Meeting the Telecommunication Industry’s Challenge of Tax Jurisdiction Assignment: A Case Study at Verizon

By Martin Sohovich

Telecommunications companies have historically had difficulties accurately situsing customers for taxation purposes.["Situsing" is the legal term for the process of determining tax jurisdictions/authority over a taxable transaction.] This is because they have been unable to determine with any true precision the tax jurisdiction in which their customers reside.This is a continual struggle owing to the constant changing of tax boundaries as a result of new incorporations, annexations, mergers, consolidations, or dissolution of local governmental entities and an increasing number of special tax districts.Added to this equation is the burdensome number of telecommunications taxes and fees assessed by different governmental bodies, from the federal to the state and local level.Those providers that have struggled to keep up with the changing boundaries have been faced with headaches ranging from disgruntled consumers claiming they have been inaccurately taxed to class action lawsuits stemming from inaccurate taxation.To help provide for accurate customer taxation, Verizon Communications Inc.(NYSE: VZ), one of the world's leading providers of communications services, utilizes Group 1 Software's (NASDAQ: GSOF) GeoTAX solution.

GeoTAX is a suite of tools that standardizes customer address and appends information regarding state, county, municipal place, and special tax jurisdictions, providing the most current, accurate tax jurisdiction assignment information.This solution first validates, corrects, and formats every element of an address element and appends a ZIP+4 code to the address for greater geographical precision.Once an address has been verified, the correct tax jurisdiction information is assigned to the address utilizing a ten-digit character FIPS (Federal Information Processing Standard) code.Up-to-date tax jurisdiction information is provided by access to a database that continually tracks and updates taxation boundary files nationwide.This information is obtained from statewide agencies that review boundary changes, individual city and county clerks, and other municipal, county, and state agencies involved in the boundary determination process.

Overseeing this operation on a corporate-wide level at Verizon is Dan Lawson, manager of tax systems and controls, a pioneer in the telecommunications industry's development of tax jurisdiction assignment solutions.In total, the solution is utilized by Verizon to provide for accuracy in tax jurisdiction assignment for the records of over 10 million customers.Verizon utilizes it on the mainframe and UNIX.Before Group 1's introduction of a fully integrated solution in 1997, Lawson sought to develop a homegrown, internal solution to ensure tax jurisdiction accuracy for GTE (which merged with Verizon in 2000).

While many major tax compliance systems assign tax jurisdiction based on a standard 5-digit ZIP code, this can be quite problematic, considering many ZIP codes are so large they encompass multiple counties, municipalities, or unincorporated areas.A benchmark analysis of major metropolitan areas by Group 1 for the Florida League of Cities confirmed the inaccuracies in the five-digit ZIP Code method, indicating an average of a one in three chance of error in using this method.For the 9-digit ZIP records, Group 1's benchmark had an accuracy rate over 99 percent.

"Software that assigns accurate tax jurisdictions helps us reduce our audit assessment and limit the potential that we will be involved in lawsuits stemming from inaccurate taxation," said Lawson."With continually changing boundaries, the ZIP+4 approach improves our compliance with state and local tax provisions and facilitates the accuracy of local level taxation throughout our operating areas," said Lawson.

"Since implementing a situsing solution, the number of calls we receive from our customers claiming they have been taxed inaccurately has dropped significantly.Using the ZIP+4 software also enables us to ensure that we are not charging or remitting funds to incorrect governmental bodies that could lead to local, county, and state audit assessment if we assign the incorrect tax jurisdiction to an address."

Verizon has also integrated the solution into certain areas within its order-entry platform, where it outputs FIPS place codes.This information is appended to the customer's address record to determine the accurate tax jurisdiction, so when a consumer orders a new service, the tax jurisdiction is assigned.To accommodate Verizon's need for a solution that could handle special tax districts, this functionality was incorporated into the product.Special tax districts are not followed by the U.S.Census or any central government body and do not have defined geographic boundaries, making the tax jurisdiction assignment challenging.There are numerous special tax districts, each established to finance a local public need, such as a hospital, school, or stadium.The number of special tax districts continues to increase, with many districts changing boundaries annually.With this new functionality, the company now has a granular solution that can match addresses in these areas by systematically identifying special tax districts, gathering and analyzing boundary information, and tracking any changes.This eliminates the time-consuming manual lookup processes, which included phone calls to local municipalities, Verizon had to undertake previously to determine boundaries and parameters.

Lawson's goal is to have the software in customer contact centers and order entry platforms to provide accurate tax jurisdiction assignment information and verified addresses for use in Verizon's various billing systems.This information could be captured on the front-end while the customer is interacting with Verizon on the phone, perhaps while credit checks are conducted on new service orders.Not only will this provide for accurate tax jurisdiction assignment, but also enable Verizon to ensure its communications reach customers accurately and on-time.When the geocoded information is fed into third-party tax compliance and billing systems, Verizon can then determine the taxes assigned to each purchase.


Published Thursday, January 10th, 2002

Written by Martin Sohovich



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