Tax Mapping & Its Meaning in Compliance

What is tax mapping?

Tax mapping is the process of assigning specific tax codes to products, services, or transactions based on their taxability in each jurisdiction where a business operates. Businesses with complex offerings, such as digital products or services, may be taxed differently across jurisdictions. Mapping ensures that the correct sales tax rate is applied according to state, local, and industry-specific regulations.

What is the purpose of tax mapping?

Knowing when and where you have sales tax obligations is a key part of compliance. Understanding your taxability – especially if you don’t sell just tangible personal property (TPP) – is key to getting the right sales tax rates on transactions.

Tax mapping helps you determine how items are taxed in a jurisdiction. Anything not tagged to a tax code in mapping is taxed as TTP, which may not be the best or correct sales tax rate. By accurately categorizing each item or service according to relevant tax laws, businesses avoid errors in collection, filing, and reporting.

Accuracy

Historically, TPP has been any property perceptible to the senses. In general, all TPP is subject to sales tax unless a jurisdiction specifically excludes it. States also include many types of digital products as TPP even though they are not, in the longstanding sense of the phrase, perceptible to the senses.

Think of tax mapping as visualizing tax rates in different states and localities to help you understand your sales tax obligations. It means you apply the right tax code for the products you sell. Tax codes are usually housed back-office in a company’s accounting application or on the digital master inventory list. This can vary by type of business.

How do these codes apply to your products? Let’s say you sell clothing. Different tax codes could apply to accessories and to various types of clothing, such as accessories, and if you sell to exempt customers (which in some states could include businesses). Or let’s say you sell baby or feminine hygiene products; you need to map these correctly to make sure to account for the numerous sales tax holidays in various states during the year. Services can also be their own special category of taxation or exemption. Your goal is the best – and most accurate – sales tax rate for your customers and you.

Those are the codes to get the tax rates if you sell TPP. What if you sell something else?

The digital question

Though computer hardware, as TPP, is generally taxable, technology has spawned a host of profitable products that fall into much murkier classifications for sales tax mapping. For instance, some states consider digital products tangible; other states don’t. (Digital advertising and marketing is its own evolving, at times confusing, area of sales tax compliance.)

Technology companies providing software, digital services and goods have always found sales tax challenging, especially when trying to define the true nature of their product/service relative to sales tax statutes. Additionally, electronic delivery of these products/services can create situations relative to a far-flung customer base and sales tax jurisdictions.

Software-as-a-Service (SaaS) is one product in the forefront of taxability questions, as are such services as training, customization and support not ordinarily subject to sales tax unless they’re provided in conjunction with SaaS. (See our SaaS taxability map for more.)

Telecommunications companies also face tougher problems than most other businesses when trying to comply with federal, state and local tax and regulatory obligations (which to by such names as sales tax, communications services tax, utility users’ tax, local license tax and so on – even the Universal Service Fund).

Telecom companies are also generally assumed to have nexus wherever they have customers because, states reason, a company can’t deliver telecom service without using infrastructure in the state; this infrastructure creates “attributional nexus” for a company whether or not that company owns the infrastructure.

(For more information about tax compliance for telecommunications companies, download our eBook, Ten Steps to Telecom Tax Compliance. 

These are just a few of the potentially troublesome areas of tax mapping. TaxConnex is an expert when it comes to navigating the many complexities of sales tax compliance. Contact us to stay on top of this ever-changing environment of tax mapping.