Misreported sales tax causes finger-pointing and woe – Wacky Tax Wednesday

With more than 12,000 different sales tax jurisdictions in the United States, it’s a wonder any business collecting in multiple states remits the correct amount of tax to the proper jurisdiction at the right time. Miraculously, they do.

Yet errors do sometimes happen, and they can be costly. Businesses usually bear the brunt of the costs; according to a Wakefield Research survey, the average audit costs companies more than $300,000. But errors can cost local governments, too, as recent events in Wyoming and Florida reveal. Read on for the disheartening details.

Wyoming woes

From October 2013 through December 2015, $2.37 million in sales tax revenue that should have been distributed to Sweetwater County, Wyoming, ended up in nearby Natrona County. Thus, while Sweetwater County finds itself unexpectedly flush, coffers in Natrona County and affected cities will soon be lighter.

According to the Wyoming Department of Revenue (DOR), a vendor in Sweetwater County collected the correct amount of local tax due but accidentally reported it to Natrona County instead of Sweetwater: “They filed their returns electronically and they just reported it in the wrong jurisdiction,” says Kim Lovett of the DOR.

The DOR then distributed the funds to local governments within Natrona County: Bar Nunn, Casper, Edgerton, Evansville, Midwest, Mills, and Natrona County, itself. For some of these, the extra revenue was significant; the county was given $366,000, and Casper received $1.7 million. This money now must be handed over to Sweetwater County.

There was no intentional foul play: County officials didn’t surreptitiously divert funds; the retailer didn’t pocket sales tax revenue or give customers a sales tax break. Although the sales tax rate in Natrona County was 5 percent, the company collected the 6 percent then due in Sweetwater County.

It was a reporting error, plain and simple, but it was a doozy. Lovett says she hasn’t seen “a mistake of this magnitude” in the past.

With the city budget now seriously out of whack, Senator Bill Landen of Casper is investigating the situation in hopes of preventing another of its kind. Depending on what he finds, he could suggest beefing up resources at the DOR or even amending the sales tax law so that an audit is triggered in the event local sales tax revenue changes drastically year over year. The Casper City Council is also calling for a review of the sales tax reporting system.

DOR Director Dan Noble says errors of this nature, if not this magnitude, are relatively frequent. Unfortunately, with approximately 32,000 vendors collecting and remitting sales tax in the state, they’re not always easy to find.

Finger-pointing in Florida

A similar situation occurred in Florida. According to the Herald-Tribune, Manatee County incorrectly received millions in sales tax revenue owed to Sarasota County. As a result, Manatee County and the Manatee County school district may have to turn over some $6 million to its southern neighbor, Sarasota.

Details between the two cases are similar but different. Manatee and Sarasota counties share a border, and both have a state and local sales tax rate of 7 percent. For several years, numerous retailers along the border were erroneously remitting tax to the wrong county.

It seems no one is interested in taking the blame.

Sarasota County Property Appraiser Bill Furst says his staff has known since 2013 that some Sarasota retailers were listed, incorrectly, as being in Manatee County: “We discovered in 2013 [the Department of Revenue was] crediting Manatee the sales tax on 21 Sarasota accounts. By 2015, that number grew to 172.” The drastic increase appears to have been due to the opening of the Mall at University Town Center; “They were assessing a lot of the mall as being in Manatee County,” Furst says.

The Florida Department of Revenue takes issue with that. The department’s Communications Director, Valerie Wickboldt says local governments "should assume responsibility for checking the accuracy of DOR address databases used to collect their local sales taxes.” She said businesses provide an address to the DOR, and the department cross references those addresses with ZIP codes. There are ample opportunities for businesses and local governments to review and verify the addresses listed in the department database, which presumably lists the county.

Unfortunately, ZIP codes don’t correspond with sales tax jurisdictions; though they often overlap, they actually have nothing to do with each other. There's  a town in Colorado with one ZIP code but four different sales tax rates, and it's not an outlier. There, as in Sarasota and Manatee counties, it's essential to know precisely where tax jurisdictions start and end.

Fortunately, there's another way: Avalara's sales tax automation software uses geolocation technology instead of ZIP codes to determine the exact point of a taxable transaction.