Business Geographics State Tax A discussion on the accurate assignment of taxes
INTRODUCTION There is no more important challenge facing state tax directors and comptrollers today than the proper assignment of taxes: important because taxes drive government, support public works and help sustain an environment where business can thrive; challenging because tax assignments have become an extremely complex maze that breeds inaccuracies and impacts revenue. This paper addresses current inefficiencies in the assignment of taxes and their potential impact on revenue and liability. It also examines new methodologies for more accurate tax assignments and describes how many states have successfully changed the way they establish tax rates. THE CURRENT STATE OF TAX ASSIGNMENTS Location accuracy is critical for tax jurisdiction assignment, yet it is estimated that tax assignments can have an error rate of about 10%. 1 In the last decade, state officials responsible for tax assignments have struggled to keep up with constantly changing jurisdictions, more and more tax districts, and new government mandates. 1 Accurate Tax Jurisdiction Assignment - A Difficult and Complex Proposition Bob Meador Directions Magazine, Sept. 17, 2004, http://ww.directionsmag.com/article.php?article_id=652 2 High Definition Data for High Definition Decisions in Government Pitney Bowes Group 1 Software 3 Lot 54 Where are You? Pitney Bowes Group 1 Software 4 High Definition Data for High Definition Decisions in Government Pitney Bowes Group 1 Software 5 Accurate Tax Jurisdiction Assignment - A Difficult and Complex Proposition Bob Meador Directions Magazine, Sept. 17, 2004, http://ww.directionsmag.com/article.php?article_id=652 6 Accurate Tax Jurisdiction Assignment - A Difficult and Complex Proposition Bob Meador Directions Magazine, Sept. 17, 2004, http://ww.directionsmag.com/article.php?article_id=652 7 History of U.S. Postal Service, USPS, http://www.usps.com/history/his2_75.htm 8 Lot 54 Where are You? Pitney Bowes Group 1 Software Up to 25% of municipal boundaries change every year. 2 The bottom line is tax assignments are a complicated business. They are not aligned with the U.S. census or any overarching governmental body. They do not conform to uniform regulations state by state, or in many cases, even from neighborhood to neighborhood. Beyond geography, they also include special tax districts such as school districts, E911, fire districts, transit, hospital, stadium, and a variety of others. 3 Even after they are assigned, tax boundaries frequently change as a result of incorporations, annexations, mergers, consolidations, dissolution or addition of tax districts, and new mandates. 4 State tax collection, for instance, has become very complicated because tax rates are not always based on the rate in effect at the point of sale. In Colorado, for example, sales taxes are based on where goods are delivered, not where they are purchased. 5 Businesses in the telecommunications, insurance, electric and gas utility, and the services and retail industries are all impacted in various ways by the need for accurate sales and use tax assignments. In many cases, collecting too much tax is as much as a problem as under collection. 6 THE PROBLEM WITH ZIP CODES The ZIP Code is a postal delivery system created by the U.S. Post Office in 1963 for the convenience of expediting mail delivery. 7 It was never intended to guide accurate and equitable tax assignments, yet most state and local tax assignments throughout the U.S. are based on street address ranges and ZIP Codes. This system may have worked well enough in the past, but it is extremely error-prone today. 8 Seemingly simple to use, Zip Codes have inherent characteristics and limitations that consistently cause ongoing and expensive problems for tax jurisdiction assignments. 2
Business Geographics THE COMPLEXITY OF STATE AND LOCAL GOVERNMENT ASSIGNMENTS Figure 1 - ZIP Codes change frequently 13 First of all, ZIP Codes don t always correspond to jurisdiction boundaries. In addition, boundaries change frequently (see Figure 1) and ZIP+4 Codes experience additions, deletions and other changes at the rate of 600,000 each month. 9 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. They may even be based on police or fire districts (as in states like Florida) resulting in still higher tax assignment errors. 10 Of the approximately 20,000 municipalities across the U.S., in fact, as many as 30% of ZIP Codes are in conflict with municipal, county and even state boundaries, 11 resulting in taxes being charged where, in fact, none are due (see Figure 2). They also often lag rapid development, failing to include, for example, entirely new sub-divisions. For individuals responsible for establishing territories and evaluating premium tax rates, the result of these inconsistencies is eye-opening: between 6% to over 25% of all territory assignments are incorrect. 12 Figure 1a. ZIP Code 60544 in 2005 Figure 1b. ZIP Code 60544 splits into 3 ZIP Codes in 2006 9 High Definition Data for High Definition Decisions in Government Pitney Bowes Group 1 Software 10 Lot 54 Where Are You? Pitney Bowes Group 1 Software 11 Bruce Shutan, Group1 Software s Latest GeoTAX application holds promise for rating tax territories 12 High Definition Data for Premium Tax Determinations, Pitney Bowes Group 1 Software, Dec. 2004. 13 Lot 54 Where Are You? Pitney Bowes Group 1 Software Note that the three new ZIP Codes do not align evenly with the original ZIP Code boundary. Portions of neighboring ZIP Codes have either been included or removed from the area that constituted what used to be ZIP Code 60544. 3
Figure 2 - Some ZIP Codes cross boundaries 14 Figure 4 - Many municipalities are without a ZIP+4. 16 Arizona 6.9% Texas 9.2% Kansas 10.5% Utah 11% South Dakota 23% Oklahoma 34% National 1,432 of 19,486 (7.3%) Figure 3 - Even ZIP+4 Codes which represent the location for several addresses can cross boundaries 15 Figure 5 - ZIP Codes are not necessarily stable over time 17 40 million ZIP+4 Codes in the US Note the red triangle is the centroid of the ZIP+4, so all results will show inside the municipality when in fact the street crosses city boundaries. 600,000 change each month 14 High Definition Data for High Definition Decisions in Government Pitney Bowes Group1 Software 15 High Definition Data for High Definition Decisions in Government Pitney Bowes Group1 Software 16 Pitney Bowes Group 1 Software 17 Lot 54 Where are You? Pitney Bowes Group 1 Software 4
