ZIP-Codes and Tax

The Problem Using ZIP-Codes to Determine Tax Rates

Figuring out the correct sales tax rate is hard.

Many professionals decide to use paid-for or free online tax rate lookups.

Most of those lookups are based on ZIP-codes.

What is a ZIP-code?

ZIP is an acronym for Zone Improvement Plan. It was chosen to suggest mail travels more efficiently and quickly (zipping along) when added to an address.

ZIP-codes (example: 97128) were created by the US Postal Service as a means to divide the US into post office zones and make it easier for USPS national hubs to distribute mail to the thousands of USPS regional hubs and then finally your local USPS offices.

ZIP+4-code (example: 97128-9402) They represent a stretch of a street that multiple houses and buildings may be on within the main ZIP-code area.

Should ZIP-codes be used to determine a tax rate?

In the US there are about 40,000 ZIP-codes.

Three quarters of these have one tax rate for the whole ZIP-code area. That works great if a business only has customers in those ZIP-codes.

The remaining 10,000 ZIP-codes cross geographic areas that have different rates.

Example: A ZIP-code area covers two cities with different rates.

As a default a lookup may give the highest, lowest or even a “best guess” rate. There may be up to 12 tax rate combinations within a ZIP-code.

What about using ZIP+4-codes to determine a tax rate?

Some tax rate lookups use ZIP+4-codes. That makes the lookup more accurate but a Zip+4-code can still cross geographic areas and so have more than one rate.

What kind of lookup should I use to get correct rates every time?

You want a system that maps rates to an address or even better, a pinpoint on a map.

You want a system that keeps all tax rates across the US up-to-date.

You want a system that keeps track of all new and shifting tax area borders including state, county, cities and special taxing areas.

Fortunately, TTR has created and keeps such a system up-to-date. TTR’s rightRates lookup.

Don’t settle for kind-of-right or good enough. Make sure you have access to TTR’s rightRates to minimize audit risk and grow your business with confidence.