Sales Tax Audits are on the Rise
While originally implemented by the US Postal Service in the 1960’s to increase accuracy in mail delivery, ZIP (Zone Improvement Plan) codes have many uses today. Not only do they help our holiday cards get delivered to our loved ones, they also connect us online with the nearest pizza delivery location and help insurance adjuster assign rates. But what ZIP codes don’t do is accurately indicate sales tax rates.
While they can be accurate at times, there are no guarantees and plenty of exceptions. If your current sales tax calculation process is ZIP code based, you risk charging the wrong rate and even remitting tax to the wrong jurisdiction. Either way, you put your organization at risk for a costly negative audit.
Contrary to popular belief, ZIP codes do not determine which tax region an address belongs to. In fact, ZIP codes don’t even designate specific cities. For example, according to the USPS, Centennial Colorado shares ZIP codes with the cities of Aurora, Englewood and Littleton.
Sales tax rates can be made up of multiple layers of tax: state, county, city, local and special tax jurisdictions. As the diagram indicates, it is not unusual for a ZIP code to encompass multiple tax rates.
ZIP codes are similar to tax jurisdictions in that both are subject to change. According to the Postal Service, as many as 1 in 20 ZIP codes changes each year. And these changes by the USPS are not tied to tax jurisdictions, which can also change frequently without concern for ZIP codes.
When calculating sales tax, determine jurisdictions using exact location, not ZIP code
The most reliable method for accurately identifying your jurisdictions is to pinpoint the correct destination or location of the transaction using data such as latitude and longitude coordinates. Cloud-based services such as AvaTax by Avalara validate transaction addresses and assign jurisdiction based on geo-coding technology, allowing you to get rooftop level accuracy.
AvaTax is completely integrated into all the ERP solutions Clients First Represents including: Epicor, SAP, Microsoft Dynamics & Sage.
With states facing budget deficits, many are hiring more auditors, and small and mid-sized businesses are more likely than ever to face an audit. Rate accuracy is crucial to audit risk mitigation.
From personal experience I can tell you a sales tax audit is worse than an IRS audit. You are almost treated like a criminal even if you thought you were complying in every way.
To learn more about the pitfalls of using ZIP codes for sales tax management, download the whitepaper: ZIP Code Inaccuracy in Sales Tax Management – Best Practices for Rate and Jurisdiction Identification.
Contact us in the chat box below or call us at 866.677.6290 to learn about integrated sales tax automation solutions for your ERP or eCommerce system.