Did you know that the way your tax rate tables are set up in your ERP system can make or break your business? Do you know how their set up for your business? That’s because most rate tables are based on ZIP codes. And ZIP codes can be completely inaccurate.
Like using a tricycle to commute to work, using ZIP codes to determine tax rates is a mistake. Originally intended to help mail delivery by identifying geographic areas and zones, ZIP codes lack the accuracy sales tax compliance requires. Overcharge customers by assigning a higher sales tax rate, they’ll get angry and complain or shop elsewhere. Undercharge customers and you’ll find yourself owing a hefty tax bill at some point down the line. ZIP codes lack the city-by-city, street-bystreet, sometimes house-by-house variance in sales tax rates.
The U.S. Postal Service developed Zone Improvement Plan, or ZIP codes, in the 1960s for the sole purpose of accurately and efficiently delivering the mail. These zones often overlap, or become subsets of other ZIP codes, or represent no geographic region at all. They can also be adjusted. In any given year, the USPS makes numerous boundary changes to ZIP code areas, making them an unstable data source.
Basing sales tax rates on a ZIP code risks applying not only an incorrect sales tax rate but remitting it to the incorrect jurisdiction. This can increase your company’s risk of audit and associated penalties, fines, and fees.
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