Wayfair Nexus Decision Has Increased Importance of Accurate Address Validation
As those of us in the sales and use tax world all know by now, the recent supreme court decision in Wayfair expanded the definition of state tax nexus—the amount and type of business activity that must be present before a business is subject to the state’s taxing authority—so-called “substantial nexus”. That definition, which used to be limited to “physical presence”, was expanded to include a concept of economic presence, which specifically requires only a certain volume of economic activity measured by either the amount or number of sales in the state. The practical effect of this expanded definition is that businesses may be subject to more state tax jurisdictions than ever before. The key to compliance in all these jurisdictions is the quality of the data used to determine: (1) where liability exists, (2) how much tax is owed, and (3) when, where and how to report it to the tax authorities. And the quality of that data depends upon how efficiently and competently a business manages the tax data relevant in the various jurisdictions.
Tax Data Management Systems and Address Validation
In the modern business era of “big data”, data analytics”, and “artificial intelligence”, the long-standing adage “garbage in-garbage out” is actually more relevant in its consequences than ever before. Quality data is power, and a tax data management system that manages that power is, as one Big Four firm put it, “the foundation of sustainable tax compliance, planning and examination support.” The key component in producing that foundational quality data is data reconciliation and validation, and in the post-Wayfair sales and use tax context, quality data means quality address validation. For without accurate addresses, businesses cannot determine nexus, and without nexus, correct tax rates and reporting obligations cannot be determined. And such mistakes can lead to large assessment by tax authorities for underpayments going back many years, as well as class-action lawsuits by purchasers who have been overcharged.
Attributes of a Best Practices Address Validation Service
Your first consideration is: How long (if ever) has it been since our customer address data was reviewed from a taxing perspective? If you answered any of the following – huh, not sure, or a long time – then a review of your existing data makes good sense (and cents). There are many “off the shelf” tools that do address validation; however, their focus is not sales tax compliance. And just because your product deliveries may be going through, that does not mean you precise enough for a sales tax audit. A good review of your customer address information should be backed by a vendor with an established reputation in both tax compliance and tax research. In addition, the service should have features like:
- Flags that include: address verified, corrected, bad (unable to verify due to incorrect information), and multiple addresses.
- For addresses that cannot be verified, a verification message indicating possible reason will be returned.
- A flag that will indicate which components of the address were corrected.
- A tool that returns a correct street, city, county and state assignment formatted to US Post Office standard for street number and name for addresses that can be verified and
- Return ZIP+4 for addresses that can be verified
The Wolters Kluwer Address Validation service is conducted by Sales Tax Experts. On average, we find that nearly 80% of customer addresses need corrections or updates. Don’t learn this from an auditor.
Consider this one example (there are thousands) of a single ZIP code that includes 6 different sales tax rates. Precision matters.