’s three to four agencies, each with its own territory, tax rate, payment schedule, and reporting requirements. In addition to collecting, reporting, and paying sales tax to each applicable tax authority, you’d also need to pay attention to tax rate changes and adjust your collections accordingly. 

This is sales tax collection at its most basic, and it’s confusing enough as it is. 

How Sales Tax Collection Becomes Complicated

As you broaden your service area, sales tax management becomes even more complicated. For example, let’s say that you start selling products on the farmer’s market circuit. Each farmer’s market is in a different city, each with its own local sales tax district. Though the county and state may be the same, you now have new local sales tax districts to interact with. 

It gets even more complicated when you start shipping products to customers. If you have a presence out of state, such as a warehouse or even a temporary presence such as a trade show, you’ll have do deal with state and local taxes in that state, too. The more you expand, the more difficult it becomes to manage all of these sales tax authorities and their ever-changing sales tax rates. 

To further complicate matters, depending on the location, the tax rate could be calculated based on street address, ZIP code, city, or county. It is not uniform. 

Just when you think you have it all figured out, the sales tax rates will likely change. Some go up, others go down, others stay the same. For example, in April, Service Objects updated its FastTax product with 125 tax rate changes across 32 counties, 8 county districts, 62 cities, and 23 city districts. Trying to keep up with all of these changes is nearly impossible without software.

The Cost of Manual Sales Tax Management

Can you manage sales tax collection, reporting, and payment without software? Absolutely, but there are costs involved including: 

• Penalties — If you do not collect, report, and pay the correct amount of sales tax, you will likely be responsible for paying the balance as well as penalties and interest. Collecting too much sales tax is problematic, too. If you cannot locate the customer to refund the difference, that extra money is usually property of the state and must be turned over. The potential cost would be the erosion of your customers’ trust in you. 
• Time — Does your accounting department have time to contact each tax authority on a monthly or quarterly basis to verify current tax rates? When we update our FastTax software, this becomes an all-consuming task carried out by a team of individuals. Using the wrong tax data will also require time spent on making corrections, reaching out to customers, and issuing refunds. 
• Customer service — As a seller, you are placed in the position of being a tax collector. Even though you are not collecting the tax for your benefit, your customers won’t necessarily see it that way. If you collect the wrong sales tax amount and later have to go back and ask for more, your customers will not be happy. If you collect too much and need to issue a refund, they may appreciate the mini windfall but have doubts about buying from you in the future. Your reputation could take a serious hit, especially if a customer has found that you’ve overcharged for sales tax and did nothing to rectify the situation. 

Keeping up with ever-changing sales tax rates is essential. Avoid these potential pitfalls by using Service Objects’ FastTax software. This real-time API, which is updated monthly, calculates the correct sales tax rate across all levels (city, state, county, city district, and county district) based on street and address-level tax information. Learn how to save time, money, and your reputation with FastTax by contacting us today.

Since May 2013, there has been a lot of talk and discontent about the Senate approving the Marketplace Fairness Act. This Act will grant states the right to require online and catalog retailers, regardless of location, to collect sales tax at the time of a transaction; the same way that physical retailers are already required.
Take note: The law only impacts those retailers generating at least $1 million in sales outside of the states where they have physical operations.

While the House is moving more cautiously than the Senate, the Marketplace Fairness Act will arguably help the numerous states facing significant budget shortfalls. In fact, many state governors are putting extra pressure on congressional leaders to pass the bill so they can start collecting this new revenue immediately. Adversaries of the bill suggest that these states have a spending problem rather than a revenue problem. For more information about your state representative’s position, visit The House of Representatives.

Regardless of your personal or political ideologies, if you have an online or catalog revenue stream, it is vital to take the appropriate actions to prepare your business, large or small, for the pending sales tax reform.

Sales Tax Calculation Service for Online Shopping

Our real-time web service API, DOTS FastTax, provides sales and use tax for US and Canadian addresses. DOTS FastTax integrates directly into your shopping cart system and can be configured to manage multiple sales and use tax lookups by street address, postal code, or city/county/state. To ensure that only the most accurate tax rates are returned, DOTS FastTax service utilizes our address validation service behind the scenes to validate the full-street addresses to the ZIP+4 level.

If you are curious as to how consumers feel about the Marketplace Fairness Act, Mashable has a short, informative infographic outlining those in favor and those with disapproval.