Sales and Use Tax Rates Database | AvaRates from Avalara

I posted this 8 years ago, but after reading this post, I wanted to clarify and expand on some of the ideas I wrote back then.

Sales and Use Tax Rates Solutions

From fast, easy rate lookups to a complete tax rate and boundary database, AvaRates provides the tools you need for accurate sales and use tax calculation AvaRates includes address validation and standardization for superior accuracy and the desktop version integrates easily with your financial application.

via Sales and Use Tax Rates Database | AvaRates from Avalara.

To streamline the collection of sales tax for online retailers, some have suggested just charging online businesses the state tax rate. Forego the local tax collection. To exclude local tax jurisdictions because the system is “too complicated” means there will be no financial incentive to support such an arrangement with the local tax jurisdictions.

“Too complicated” is something credit card processors would say.

If you want fair collection of sales taxes for online and offline, then you have need a system that determines the correct tax rate for every ship to address. If you’ve ever looked at a city map, you know that it is not a nice square. Tax jurisdictions are the same way. Even one jurisdiction may have multiple polygons that make up their jurisdiction.

Even with all this complexity, most of your tax collection can occur easily and without issue. A small percentage will need need further research, but as you build out this exception data, you can have very accurate tax collection over time.

Tax collection options

Collect state sales tax only

You could forego some local tax funds and collect on the state tax rate level. You would collect easily from all online transactions, but puts online businesses at a tax advantage over local brick & mortars.

Collect state sales tax, city tax, etc.

Figure out the best way to tax accurately. Do the extra work to collect all the correct sales tax like the online business were located at the ship to address.

  • If the ship to address and/or zip code brings up several possible tax rates, what is the most likely tax rate?
  • Can we assume the tax rate for the questionable zip code based on the tax rate of surrounding zip codes?

For the ship to addresses that require more research, collect a fixed rate (such as average of city tax across the entire state) and put this in a fund to distribute back to the local regions based on the dollar amount collected from each region. If cities want to their collected tax money, claim a right to the specific ship to addresses. Cities could pin these addresses on a Google maps and pass on the geolocation code or geolocation short code. This is the data that can be shared with businesses like Avalara as an open source data.

Split payment immediately

As technology has evolved, online merchants can easily “split” payment among different parties. This automates the burden of tax collection and paperwork. For example, when I shop at Whole Foods, they give you a receipt showing the sales tax collection.

From the Durango Herald, someone’s trip to Walmart clearly shows the different tax jurisdictions collecting for that Walmart. You can easily split payments daily where the funds for tax 1, tax 2, and tax 3 go directly to the registered bank accounts. If you want to involve cryptocurrency, you could further automate and make transparent using a stable coin such as USDC (Circle USD). The funds sent to the different tax jurisdictions show up on a public ledger that Walmart, tax agencies, and the public can all audit.

https://durangoherald.com/articles/137354

Should businesses use Avalara?

I don’t know much about Avalara and how they would work in this scheme, but I have read they charge small sellers $0.25 per transaction, while they might charge bigger companies $0.02 to $0.05 per transaction. That is an awful lot of money to get an appropriate tax rate. One has to do the cost/benefit analysis, but there is some merit then to collecting only state tax rate since the cost for implementing and using third-party services may outweigh whatever local tax dollars are lost from online transactions.

If local government agencies all contribute to an open source online public database, then ecommerce shopping cart providers, online retailers, etc could all get the tax data they need in an open automated way without having to rely on companies like Avalara.

 


 

To streamline the collection of sales tax for online retailers, some have suggested just charging online businesses the state tax rate. Forego the local tax collection. To exclude local tax jurisdictions because the system is “too complicated” means there will be no financial incentive to support such an arrangement with the local tax jurisdictions.

“Too complicated” is something credit card processors would say.

If you want fair collection of sales taxes for online and offline, then you have need a system that determines the correct tax rate for every ship to address.

Of course, there will be a small percentage that may need further research, but you can try to make educated guesses based on assumed tax rate location of the ship to address.

For example,

  1. you could default to state tax rate collection only. this leaves local tax regions without any tax collection from online businesses. this then again, put online stores at a financial advantage. B&Ms will complain: Why do we have a to pay a local rate while online businesses do not?
  2. a flat rate collected on top of the state for “questionable” addresses which would be put in a general fund. These funds would be distributed back to local regions based on dollar amount of taxes collected from each region.
  3. figure out a more accurate way to tax accurately. If the ship to address and/or zip code brings up several possible tax rates, what is the most likely tax rate? Can we assume the tax rate for the questionable zip code based on the tax rate of surrounding zip codes?
  4. can you utilize map technology (GIS) or GPS as a layer you place on top of addresses to figure out what tax rate the address needs to pay?

If the charged rate is questionable, these transactions can be flagged. Most buyers will not care unless it is a big discrepancy. As long as the collection favors the state, states will do nothing. If they are collecting less than they should get, certain transactions can be cherry picked for investigation since the dollar amount may be worth the effort.

I don’t know much about Avalara and how they would work in this scheme, but I have read they charge small sellers $0.25 per transaction, while they might charge bigger companies $0.02 to $0.05 per transaction. That seems like an awful lot of money to get an appropriate tax rate.

One has to do the cost/benefit analysis, but there is some merit then to collecting only the state tax rate since the cost for third-party services may outweigh whatever local tax dollars are lost from online transactions.

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