State Tax

A discussion on the accurate assignment of taxes

White Paper

Business Geographics®

INTRODUCTION

There is no more important challenge facing state tax directorsand comptrollers today than the proper assignment of taxes:important because taxes drive government, support public worksand help sustain an environment where business can thrive;challenging because tax assignments have become an extremelycomplex maze that breeds inaccuracies and impacts revenue.

This paper addresses current inefficiencies in the assignment oftaxes and their potential impact on revenue and liability. It alsoexamines new methodologies for more accurate tax assignmentsand describes how many states have successfully changed theway they establish tax rates.

THE CURRENT STATE OF TAXASSIGNMENTS

Location accuracy is critical for tax jurisdiction assignment, yet it isestimated that tax assignments can havean error rate of about 10%.1

In the last decade, state officialsresponsible for tax assignments havestruggled to keep up with constantlychanging jurisdictions, more and moretax districts, and new governmentmandates.

The bottom line is tax assignments are a complicated business.They are not aligned with the U.S. census or any overarchinggovernmental body. They do not conform to uniform regulationsstate by state, or in many cases, even from neighborhood toneighborhood. Beyond geography, they also include special taxdistricts such as school districts, E911, fire districts, transit,hospital, stadium, and a variety of others.3

Even after they are assigned, tax boundaries frequently change as aresult of incorporations, annexations, mergers, consolidations,dissolution or addition of tax districts, and new mandates.4 State taxcollection, for instance, has become very complicated because taxrates are not always based on the rate in effect at the point of sale.In Colorado, for example, sales taxes are based on where goods aredelivered, not where they are purchased.5

Businesses in the telecommunications, insurance, electric andgas utility, and the services and retail industries are all impactedin various ways by the need for accurate sales and use taxassignments. In many cases, collecting too much tax is as muchas a problem as under collection.6

THE PROBLEM WITH ZIP CODES™

The ZIP Code™ is a postal delivery system created by the U.S.Post Office in 1963 for the convenience of expediting maildelivery.7 It was never intended to guide accurate and equitabletax assignments, yet most state and local tax assignmentsthroughout the U.S. are based on street address ranges and ZIPCodes™. This system may have worked well enough in the past,but it is extremely error-prone today.8

Seemingly simple to use, Zip Codes™ have inherentcharacteristics and limitations that consistently cause ongoingand expensive problems for tax jurisdiction assignments.

2

®

1 Accurate Tax Jurisdiction Assignment - A Difficult and Complex PropositionBob Meador Directions Magazine, Sept. 17, 2004, http://ww.directionsmag.com/article.php?article_id=6522 High Definition Data for High Definition Decisions in Government Pitney Bowes Group 1 Software3 Lot 54 Where are You? Pitney Bowes Group 1 Software4 High Definition Data for High Definition Decisions in Government Pitney Bowes Group 1 Software5 Accurate Tax Jurisdiction Assignment - A Difficult and Complex PropositionBob Meador Directions Magazine, Sept. 17, 2004, http://ww.directionsmag.com/article.php?article_id=6526 Accurate Tax Jurisdiction Assignment - A Difficult and Complex PropositionBob Meador Directions Magazine, Sept. 17, 2004, http://ww.directionsmag.com/article.php?article_id=6527 History of U.S. Postal Service, USPS, http://www.usps.com/history/his2_75.htm8 Lot 54 Where are You? Pitney Bowes Group 1 Software

Up to

25%of municipalboundaries

changeevery year.2

THE COMPLEXITY OF STATE AND LOCALGOVERNMENT ASSIGNMENTS

First of all, ZIP Codes™ don’t always correspond to jurisdictionboundaries. In addition, boundaries change frequently (seeFigure 1) and ZIP+4® Codes experience additions, deletions andother changes at the rate of 600,000 each month.9

Further complicating the landscape, some states require thatjurisdictions correspond not just to ZIP Code™ requirements,but to political or census boundaries as well, which ebb andflow along with local populations. They may even be based onpolice or fire districts (as in states like Florida) resulting in stillhigher tax assignment errors.10

Of the approximately 20,000 municipalities across the U.S., infact, as many as 30% of ZIP Codes are in conflict withmunicipal, county and even state boundaries,11 resulting in taxesbeing charged where, in fact, none are due (see Figure 2). Theyalso often lag rapid development, failing to include, forexample, entirely new sub-divisions.

