A Taxing Problem

For carriers that cover large geographic areas and multiple tax jurisdictions, assigning correct tax jurisdictions is crucial to determining the right rates and correctly reporting and disbursing tax revenues. Lots of money rides on your ability to determine properly which taxing jurisdiction each of your customers is in.

The U.S. government levies various taxes on products and services down to the local municipality level in more than a third of states. In many instances, accurate tax-jurisdiction assignment is more than just knowing the right state, the right county and the right municipality. Certain special tax districts, such as public-safety areas, mass transit and school districts, have the authority to levy taxes, as well.

TRACKING BOUNDARY CHANGES How well do you attribute a customer's address to the right tax jurisdictions? In almost all instances, carriers can identify the correct state and county. As shown by a recent case involving BellSouth Mobility's customers in south Florida, however, not all carriers are immune to occasional errors in county assignment. In this instance, some BellSouth customers in Monroe County were improperly taxed at a higher rate, which was appropriate for neighboring Miami-Dade County (7% vs. 1.5%). No state and only six counties have changed boundaries over the last decade. Because states and counties are geographic areas with highly stable boundaries, the source of such errors is almost certainly data-processing related, not caused by boundary changes.

When assigning an address to the right municipality, however, it is much more difficult to keep up with boundary changes. The concept of place is important to determining tax jurisdictions. According to the place concept, any area in the United States can be designated as either an incorporated place, a non-incorporated place or outside a place. Incorporated municipalities, which are those with the ability to levy taxes, must be identified as places by the U.S. Census Bureau. Places also may include areas that are not legally incorporated but are designated by the states as having significant population density. This process leaves significant areas of the country, particularly rural areas, not specifically identified as places.

During 1998, more than 3,000 municipal place boundary changes were identified, tracked, analyzed and reported. There are approximately 19,000 incorporated places in the United States, so 3,000 place changes in one year is a significant change rate. Few organizations are aware of these boundary issues and changes. Even major accounting firms have admitted that they are unaware that more than 15% of municipal place boundaries change each year, so this news could be a revelation for you, as well. You must keep up with these boundary changes in your tax-compliance and billing systems.

When municipal-boundary changes are tracked nationwide, some areas have few or no boundary changes. But in areas of rapid population growth, municipal boundaries change rapidly. For example, 100 of the 400 municipalities in Florida changed their boundaries in 1998. Of these same 400 municipalities, 300 charge public-service taxes on telecommunications. Keeping up with municipal-boundary changes and appropriate tax rates is a major task for any Florida carrier.

ASSIGNING JURISDICTIONS Tracking boundary changes is just one part of the taxing and rating challenge for wireless carriers. The other major part is actually assigning the right tax jurisdictions to the address. Major tax-compliance systems assign municipal-tax-jurisdiction information to the 43,000 5-digit ZIP codes in the United States, but this approach can be inaccurate. In contrast, assigning tax-jurisdiction information to ZIP+4 records is a much more accurate way to determine tax rates.

Historically, firms have relied either on homegrown systems that are manually derived and often difficult to maintain or have purchased systems based on 5-digit ZIP codes. The latter approach takes the street address, city name, state and 5-digit ZIP code, then assigns a geocode to the record and cross-references the geocode to the tax-rate table. Tax-table companies use either the Federal Information Processing Standard geocodes published by the U.S. Census Bureau or a proprietary format.

The main data association in this address-to-geocode technique is based on the 5-digit ZIP code. The major challenge to this approach is that 5-digit ZIP-code areas can be so large that they encompass multiple places or areas outside of places. One carrier, for example, discovered that roughly 90% of 5-digit ZIP codes included multiple tax places. Its system does not automatically tell it which tax jurisdiction and tax rate are correct for each customer address, so it is forced to look at other sources or query the customer or local government officials. The administrative costs for manual tax compliance, as well as the risk of incorrect taxing, are significant.

A benchmark of 26 major metropolitan areas determined the inaccuracy of 5-digit ZIP-code-based approaches. It found that there was roughly a 1-in-3 chance that, even with a valid city postal address, the actual location was in a place outside of the city's legal boundary. In those instances, the actual location could be in another incorporated place, a non-incorporated place or an area outside of a place.

Results were derived through identifying all valid 5-digit ZIP codes for each city and all valid 9-digit ZIP codes for each valid 5-digit ZIP. The 9-digit ZIPs were cross-referenced to accurate place information. Using the 9-digit ZIP codes associated with each ZIP allows carriers to get to much smaller, more finite areas than the 5-digit ZIP code identifies. A 9-digit ZIP code corresponds to a street segment or city block, and typically only one side of a street. A highly accurate 9-digit ZIP-to-place cross-reference system can determine the places and non-places where addresses actually reside.

Assigning accurate tax jurisdictions is one of the less understood and most neglected issues in billing and taxation. Carriers can't afford to continue assigning and reporting tax jurisdictions as they have in the past. Smaller carriers subject to less audit scrutiny might be able to get away with inaccurate reporting, but not for long. Larger carriers that err may face steep financial exposure. The risk of potential back taxes, penalties and possible class-action lawsuits from incorrect tax assignment is growing every day. When you add customer dissatisfaction and damaged public relations, you could face devastating problems.