Charging a customer the right sales tax in South Dakota is now much simpler due to the state's new, GIS-based TaxMatch system. In the past, merchants and businesses in the state confronted more than 200 different tax rates and codes because municipalities can levy varied sales taxes.
Previously only private companies offered technological solutions to help businesses charge the correct sales tax based on customer location, but since January 2004, the state has offered a free service that uses the state's existing GIS system to deliver sales tax collection help online.
Users log on to the Department of Revenue and Regulation's (DRR) Web site
and click the GIS icon to go to TaxMatch. By entering any South Dakota address in the TaxMatch system, users get applicable tax codes and rates for that address. DRR officials said they had no data indicating whether the agency has collected extra sales tax revenue from remote sellers as a result of TaxMatch.
The new system doesn't change who is supposed to collect sales taxes, officials said, but only makes it easier for businesses and merchants to collect the right tax. In the future, depending on whether the Streamlined Sales Tax agreement (SSTA) helps convince the federal government to allow states to collect sales taxes from out-of-state vendors, there's a strong chance extra revenue would be collected.
Unwieldy Tax System
TaxMatch was a response to standards defined in the federal Mobile Telecommunications Sourcing Act, passed by Congress in 2000 to simplify how cellular service is taxed at the state and local level by developing national, uniform rules, according to Scott Peterson, director of the DRR's business tax division.
"That was prior to the Streamlined Sales Tax Agreement," said Peterson, who is also co-chair of the Streamlined Sales Tax Project (SSTP), the organization that drafted the SSTA. "So when Streamlined came along, this standard was incorporated into the TaxMatch address database as part of the Streamlined agreement."
The SSTP involved more than four years' work by 42 states and the District of Columbia to create national standards to eliminate or reduce the costs retailers currently incur to collect state and local sales taxes.
America's sales tax system is viewed by the National Governors Association (NGA) as antiquated, complex and cumbersome to businesses in today's economy.
The problem is not only the different tax rates, but also the many different laws or definitions of what is taxable.
The NGA estimates that a simplified system could save businesses millions of dollars by removing the burden of complying with existing laws, rules and regulations in thousands of jurisdictions. Implementation of the agreement would also create a level playing field between remote sellers, who are not obligated to collect and remit sales taxes, and "main street" retailers, who must collect sales taxes.
Calculating the correct tax rate, however, can be tricky even for vendors located with the state. In the past, tax rates have often been calculated based on ZIP codes, but this can be inaccurate for rural regions where one ZIP code sometimes covers different tax jurisdictions.
AT&T was recently sued for this reason, Peterson said. AT&T used ZIP codes for calculating sales tax and collected city sales tax from people outside the tax jurisdiction. It began with two or three people who lived outside a small city in Oklahoma who were being charged city sales tax and expanded to at least 27 states, including South Dakota.
For a large enterprise, such as AT&T, a few billing inaccuracies can quickly add up.
"If you've got one customer, you can ask them where they live," said Peterson. "If you've got 7 million customers, it gets a little complicated. A solution that offers 95 or 98 percent accuracy, as some commercial products do, still can mean a lot of people are charged incorrectly."
GIS Fits the Bill
For the DRR, GIS was the best way to provide complete accuracy in automated tax rate calculations.
"When we started this project, the Department of Transportation was already out driving the roads of South Dakota and 'GPS-ing' the road segments," explained Carrie Tschetter, a DRR management analyst who is now the TaxMatch project director. "They shared their database with us, and we just extended it by adding street names and address ranges. With that as our foundation, it was then easy to overlay the boundaries of cities in South Dakota that impose a municipal sales tax."
The DRR decided three different approaches were needed to fully assist businesses in South Dakota. The first was a Web-based application running on an ESRI product -- Internet Map Server -- that the public can use when going to the TaxMatch Web site by entering one address at a time.
"A lot of companies are using it that way," said Tschetter. "Our audit staff [members] also use it when they are out on a site auditing the records of a taxpayer and they want to determine if the right city tax was collected based on the shipping address on invoices."
The DRR also offers a stand-alone version that allows vendors to import batch files of addresses with the city tax codes and rates at the end of the file. The DRR said it will provide a flat file of the data in early 2005. That data can be integrated into a company's data processing software system, so the company can do calculations on the fly. Their application software sends out a call to the flat file and returns the correct city tax rate and code for any address.
South Dakota municipalities verify the data and help keep the system updated with changes on a quarterly basis.
"I think one of the things we see from the IT perspective is that GIS was the necessary tool to really bring this easily to fruition," said Otto Doll, CIO and commissioner of the state's Bureau of Information and Telecommunications. "The real challenge was getting all the addresses, making sure they were valid and having a process to keep them updated over time. GIS fits the bill here because, really, this all boils down to an issue of exact location, and GIS handles that perfectly."
On one level, the project is an example of how state government can make doing business easier in a state like South Dakota. But because it aligns with the SSTA, TaxMatch also demonstrates that technological solutions can make it easier to calculate sales tax on all types of transactions.
"This initiative fits hand and glove with the overall goal of the SSTA and the work of the sales tax states to convince Congress that we have removed the administrative burden for remote sellers to collect our individual sales taxes," said Gary Viken, secretary of the DRR. "This is just one more step that demonstrates that even though there are as many as 8,300 sales tax jurisdictions in this country, an out-of-state seller who wants to collect our tax can collect it and be guaranteed the rate we give them is going to be the correct rate.
"When we first started on the SSTA, we had this general understanding and assumption that this would be required only in those states where local governments only had sales taxes," he added. "Then we found out that there is a range of addresses on the Indiana-Ohio or Indiana-Illinois border that had exactly the same ZIP code. We very quickly realized that for that range of addresses, ZIP codes don't work. Half those addresses are technically in one state, and half of them are in another state."
TaxMatch, Viken said, is a system that addresses one fundamental barrier to implementation of the SSTA. It proves that remote sellers could easily collect sales tax on interstate transactions, provided they have the right technological tools to help them.