Sabrix® Solution

U.S. Zone Tree White PaperFebruary, 2007

© Copyright 2007, Sabrix, Inc.

SABRIX and the SABRIX logo are registered trademarks of Sabrix, Inc. or its subsidiaries in the United States and other countries. All other product names or brands are trademarks or registered trademarks of their respective manufacturers or owners. This version of this document supersedes any and all previous versions of this document. This document is the confidential and proprietary property of Sabrix, Inc. and is intended solely for possession and use by parties who have received prior written permission by Sabrix, Inc. This document is copyrighted and is protected by worldwide copyright laws and treaty provisions. This document may not be copied, reproduced, modified, published, uploaded, posted, transmitted, or distributed in any way, without Sabrix, Inc.'s prior written permission.

February 6, 2007

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Table Of Contents

Sabrix Solution U.S. Zone Tree . . . . . . . . . . . . . . . . . . . . . . . 1

U.S. Authorities and the U.S. Zone Tree . . . . . . . . . . . . . . . . 1

Sabrix Solution Components . . . . . . . . . . . . . . . . . . . . . . . . 2

Address Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Tax Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Tax Authority Boundaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The U.S. Zone Tree Structure . . . . . . . . . . . . . . . . . . . . . . . . 3

ZIP Code Boundaries and Centroids . . . . . . . . . . . . . . . . . . 5

How ZIP Code Data is Stored in the U.S. Zone Tree . . . . . . . 6

City Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

How Sabrix Integrates U.S.P.S. and GIS Data to Create the U.S. Zone Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Table Of Contentsiv

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Sabrix® Solution U.S. Zone Tree

U.S. Authorities and the U.S. Zone Tree

The Sabrix Solution U.S. Zone Tree is designed to determine the applicable state and local sales and use tax on a taxable transaction. The Sabrix Solution uses the U.S. Zone Tree to map transactions to the correct taxing authorities to determine the appropriate tax rates.

The U.S. Zone Tree is a hierarchical representation of U.S. geography. Each state is listed in the Zone Tree with its counties, incorporated cites, unincorporated areas, 5-digit ZIP Codes, and ZIP +4s.

The Sabrix Solution receives address elements passed in each transaction. Each address is located within the Zone Tree to the ZIP +4 level. The Sabrix Solution uses the Zone Tree to query which U.S. Tax Authorities are associated with each zone. Based on the applicable U.S. Tax Authorities, the U.S. Jurisdiction Logic determines which tax authorities will impose tax on the transaction. See the Sabrix Solution Jurisdiction Logic for Intra- and Interstate Sales, February 2007 white paper, available from Sabrix Support Services.

This White Paper explains the role of the U.S. Zone Tree in determining the appropriate tax calculation on a taxable transaction.

The following sections describe:

• Sabrix Solution Components (page 2)

• Address Elements (page 2).

• Tax Authorities (page 3)

• Tax Authority Boundaries (page 3).

• The U.S. Zone Tree structure (page 3).

• ZIP Code Boundaries and Centroids (page 5).

• How ZIP Code Data is Stored in the U.S. Zone Tree (page 6).

• City Default (page 8).

• How Sabrix Integrates U.S.P.S. and GIS Data to create the U.S. Zone Tree (page 9).

Sabrix® Solution U.S. Zone TreeSabrix Solution Components

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Sabrix Solution Components

U.S. sales and use taxes are based on the geographic location of a sale. For the Sabrix Solution to determine the exact location of a sale, accurate data must be included in the address element fields and tax authorities must be correctly assigned to the geographic zones in the Zone Tree. Once the address elements locate the sale location in the Zone Tree, the U.S. Tax Authorities assigned to the zone are applied to the transaction. It is possible for state, county, city, and district authorities to impose taxes on the transaction.

Address Elements

Addresses are passed into the Sabrix Solution for each transaction. Types of addresses passed into the Sabrix Solution might include the Ship To address, Ship From address, Supply address, Order Origin address, or Order Acceptance address. The address elements of an address are passed into the Sabrix Solution as XML code and include Country, State, County, City, 5-digit ZIP Code (Post Code), and ZIP +4s. (Note that province and district fields are not used in the U.S. Zone Tree.) These address elements are the first step in calculating the appropriate tax rate, and providing as much address detail as possible results in the most accurate tax calculation.

Below is an example of Address Elements in the Sabrix Solution.

Sabrix® Solution U.S. Zone TreeTax Authorities

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Tax Authorities

Taxing authorities represent the governments or districts that impose taxes. There are four levels of sales and use taxing authorities in the U.S.: state, county, city, and district. Once individual authorities are entered into the Sabrix Solution, they are attached at the appropriate level in the Zone Tree. For instance, Alabama imposes a statewide sales and use tax. Because this tax applies to the entire state, the state authority (AL - State Sales/Use Tax) is attached at the state level. If a transaction is passed in the state of Alabama, the state authority will always be returned in the Sabrix Solution U.S. Zone Tree. This same principle applies to all taxing authorities, at all levels of the Zone Tree.

