In the now landmark 2018 U.S. Supreme Court decision handed down in South Dakota vs. Wayfair, states can now charge sales tax for online purchases, even though the retailer may have no physical presence, like a brick-and-mortar store, located in that state. Wayfair, the online retailer, as well as others like it, such as Overstock and Amazon, argued that a South Dakota law requiring the collection of sales and use taxes at the point of sale had violated the U.S. Constitution’s Commerce Clause that restricted a state’s right to tax interstate commerce. As many consumers are now aware, online sales taxes are automatically added according to state sales tax rates.
The increase in online purchases through ecommerce platforms has increased over the last several years and has risen dramatically during the COVID-19 pandemic as more consumers avoided indoor malls and chose to let their fingers do the buying. eMarketer recently reported that U.S. ecommerce growth in 2020 jumped to more than 30%, accelerating online shopping to levels that were not expected until 2022.
In the same article, eMarketer predicts the lasting impacts of the pandemic such as store closures and changing consumer shopping behaviors. “Many consumers have either shopped online for the first time or shopped in new categories (i.e., groceries).” These forecasted, “permanent” changes will have an impact on both consumers and retailers as they adapt to the new cadence of buying online.
But, how do retailers know how much tax to charge on each purchase?
According to Bench, a bookkeeping service for entrepreneurs, “Some states are “origin-based” sales tax states and some are “destination-based” sales tax states. In origin-based states, you collect based on your business location. In destination-based states, you collect based on your buyer’s location.” Confusing, right?
The Complexity of Local Tax Jurisdictions
As the examples above illustrate, accurate location assignment is essential in calculating the correct tax. They relate primarily to taxes applied regionally but more difficult is the challenge of assigning the correct tax within local jurisdictions that are sometimes encumbered by overlapping tax district boundaries.
In the United States, taxes can be applied based on the municipal, county, ZIP code or school district in which an individual resides. Just for municipal boundaries, there are an estimated 4,800 changes every single year. In addition, a special or limited purpose tax district may have been established. These are created to fund specific services, to finance special projects, or to encourage economic development. For example, when tax increment financing, or TIF, is used to stimulate a new development in a specific area of a municipality, a special district is created. According to Precisely, “special districts do not conform to municipal or other boundaries and are difficult to navigate because they can cross ZIP Codes, can exist within only a portion of a ZIP Code, may consist of multiple disconnected regions, can be overlaid on top of one another, and can change frequently.” These special districts combined with other sales tax boundaries illustrate the complexity of calculating taxes correctly.
Accurate Tax Calculations Need Accurate Address Information
Let’s focus specifically on local sales tax and where to start to calculate taxes correctly.
As a first step, accurate geocoding is essential. Delivery of finished goods must find the consumer at the right address. However, as mentioned above, there are overlapping tax boundaries, and it is possible that your street may be on one of them.
Here’s the problem. Depending on the geocoding technology in use, your address may be located on the street and not directly within your property boundary, also referred to as a parcel boundary. The “street interpolated” geocode (i.e. placing the location of your house at the street centerline) may rest on or within one tax jurisdiction while your property is in an entirely different jurisdiction. It is very well possible that your neighbor across the street is located within a different tax jurisdiction than you. So, if you are purchasing goods from an online retailer, they will need the most accurate address in order to charge you the correct sales tax.
Let’s now look at this challenge from the retailer’s perspective. Precisely explains: “Consider an instance where you have a frequent buyer that is being taxed at the wrong rate and/or their taxes are being remitted to the wrong jurisdictions. Extrapolate this across all your web traffic and the audit liability increases proportionally throughout the year.” The problem multiplies because both the consumer and the retailer could find that their tax liability is being incorrectly calculated. To correct this problem, both accurate geocoding software and up-to-date tax boundaries are needed.
In another example, let’s look at a beverage distributor where the point of sale is a vending machine. Here again, goods are potentially transported across multiple jurisdictions and are sold at multiple locations such as hotels, schools, convention centers, sports arenas, or convenience stores. If even a one cent difference in tax is applied incorrectly, the discrepancy becomes multiplied across the hundreds and sometimes thousands of beverages dispensed and sold daily. The pennies add up!
As one final example, let’s look at ecommerce sales tax as applied to international transactions. Online retailers selling across borders have two fundamental issues. The first is estimating the correct sales tax and the second is local import taxes. One or both may apply but the seller would be responsible for providing an estimate of both. It’s not an easy problem to solve.
Korem Has the Answers
At Korem, we have the tools to help you unravel the complexity of calculating the correct online sales tax. We have access to the most accurate geocoding technology and the best sources for tax boundary data. Together, you can be assured of improving your tax liability and finding solutions that are less “taxing” on your bottom line.