As the tax-free Internet era comes to an end, retailers need to take a more reliable approach to determining tax jurisdictions.
This past holiday shopping season, online retailers experienced a significant spike in Cyber Monday sales with ComScore reporting a +17% increase year-over-year. For the most part, these holiday shoppers enjoyed purchasing items tax-free, but that is likely to change in 2013 with pending legislation. (See article: Rejoice a Comprehensive Online Sales Tax Appears Dead for Now But Will Resurface in 2013.)
Current regulations on interstate commerce do not require retailers to collect sales tax on customers who are “out of state.” This means that many online merchants do not need to collect sales tax from their out-of-state customers. However, there is a movement by states to tax sales at the point of use, rather than the point of sale.
This proposed legislation will have the biggest impact on large online retailers that receive a significant portion of their revenue from online sales such as Amazon.com, Dell Computers or HarryandDavidcom. It also has implications for more traditional retailers such as Costco, The Gap and REI to name a few.
One of the major challenges this poses to online and multichannel retailers is the mastery of the process of assessing and collecting taxes from customers in the 46 states and the thousands of municipalities that impose these taxes
Since it seems inevitable that this legislation will eventually pass, retailers need to have instant access to accurate, nationwide sales and use tax jurisdiction information. Today, this is done using a process called ZIP code taxation where the customer’s ship-to ZIP code is used to determine their tax.
Although ZIP codes provide an easy way to determine sales tax, they have inherent characteristics and limitations that consistently cause ongoing and expensive problems for tax jurisdiction assignments.
First of all, ZIP codes don’t always correspond to jurisdiction boundaries. In addition, ZIP code coverage changes frequently.
Further complicating the landscape, some states require that jurisdictions correspond not just to ZIP code requirements, but to political or census boundaries as well, which ebb and flow along with local populations.
The risk of getting it wrong leads to undercharging with no ability to recover the tax from customers, while overcharging can lead to penalties and even class-action lawsuits.
Many companies and agencies are already taking advantage of segmentation strategies and innovative technology to correct ZIP code deficiencies and confidently assign sales and use tax jurisdiction.
This methodology goes far beyond ZIP codes to correct, clean and standardize information so that it reflects accurate physical addresses and locations. Utilizing technology-based Geographic Information Systems (GIS) that combine multiple layers of geographic data can provide a better scope of understanding of a physical location.
Geographic taxation or “geotaxing” combines geocoding, the assignment of latitude and longitude to address locations, and spatial analysis, the assignment of territories, to map rich sets of data for use in such far-ranging activities as census gathering and disaster preparedness. This approach can help retailers ensure the accuracy of street-level assignments for tax jurisdiction in a variety of applications.
As the tax-free Internet era comes to an end, retailers need to take a more reliable approach to determining tax jurisdictions. By integrating geotaxing solutions, retailers can not only ensure a more accurate determination, but also greatly improve the customer experience.
Read more on this topic in the following white paper: Preparing for the Internet Sales Tax.
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