Here’s a not-so-fun fact: A large percentage of businesses in the United States have rate tables in their ERP system with rates based on ZIP codes. In fact, you might be one of them. Unfortunately, this method can give you inaccurate rates, landing you in trouble with customers and taxing authorities. Here’s why:
The U.S. Postal Service developed Zone Improvement Plan (ZIP) codes in the 1960s, so mail could be delivered more efficiently. What many people don’t know is that these “zones” can not only overlap each other, they can be adjusted and, sometimes, they might not represent a geographic region at all. In any given year, the USPS makes numerous boundary changes to ZIP code areas, making them an unstable data source. Most importantly, tax jurisdictions do NOT correspond with ZIP code regions. That means basing sales tax rates on a ZIP code risks applying not only an incorrect sales tax rate, but remitting it to the incorrect jurisdiction.