For individuals responsible for establishing territories andevaluating premium tax rates, the result of these inconsistenciesis eye-opening: between 6% to over 25% of all territoryassignments are incorrect.12

Figure 1a. ZIP Code 60544 in 2005Figure 1b. ZIP Code 60544 splits into 3 ZIP Codes in 2006

Note that the three new ZIP Codes do not align evenly with theoriginal ZIP Code boundary. Portions of neighboring ZIP Codeshave either been included or removed from the area thatconstituted what used to be ZIP Code 60544.

3

White Paper

Business Geographics

9 High Definition Data for High Definition Decisions in Government Pitney Bowes Group 1 Software10 Lot 54 Where Are You? Pitney Bowes Group 1 Software11 Bruce Shutan, Group1 Software’s Latest GeoTAX application holds promise for rating tax territories12 High Definition Data for Premium Tax Determinations, Pitney Bowes Group 1 Software, Dec. 2004.13 Lot 54 Where Are You? Pitney Bowes Group 1 Software

Figure 1 - ZIP Codes change frequently13

Note the red triangle is the centroid of the ZIP+4, so all resultswill show inside the municipality when in fact the street

crosses city boundaries.

4

®

14 High Definition Data for High Definition Decisions in Government Pitney Bowes Group1 Software15 High Definition Data for High Definition Decisions in Government Pitney Bowes Group1 Software16 Pitney Bowes Group 1 Software17 Lot 54 Where are You? Pitney Bowes Group 1 Software

40 millionZIP+4 Codes

in the US

600,000change each month

Figure 4 - Many municipalities are without a ZIP+4.16

Figure 5 - ZIP Codes are not necessarily stable over time17

Arizona 6.9%Texas 9.2%Kansas 10.5%Utah 11%South Dakota 23%Oklahoma 34%

National 1,432 of 19,486 (7.3%)

Figure 3 - Even ZIP+4 Codes which represent thelocation for several addresses

can cross boundaries15

Figure 2 - Some ZIP Codes cross boundaries14

5

THE SOLUTION TO ZIP CODEASSIGNMENTS

Many government agencies are taking advantage of newsegmentation strategies and innovative technology to correct ZIPCode™ deficiencies and confidently assign sales and use taxjurisdictions, most notably in the area known as “BusinessGeographics.

BUSINESS GEOGRAPHICS

A Street Level Assignment Provides the Correct Jurisdiction

Business Geographics is a methodology that is bringing streetaddress-level precision to county, municipality and sub-jurisdiction tax assignments. It can also help citizens determinetheir congressional districts, representatives, voting precinctsand polling locations or school districts.

Business Geographics goes far beyond Zip Codes™ to correct,clean and standardize information so that it reflects accuratephysical addresses and locations. Utilizing technology-basedGeographic Information Systems (GIS) that combine multiplelayers of geographic data, Business Geographics provide a betterscope of understanding of a physical location. It combinesgeocoding, the assignment of latitude and longitude to addresslocations, and spatial analysis, the assignment of territories, tomap rich sets of data for use in such far-ranging activities ascensus gathering, disaster preparedness, fire services, healthservices, sanitation, transportation, economic development,housing, land use and assessments.18

LEVERAGING BUSINESSGEOGRAPHICS FOR TAX ASSIGNMENTS

Business, banking, commercial and residential construction, realestate, and governments at all levels are using BusinessGeographics to correct inaccuracies and inefficiencies resultingfrom error-prone ZIP Code-based municipal assignments. Withnew methodologies developed specifically for them, taxdirectors and comptrollers are now also using businessgeographics to quickly and accurately assign tax territories.19

They are also using this approach to locate businesses withintax jurisdictions, enhance DMV customer data and information,and in the distribution of income tax funds back to cities.20

White Paper

Business Geographics

18 The Public Health Disparities Geocoding Project Monograph Harvard Universityhttp://www.hsph.harvard.edu/thegeocodingproject/webpage/monograph/geocoding.html

19 Lot 54 Where are You? Pitney Bowes Group 1 Software20 Pitney Bowes Group 1 Software

Figure 6 - Street level assignments

By implementing a business geographics approach, state andlocal governments have the ability to:

