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How to fix your customer address data-quality problem

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Last Updated

How to fix your customer address data-quality problem

Anrok | Streamlined sales tax for SaaS

Before the digital age, retailers didn’t need to worry about customers’ addresses. Most sold goods in a brick-and-mortar store and had no care where their shoppers lived. Mail-order operations sold physical goods and thus could depend on customers providing an accurate shipping address.

Then came two major developments: Online shopping and associated expansion of nexus laws, and the creation of software that could be delivered digitally. With new nexus laws requiring companies to pay taxes in more places, vendors need to know where their customers are located. Yet those companies selling digital products are able to sell access to their product without needing to know their customers’ addresses. 

These two shifts have created a major stumbling block for digital software vendors. If you’re one of these companies, you may already be familiar with the customer address data-quality problem. Here’s a run-down of what you should know and what you can do about this niche-but-important topic. 

Why you may not know your customers’ whereabouts

Those who are selling software may never actually deliver a product to a physical address. Cloud-based software doesn’t typically have a tangible form and is often remotely hosted. So while the user is in one state, the product itself—which historically was a physical good transferred and taxed at a physical point—may be hosted and run on a server three states over. Since access to the product can be granted virtually, software companies might think they don’t need the customer address and don’t bother to collect it. 

In some cases—especially if you have an enterprise sales motion—your team may collect an address to put down as a bill-to or ship-to address on the invoice. But if you do self-serve sales, the customer inputs their data into your system, and they may not include an address. In a world where marketing and sales are trying to reduce the friction to purchase online, presumably unnecessary fields like customer address are often neglected.

If you suffer from the latter self-serve problem, the easy fix is to make a policy of requiring that self-serve customers input a full address. But changing that rule for the future won’t help you fix the problem of already having records in your files with missing or incomplete addresses. 

What happens if you don’t have valid addresses to use for compliance purposes?

Without valid addresses for all your customers, you have an incomplete picture of your nexus and exposure, and you may face increased audit risk as a result. We go into nexus in more detail here, but the quick version is that the obligation to collect sales tax can be determined by how much revenue you’re making in a given state. This is where customer address data comes in handy. 

If a state taxation agency sees that you have incomplete address data, it can decide how to fill in the gaps. One common approach is for tax authorities to apply the percentage of customers with address info in a given place to the customers with missing address info. So, if 15% of your customers are in Massachusetts, then state tax authorities there may apply 15% to the missing address transactions and claim them as Massachusetts sales. 

If you have no address detail at all, another common audit approach is to apply a population analysis, so if New York has 10% of the US population, they would assign 10% of your sales to NY customers. 

In both instances, it would be your job to prove them wrong. Alternatively, you can proactively work this out for your business and avoid these inaccurate and often detrimental assessments.

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What to do if you’re missing address info

If a portion of your records are missing address info, you’ll need to decide whether to try to fix the problem for these past transactions. You may choose to overlook them, determining that you’ll simply address the issue if you are audited and pay any assessments at that time. But whether you can feel confident in that decision will likely depend on your risk tolerance and what portion of your records lack information.

If you’d like to try a best-effort assessment of your tax obligations, here are some options for making a guess of what and where you owe for your transactions with unknown addresses: 

  1. Check whether you have zip codes. If you used a payment gateway, check to see if the system collected and stored any of the customer’s billing address information. In many cases, this billing information will include the customer’s zip code. 
  1. Take a business-specific pro-rata approach. Do a best-effort estimate given your distribution of sales. Let’s assume $7M of your transactions have known addresses and $3M have unknown addresses, and let’s assume 50% of the known addresses are in New York where you have nexus. You might then take 50% of the $3M with unknown addresses and claim them as New York transactions. Since New York does tax software, you would take 50% of $3M and calculate tax on the $1.5M. You could take the statewide average rate or pick the aggregate sales tax rate of the most populated city in New York to calculate the tax rate.
  1. Take a generic statistical approach. Similar to the option above, this option would have you distribute your unknown transactions across states by population density or contribution to GDP. Let's say you choose the GDP approach with the state of Texas, where you have nexus. Since Texas accounts for 8.5% of U.S. GDP, you would attribute 8.5% of your $3M of unknown address sales to Texas. Since Texas is a state that does tax software under data processing services, you would calculate tax on $255,000 of your sales. (Note: Texas only taxes 80% of the sale of data processing services, so you might be able to reduce your tax-due amount further.)

Get ahead of your address problem

As retail has gone online, the complexities of taxation have only grown, and all the more so now that products can be entirely digital. Those selling software and other digital goods must be particularly aware of the specifics of nexus rules and the common pitfalls to watch out for. 

Failing to collect addresses is one of those. But now that you know the details of this issue, you can take action to prevent future problems with tax accounting and have a path forward on how to get compliant today. Getting started and calculating accurate exposures has never been easier with a tax-automation service provider built for the Internet economy.

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