Unless you live in a single rate state like Massachusetts, where you calculate sales tax at one rate (6.25%) for every address in the state, the total sales tax rate for a given address could have up to five different pieces for a small business to track.
The total sales tax rates for addresses in these multi-level taxing states may be made up of the state, county, city, and multiple district level tax rates.
In addition to this, what makes accurate calculation so difficult is that the applicable rates can vary widely by local jurisdiction and even by street address. The more complete and accurate the address your customer provides to you is, the more accurate tax rate you can provide back to them, and the less likely you are to get the rate wrong and under-collect tax that then has to be paid out of your pocket when it is time to file your returns.
How addresses affect sales tax
The United States Postal Service introduced the Zone Improvement Plan (ZIP) Codes in 1963 to increase efficiency in mail delivery. The basic format of a ZIP code is five digits. In 1983, the Postal Service introduced an extended version including four additional digits to reference more specific locations.
The full nine-digit ZIP Code, commonly called a ZIP+4, provides more accuracy for mail delivery than the basic five-digit format. The same thing is true for sales tax calculation. The more complete the address, the more accurate the sales tax result will be.
There are nearly 11,000 local sales tax jurisdictions in the United States. Many states allow these local jurisdictions to impose local sales tax rates that are different from the standard state rate. This is different from the single-rate states referred to above, that apply the same rate everywhere.
- Example 1: In Maryland, a single-rate state, the sales tax rate in Annapolis (6%) will be the same as the sales tax rate in Baltimore or anywhere else in the state.
- Example 2: In California, a multi-rate state, the sales tax rate in San Francisco (8.5%) is different from the sales tax rate in San Diego (7.75%) due to different county, city, and district rates that apply.
For states with local level sales tax, you can start to see that total sales tax rate may become very difficult to track and calculate. It gets worse!
The missing pieces
Using the traditional five-digit ZIP Code will not always calculate sales tax at the most accurate rate. For example, the following two addresses in St. Louis, Missouri have the same five-digit ZIP Code:
- 827 Washington Ave., Saint Louis, MO 63101
- 521 Olive St., Saint Louis, MO 63101
If you calculate sales tax based on just the five-digit zip code of 63101, you will get the same rate of 9.6790% for both addresses. This total rate is made up of the state (4.225%) and the city of St. Louis (5.454%) rates. This is the correct sales tax by zip code, but for one of the addresses, there are additional pieces missing.
With the same example, if we get more complete information about both of the addresses (IE: ZIP+4), things change:
- 827 Washington Ave., Saint Louis, MO 63101-1201
- 521 Olive St., Saint Louis, MO 63101-1809
The ZIP+4 for each address is different. When we run the addresses through the Missouri online sales tax lookup tool, below are the accurate total sales tax rates at each address; the ones the State will expect you to collect on your sales in these locations:
827 Washington Ave, St. Louis, MO 63101-1201
- Missouri State Rate: 4.2250%
- City of St Louis Rate: 5.4540%
- St. Louis Convention Center Hotel 3 CID: 1.0000%
- St. Louis Convention Center Hotel TDD: 1.0000%
- Total Rate: 11.6790%
521 Olive St, St. Louis, MO 63101-1809
- Missouri State Rate: 4.2250%
- City of St. Louis Rate: 5.4540%
- Total Rate: 9.6790%
The complete picture
What you see in these results is that the total applicable sales tax rate at each address is actually different because there are Community Improvement (CID) and Transportation Development (TDD) Districts that apply to one of the addresses, but not to the other.
Imagine if your small business was located on Washington Ave in St. Louis and you were only calculating sales tax by zip code? Large sales volumes could lead to a hefty monetary difference between taxes owed and tax collected that your business will still be obligated to pay.
This simple example, like many thousands across the US, illustrates how multiple sales tax rates can affect the same ZIP Code. The reason; five-digit ZIP Codes often cross taxing areas such as counties, cities, and districts.
This could not only leave your business out of pocket for the tax, but could also leave you paying penalties and interest for incorrect filings. It is important, therefore, to use the full ZIP+4 to calculate sales tax rates for your business and generate the most accurate result.
If you want to see how the information above affects your business, take a look at the new online sales tax calculator powered by QuickBooks Sales Tax. QuickBooks Sales Tax can help you avoid the hassle of figuring out sales tax and all of the rules that exist in each state, including the multiple factors that could change a sales tax calculation.
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
Featured Image Credit: Depositphotos.