Tax Authority Boundaries

It is important to know whether a sale took place inside or outside of a taxing jurisdiction. To do this, Sabrix tracks tax authority boundaries for all four levels of state, county, city, and district. Each authority has its own boundary, and if a taxable transaction falls within that boundary the tax authority has jurisdiction to impose tax.

Sabrix collects and maintains tax authority boundary information in two ways: from GIS data providers, and from our own Tax Research Department and Sabrix GIS analyst.

Sabrix collects state, county, and city geographic boundary information from GIS data providers. State and county boundaries rarely change. City boundaries change frequently with annexations, so Sabrix Tax Research monitors city boundaries, in addition to the information it obtains from GIS data providers.

The Sabrix Tax Research Department also researches and maintains district boundaries. Currently, Sabrix maintains the boundaries for over 350 tax districts, each with unique and irregular boundaries that do not follow city, county, or state boundaries.

All tax authority boundaries are updated regularly by both the GIS data providers and by Sabrix, and the latest information is included in the monthly Sabrix Tax Data Updates.

The U.S. Zone Tree Structure

The Sabrix U.S. Zone Tree is a hierarchical representation of U.S. geography. The Zone Tree is comprised of these elements: Country, State, County, City, 5-Digit ZIP Code, and ZIP +4.

The Sabrix U.S. Zone Tree was created using a Geographic Information System (GIS). GIS software is used for mapping, storage, retrieval, and analysis of geographic information. Locations are recorded and stored using geographic coordinates (longitude and latitude) which refer to unique locations on the earth. The GIS enables the overlay of state, county, city, and district boundaries to identify the ZIP Codes and ZIP +4s for each tax jurisdiction.

Sabrix® Solution U.S. Zone TreeThe U.S. Zone Tree Structure

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Here is a map depicting state, county, and city boundaries.

Here is the Sabrix U.S. Zone Tree representation of the same area, including ZIP Codes, and ZIP +4s.

Sabrix® Solution U.S. Zone TreeZIP Code Boundaries and Centroids

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ZIP Code Boundaries and Centroids

A ZIP Code boundary is a geographic representation of the area included within a United States Postal Service (U.S.P.S.) ZIP Code. There are approximately 43,000 ZIP Codes throughout the United States. These boundaries change frequently as new ZIP Codes are introduced to accommodate growth, and the old boundaries are realigned. ZIP Codes are needed to determine the exact taxing boundary and tax rate calculation because state, county, and city address information alone may not be granular enough to determine the correct tax calculation. Mailing addresses do not always map exactly to city boundaries. For example, a customer may live in an unincorporated part of the county, but their mailing address uses the nearest city with a post office. Without the ZIP Code, the Sabrix Solution would not have enough information to accurately place the address in the unincorporated part of the county, and the tax would not be calculated correctly.

In addition to the 5-digit ZIP Code, the Sabrix Solution uses a ZIP +4. A ZIP +4 is a much smaller area, comprising a sub-set of the 5-digit ZIP Code. For example, 97140 - 0000. One 5-digit ZIP Code area can include hundreds or thousands of ZIP +4s. A ZIP +4 typically encompasses one city block, but can be as large as several square miles in a rural area, or as small as a single P.O. Box. This data is represented by a point on a map, referred to as the “centroid”, the center point of the ZIP +4 area. Currently, the data available in the U.S. GIS data provider market uses centroids only for ZIP +4s, and boundary information at this level is unavailable. Since a ZIP +4 area is typically small, the risk of a ZIP +4 crossing tax boundaries is very small, although possible.

Sabrix obtains ZIP Code boundary and centroid data updates regularly from GIS data providers. Sabrix also obtains ZIP Code data directly from the U.S.P.S. to ensure that all valid ZIP Codes are accurately represented in the U.S. Zone Tree. The latest information is included in the monthly Sabrix Tax Data Updates.

The following page illustrates how ZIP Codes and ZIP +4 centroids are depicted on a map.

