Sales Tax Glossary: Taxing Jurisdiction

Sales tax talk isn’t always the easiest to understand. It reflects the high complexity of the sales and use tax world. One expression that baffles a lot of people who aren’t sales tax experts is the phrase “taxing jurisdiction” or “tax jurisdiction.” Isn’t that the same thing as your state? Well, not exactly. Understanding tax jurisdictions requires a knowledge of how sales tax rates are determined. Each state first decides if they’re going to have sales tax, some other type of sales related tax, or no sales tax at all. California, for instance, has the highest state rate at 7.5%. New Hampshire, however, has no sales tax at all. Hawaii has general excise tax but it acts like sales tax in many cases. However, this is only the first level of what makes up a tax jurisdiction.

After the state level, there are local option taxes that counties, municipalities, and even specific areas inside of a municipality can create. For instance, if your business is located in the downtown tourism district of a town in Illinois, you might have to collect sales tax for the downtown district, your town, your county, and your state. Your tax rate is a combination of all the different rates that apply to your area. Each different part that goes into your total rate is a tax jurisdiction, so in the case of the above imaginary business, there are 4 separate jurisdictions to which the business needs to pay attention. There are thousands of tax jurisdictions across the country to the point where one business might collect a completely different rate than the business across the street.

That’s also why you should never use zip codes to calculate sales tax. There can easily be multiple rates in one zip code so using an exact address is important to getting the tax jurisdictions that apply correct. Keeping up with rate changes on your own is a impossible when there are so many tax jurisdictions so automating your sales tax processes is a smart business move. Sales Tax DataLINK software automates the process and keeps all the rates in all the jurisdictions up to date. It automatically finds variances when you file, too, so you can easily catch and correct any issues before you file — not later, when it’s a lot more trouble to fix the problem. Contact us today and let us impress you.

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