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 unknown addresses:
- Check the country is indicated. If you used a payment gateway, check to see if the system collected and stored the customer’s country name from their credit card charge.
- Check whether you have zip codes. If you used a payment gateway, check to see if the system collected and stored the customer’s zip code from their credit card charge, often stored as “postal_code” on the charge object.
- 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.
- Take a generic statistical approach. Similar to the option above, this option would have you distribute your unknown transactions across jurisdictions by population density or contribution to GDP. Let's say you choose the GDP approach with the UK, where you have met the registration threshold. Since the UK accounts for 2.1% of global GDP, you would attribute 2.1% of your $3M of unknown address sales to the UK.
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 global tax-automation service provider built for the Internet economy.