Business Geographics THE SOLUTION TO ZIP CODE ASSIGNMENTS Figure 6 - Street level assignments Many government agencies are taking advantage of new segmentation strategies and innovative technology to correct ZIP Code deficiencies and confidently assign sales and use tax jurisdictions, most notably in the area known as Business Geographics. BUSINESS GEOGRAPHICS A Street Level Assignment Provides the Correct Jurisdiction Business Geographics is a methodology that is bringing street address-level precision to county, municipality and subjurisdiction tax assignments. It can also help citizens determine their congressional districts, representatives, voting precincts and polling locations or school districts. Business Geographics 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, Business Geographics provide a better scope of understanding of a physical location. It 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, disaster preparedness, fire services, health services, sanitation, transportation, economic development, housing, land use and assessments. 18 LEVERAGING BUSINESS GEOGRAPHICS FOR TAX ASSIGNMENTS Business, banking, commercial and residential construction, real estate, and governments at all levels are using Business Geographics to correct inaccuracies and inefficiencies resulting from error-prone ZIP Code-based municipal assignments. With new methodologies developed specifically for them, tax directors and comptrollers are now also using business geographics to quickly and accurately assign tax territories. 19 They are also using this approach to locate businesses within tax jurisdictions, enhance DMV customer data and information, and in the distribution of income tax funds back to cities. 20 18 The Public Health Disparities Geocoding Project Monograph Harvard University http://www.hsph.harvard.edu/thegeocodingproject/webpage/monograph/geocoding.html 19 Lot 54 Where are You? Pitney Bowes Group 1 Software 20 Pitney Bowes Group 1 Software 5
By implementing a business geographics approach, state and local governments have the ability to: Correct jurisdiction assignments Perform audits to help ensure compliance and assign taxes appropriately Perform jurisdiction assignments in real-time Greatly reduce human error during address entry Execute batch geocoding and spatial processes to benefit back-end processes and deliver consistent jurisdiction assignments Identify non-residential addresses, such as Rural Route addresses, and assign the residential address STATES USING BUSINESS GEOGRAPHICS TODAY Many state and local governments are applying a business geographics approach to help identify correct sales tax rates. Some school districts are even realizing millions of dollars in improved tax revenue collection as a result of more accurate tax jurisdiction assignments. GeoTAX A number of state agencies and others are utilizing a Business Geographics product suite called GeoTAX from Group 1 Software, Inc. that can meet the unique requirements of tax assignments. GeoTAX standardizes addresses and appends state, county, municipal place, and special tax jurisdiction information to address records. GeoTAX provides access to the most current taxation boundary information through a data update process that continually tracks and updates taxation boundaries nationwide. GeoTAX users have access to Tele Atlas' dynamap/municipal boundaries database, with updates on governmental boundary changes from new incorporations, annexations, deannexations, mergers, consolidations, disincorporations, or dissolution of local governmental entities. GeoTAX supports legislation and enhances compliance with jurisdictional coding requirements of Federal and state legislation such as the Mobile Telecommunications Sourcing Act (MTSA). GeoTAX can locate valid addresses that are not in the USPS database by using two separate data sets USPS addresses and geographic street network data. GeoTAX supports state-supplied address listings, enabling users to match address data against street address ranges as required by the Mobile Telecommunications Sourcing Act (MTSA). GeoTAX provides comprehensive coverage of municipal and special tax districts through more accurate method of matching an address and determining whether it is inside or outside of these tax districts. 6
Business Geographics CONCLUSION State and local governments depend on accurate tax jurisdiction assignments to support budgets and serve its constituents. Yet with tax jurisdictions constantly changing and new tax jurisdiction assignment requirements mandated by federal and state laws, the potential errors and liability resulting from inaccurate tax assignment poses a significant problem. Business Geographics offers tax directors and comptrollers significant and measurable alternatives to tax assignments based on ZIP Code and other parameters. Along the way, they can correct revenue imbalances and streamline operations. To find out more, contact Pitney Bowes Group 1 Software at 1-888-413-6763 or visit www.g1.com. GeoTAX is a comprehensive solution that standardizes addresses and appends accurate state, county, municipal place, and special tax jurisdiction information to customer address records. Importantly, switching to an address-based territory assignment and Business Geographics model does not require a major change to an organization s existing Information Technology architecture. GeoTAX is specifically designed to work within an existing operation reducing implementation time and costs. GeoTAX is a product of Group 1 Software, which specializes in high-definition customer intelligence to help organizations communicate better and make smarter business decisions. Pitney Bowes Group 1 Software provides industry-leading solutions that make it easy for government agencies to cleanse and enrich their data, generate personalized customer communications and empower constituents to serve themselves. GeoTAX is available in client/server and interactive, webenabled versions. Additionally, organizations can utilize GeoTAX through HotData, Group 1's hosted services. 7
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