12 Sales Tax Tips for Small Businesses: #10, ZIP Codes & Jurisdictions
- Sales and Use Tax
- January 11, 2012 | Will Frei
Verify your jurisdictions using exact location, not ZIP code*
The New Year is the perfect time to verify that you are using the correct sales tax rates. One critical component is ensuring you know where you have liability to collect sales tax. ZIP codes are a web of streets and postal routes that can be divided and changed as areas become more densely populated. Using ZIP codes to determine sales tax rates may prove accurate some of the time, however, using a rate from the wrong jurisdiction may lead to huge hassles, such as audits, penalties and return reconciliation.
Sales tax rates consist of several layers of tax: state, county, city, local and special district taxes. The number referred to as the total sales tax rate is really the sum of those taxing jurisdictions. Each jurisdiction is defined by a variety of criteria and can vary from one address to the next. It is not unusual to have multiple sales tax rates within a single ZIP code.
If you base your sales tax rates on ZIP codes, you risk applying the wrong rates and remitting sales tax to the wrong jurisdictions. Why? ZIP codes do not identify which tax region an address belongs to. In fact, ZIP codes do not even designate specific cities. For instance, according to the USPS, Centennial Colorado, shares ZIP codes with Aurora, Englewood and Littleton.
The key to accurately identifying your jurisdictions is to pinpoint the correct destination or location of the transaction using data such as latitude and longitude coordinates. The easiest and most accurate way we know to do this is to use our cloud-based sales tax calculation service:AvaTax.
Avatax uses geo-location technology, which employs latitude and longitude coordinates to calculate sales tax based on a user’s exact physical location. This means it can calculate sales tax even if you don’t have an available address. Take a minute to find out more about AvaTax, especially if your business has more than one location, or sells throughout a state via the internet.
*Adapted from ZIP Code Inaccuracy in Sales Tax Management
Finding The Right Jurisdictions Is More Than Picking Up the ZIP Code
In Colorado, numerous tax jurisdictions can exist in a given ZIP code boundary. Shown here, you can see that ZIP code 80111 encompasses at least 5 sales tax rates, all due to local jurisdictions and where their taxes apply. In addition, you can see that the tax rates can jump between ZIP codes.