■ Correct jurisdiction assignments ■ Perform audits to help ensure compliance and assign taxes

appropriately■ Perform jurisdiction assignments in real-time■ Greatly reduce human error during address entry■ Execute batch geocoding and spatial processes to benefit

back-end processes and deliver consistent jurisdiction assignments

■ Identify non-residential addresses, such as Rural Route addresses, and assign the residential address

STATES USING BUSINESS GEOGRAPHICS TODAY

Many state and local governments are applying a businessgeographics approach to help identify correct sales tax rates.Some school districts are even realizing millions of dollars inimproved tax revenue collection as a result of more accurate taxjurisdiction assignments.

GeoTAX®

A number of state agencies and others are utilizing a BusinessGeographics product suite called GeoTAX® from Group 1Software, Inc. that can meet the unique requirements of taxassignments.

GeoTAX® provides comprehensive coverage of municipal andspecial tax districts through more accurate method of matchingan address and determining whether it is inside or outside ofthese tax districts.

6

®

■ GeoTAX® standardizes addresses and appends state, county, municipal place, and special tax jurisdiction information to address records.

■ GeoTAX® provides access to the most current taxation boundary information through a data update process that continually tracks and updates taxation boundaries nationwide.

■ GeoTAX® users have access to Tele Atlas' dynamap/municipal boundaries database, with updates on governmental boundary changes from new incorporations, annexations, deannexations, mergers, consolidations, disincorporations, or dissolution of local governmental entities.

■ GeoTAX® supports legislation and enhances compliance with jurisdictional coding requirements of Federal and statelegislation such as the Mobile Telecommunications Sourcing Act (MTSA).

■ GeoTAX® can locate valid addresses that are not in the USPS® database by using two separate data sets – USPS®

addresses and geographic street network data.

■ GeoTAX® supports state-supplied address listings, enabling users to match address data against street address ranges as required by the Mobile Telecommunications Sourcing Act (MTSA).

7

CONCLUSION

State and local governments depend on accurate tax jurisdictionassignments to support budgets and serve its constituents. Yetwith tax jurisdictions constantly changing and new taxjurisdiction assignment requirements mandated by federal andstate laws, the potential errors and liability resulting frominaccurate tax assignment poses a significant problem. BusinessGeographics offers tax directors and comptrollers significantand measurable alternatives to tax assignments based on ZIPCode™ and other parameters. Along the way, they can correctrevenue imbalances and streamline operations.

GeoTAX® is a comprehensive solution that standardizesaddresses and appends accurate state, county, municipal place,and special tax jurisdiction information to customer addressrecords. Importantly, switching to an address-based territoryassignment and Business Geographics model does not require amajor change to an organization’s existing InformationTechnology architecture. GeoTAX® is specifically designed towork within an existing operation – reducing implementationtime and costs.

GeoTAX® is a product of Group 1 Software, which specializesin high-definition customer intelligence to help organizationscommunicate better and make smarter business decisions.Pitney Bowes Group 1 Software provides industry-leadingsolutions that make it easy for government agencies to cleanseand enrich their data, generate personalized customercommunications and empower constituents to serve themselves.

GeoTAX® is available in client/server and interactive, web-enabled versions. Additionally, organizations can utilizeGeoTAX® through HotData, Group 1's hosted services.

To find out more, contact Pitney Bowes Group 1 Software at 1-888-413-6763 or visit www.g1.com.

White Paper

Business Geographics

®

For more information about our products and services, please log onto our website: www.g1.com

©2006 Pitney Bowes Inc. • All Rights ReservedAn Equal Opportunity Employer. • Printed in U.S.A. • WPW1013/1206G1

Group 1 Software4200 Parliament Place • Suite 600

Lanham, MD 20706-18441-888-413-6736

Group 1, GeoTax and the Group 1 logo are registered trademarks of Group 1 Software, Inc. The following are trademarks owned by the United States

Postal Service®: USPS and ZIP Code. Pitney Bowes is a registered trademark andthe Pitney Bowes Process Bar Design is a trademark of Pitney Bowes Inc.

All other marks are trademarks registered trademarks of their respective companies

®

White Paper

Business Geographics