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.

Take Greenwood Village, Colorado. If you’re a business with a taxable sale in Greenwood Village, and you use a generic look-up tool to find the correct sales tax rate, you’d enter the address and then ZIP code 80111. You’ll be given the sales tax rate of 7.72%.

In fact, Greenwood Village has one ZIP code, but four different sale tax rates. When a blunt instrument like ZIP codes is employed to determine sales tax rates and boundaries, calculation mistakes are almost guaranteed. Unlike more accurate tools with geolocation technology, ZIP codes lead otherwise savvy business people to conclude they’ve got sales tax compliance handled, when in fact they’re using the wrong rates most of the time.

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.

Even though sales tax rates are typically set at the state level, some states authorize county, city, or local taxing districts to set their own rates and rules. With so many jurisdictions generating rates, rules, and boundaries, sales tax compliance can be a nightmare for businesses. When businesses sell into new states, they must track even more rates, rules, and boundaries. As another example, consider Savannah, Georgia.

Ted's Fishing Gear sells tackle and rods out of a warehouse in Savannah, Georgia. They ship to customers in several towns including Loganville, Georgia represented by ZIP code 30052. Using a fictitious address, let’s say employee Ted Jones enters this 30052 location into a generic look-up tool, which tells him the correct sales tax rate to charge Sam is 7%. This sales tax rate is incorrect.

If Ted had availed himself of a look-up tool containing geolocation, such as salestax.avalara.com, he’d know that the correct rate to charge Sam is actually 6%. Zip code 30052 covers an area that includes four counties, each with a different sales tax rate. This is not uncommon. Unless the online tool you choose includes geolocation, you’re very likely to be given inaccurate information.

Identifying the taxing jurisdiction associated with your company’s taxable transactions is one of the key components of sales tax compliance. Don’t waste your time with ZIP codes, when a pinpointed methodology is available.

Avalara AvaTax, our automated sales tax calculation service uses proprietary geolocation technology to validate an address and match it to our nationwide database of tax regions. Avalara’s tax data is researched and maintained by our compliance team, so the rates and boundaries are always up-to-date. In addition, our solutions easily manage complex tax issues such as nexus, exemptions, product taxability, sourcing rules, split rates, sales tax holidays, tax caps/thresholds and more.

Why use scissors to trim your lawn, when the latest and greatest self-propelled mower is only feet away?

Guessing and estimating sales tax rates increases your audit risk. Why take a chance, when better, faster, more efficient technology to get sales tax right is available?

Our online sales tax calculator uses addresses as well as geolocation to determine the exact point of the taxable transaction. Taxation services that use geolocation offer greater precision than a single 5-digit zip code.

Once you’ve put away the generic ZIP code look-up tools, you’re ready to take your company’s sales tax compliance efforts into the 21st Century. Avalara’s transactional tax solutions ensure accuracy with full end-to-end sales tax automation, including returns filing and payment remittance.