A frightening number of businesses use free sales tax calculators and ZIP codes to get sales tax rates for customer addresses.

For instance, if you need to know how much sales tax to charge a California customer, you might be inclined to take the ZIP code from their address and use a sales tax calculator or free rate table to find the rate. This method can give you inaccurate rates, landing you in trouble with customers and states. Using geolocation technology to find the right sales tax rate, on the other hand, now that’s a different story. Find out the difference between the two in the video below, then check out a free sales tax tool that uses geolocation:

Use Geolocation

Video transcription

Hi, we’re going to talk about not overcharging your customers sales tax. That’s definitely something you don’t want to do. It’s bad for your customers. It’s bad for you, and if the state comes calling they’re going to penalize you if they find out. There are a couple really common ways people use to calculate sales tax. I’d say the most common is based on zip code, up and coming geo location. We’re going to talk about both.

To illustrate these I’m going to draw out a little map of a rural street near Denver, Colorado. There’s your street. It probably reminds you of your own street. There are houses on both sides, but we’re going to focus on the houses on this side of the street. Let’s just do two a couple houses over here. Now, let’s say you’re an Ecommerce store holiday season, and you’re clothes are selling like gangbusters. Both of these households purchased the same pair of shoes from you. What’s the sales tax going to be like on that? Well, if you’re using a zip code solution that’s going to give you a rate based on zip code, and as it turns out this whole neighborhood is one zip code. There it is. Shout out to the 80022. One zip code which means one sales tax rate. If you’re doing this using a rate table to look up zip codes or using some type of tool of software that maps tax rates to zip codes you’re going to be charging both of these households the same sales tax rate. That’s terrible because zip codes do not actually map to tax jurisdictions therefore they do not actually map to rates.

Geo-location, the same technology that Google Maps uses to know exactly where you are uses latitude and longitude to find exactly where a geographical location is; if you map that to rates you’re going to get the right rate every time. Let me show you. Look at that crazy line. This all is 4.75 percent in the orange. That’s the sales tax rate. On the other hand this in the blue sales tax rate 8.25 percent. This household you need to charge the 4.75. This household right next door you need to charge them 8.25. Geo-location can use satellite information to get you these exact rates. All you have to do is enter in the address. Let me give you the web address of a free tool where you can go and use geo-location technology to get exact sales tax rates. Play with it yourself, and find out what it’s all about, AVATAXRATES.com.

[Update: check out salestax.avalara.com]. Check it out. It’s fantastic. It’s a map. Just go there and you’ll see what I mean. Remember, most importantly here do not use zip codes. They will get you in trouble. Stick with geo-location. See you next time.