Sabrix® Solution U.S. Zone TreeHow ZIP Code Data is Stored in the U.S. Zone Tree

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Map of ZIP Codes and ZIP +4 centroids:

How ZIP Code Data is Stored in the U.S. Zone Tree

Tax calculation becomes complicated when a ZIP Code crosses tax jurisdiction boundaries. If a ZIP Code falls into multiple jurisdictions and a ZIP +4 is not passed in the transaction, the Sabrix Solution uses a ZIP Code that has been designated as the “default” for that address. The default ZIP Code is assigned to the jurisdiction with the greater number of ZIP +4s within the ZIP Code. A greater number of ZIP +4s indicates a larger population, and therefore the most likely geographic designation. Note that all 5-digit ZIP Codes are stored in the U.S. Zone Tree, but only those ZIP +4s that drive separate taxation are included. A ZIP Code designated as the default generally does not have ZIP +4s stored in the Zone Tree. ZIP +4s are only required for ZIP Codes that are not designated as the default. This reduces the number of ZIP +4s required to be stored in the Zone Tree, and greatly reduces the amount of data to be stored and shipped in the monthly Sabrix Tax Data updates.

For example, if a ZIP Code crosses two County taxing authority boundaries, the ZIP Code will be included under both counties in the Zone Tree. If the address element for the County is passed in the transaction, then the Sabrix Solution will accurately identify which County jurisdiction can impose tax. If the County address element is not passed in the transaction, then the Sabrix Solution looks for additional data, such as a ZIP +4. If a ZIP +4 is passed, the Sabrix Solution will locate it on the U.S. Zone Tree and calculate tax in the correct County. If a ZIP +4 is not passed, the Sabrix Solution uses the default ZIP Code as described above, because it is the most likely geographic designation.

Sabrix® Solution U.S. Zone TreeHow ZIP Code Data is Stored in the U.S. Zone Tree

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This map shows that ZIP Code 36052 in Alabama crosses into both Montgomery and Bullock Counties.

As shown in the following screenshot, the Sabrix Solution has determined that the portion of the ZIP Code falling into Montgomery County has a greater number of ZIP +4s so it has been designated as the default ZIP Code.

If this ZIP Code is passed into the Sabrix Solution without a County or a ZIP +4, Sabrix will use the default ZIP Code for Montgomery County. You can view this on your own instance of the Sabrix Solution by searching the U.S. Zone Tree for the ZIP Code 36052.

Sabrix® Solution U.S. Zone TreeCity Default

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City Default

When a city crosses County boundaries, the Sabrix U.S. Zone Tree designates a default city location. The county with the greatest geographic portion of the city is typically chosen to be the default city location.

In this map of the city of Haleyville, Alabama, you can see that most of the city falls within the county of Winston, and a smaller portion of the city falls within the county of Marion.

Sabrix® Solution U.S. Zone TreeHow Sabrix Integrates U.S.P.S. and GIS Data to Create the U.S. Zone Tree

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In the Sabrix Solution U.S. Zone Tree, the default county location for the city of Haleyville is Winston, because it’s where the majority of Haleyville addresses exist.

How Sabrix Integrates U.S.P.S. and GIS Data to Create the U.S. Zone Tree

The Sabrix U.S. Zone Tree is not based solely on U.S.P.S. data because occasionally this information does not accurately identify the exact geographic location of the delivery address. The U.S.P.S does not assign city names for addresses based on incorporated city limits. For example, an address may use the name of a city but fall geographically outside of the incorporated city limits. Or, the U.S.P.S. may deliver mail to neighboring cities that are closer to that post office. When that happens, the U.S.P.S. uses the city name of the post office delivering the mail, but will also accept an address using the actual delivery city address. Consequently, a single location may have two or more acceptable city names in the delivery address.

The U.S.P.S. sometimes uses multiple names for a single geographic location for addressing, referred to as a “Vanity Name.” For example, the U.S.P.S. views both “Washington, D.C.” and “National Imagery and Mapping, D.C.” as acceptable city names for ZIP Code 20303 and will deliver mail correctly. The U.S.P.S. city list also contains abbreviations and misspellings, and many cities have multiple acceptable spellings. For example, “Fort Stevens” can also be spelled “Ft. Stevens”; “McCall” can be spelled as “Mc Call”; “Jons Landing” can be spelled as “Johns Landing”.

While this flexibility in addressing allows the U.S.P.S to accurately deliver mail, transaction tax must be pinpointed to a unique location for accurate tax calculation. The Sabrix U.S. Zone Tree represents each unique geographic location only once, and cannot list multiple names for one unique location.

In the Sabrix Solution Version 4.3.3, Sabrix introduced the concept of Zone Aliases. This feature addresses the above problems with U.S.P.S. data by allowing Sabrix to support abbreviations, vanity names, multiple acceptable city names, and spellings. Most U.S.P.S. differences are supported directly in Sabrix Tax Data, and the Sabrix Solution allows customers to add their own aliases. For more information on Zone Aliases, see your Sabrix Solution User’s Guide.

Sabrix® Solution U.S. Zone TreeHow Sabrix Integrates U.S.P.S. and GIS Data to Create the U.S. Zone Tree

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