Destination and Origin Based Sales Tax

destination and origin based sales taxThe term “sales tax sourcing” is used to describe which tax rates are applied to a given purchase, and to which jurisdictions the tax money collected is owed. In most cases, this doesn’t affect brick-and-mortar stores, where the customer comes into the store to purchase the product. In this case, the sales tax is based on the rate where the store is located. Sales Tax Sourcing becomes much more important for retailers who ship products to other locations, such as online retailers and those who sell products by catalog. When you ship a product to another address, the knowledge of your tax rules becomes very important in both the sales tax calculation and when completing your tax returns.

What is Origin-Based Sales Tax?

Only a few states have laws that are origin-based, where products that are shipped to the customer are taxed based on the location of the business itself. As of this writing, these states are:

Arizona
California*
Illinois
Mississippi
Missouri
New Mexico
Ohio
Pennsylvania
Tennessee
Texas
Utah
Virginia

In these origin-based states, if the location of the company selling the product has, say, a 6.5% tax rate, then all shipments within that state are taxed at 6.5%, regardless of the tax rate at the location where the product is being shipped.

* California is a modified-origin state, where state, county, and city taxes are based on the origin of the sale, while district taxes are based on the destination of the sale.

What is Destination-Based Sales Tax?

Most states use destination-based sales tax, which defines the source of the transaction to be the destination at which the product will eventually be used, or the address to which the product is shipped. This is a more common practice, but one that is also harder to manage. In this case, retailers who ship product to an address within their state must collect sales tax at the rate of the address to which the product is being shipped.  The following states operate on a destination-based model at the time of this writing:

Alabama
Arkansas
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Idaho
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Nebraska
Nevada
New Jersey
New York
North Carolina
North Dakota
Oklahoma
Rhode Island
South Carolina
South Dakota
Vermont
Washington
West Virginia
Wisconsin
Wyoming

Destination-based taxes are more difficult to manage for online retailers (and even for those without online sales who sell through catalogs or other forms of mail-order). These retailers must know the combined tax rate for the address to which they are shipping an order. The tax rates aren’t always easy to determine. They differ throughout the states, and the rate often cannot be determined by a simple piece of address information such as a 5-digit zipcode.

It can also be more complicated to complete a sales tax return in a destination-based state. Some states do not require you to break down your sales by jurisdiction; you simply remit the full amount of the tax collected. But in other states, the sales tax return requires you to calculate tax amounts for different jurisdictions, so your records need to clearly indicate the sales tax amount due to each taxing authority.

How We Can Help

Our TaxTools sales tax software helps retailers comply with sales tax sourcing laws, by determining the correct sales tax rates for each order as the customer completes the order on your website. We remove the burden of inaccurate sales tax calculations and the need for retailers to manage a database of geographic locations and applicable sales tax rates. Our reporting system helps retailers complete tax returns with correct information. Additionally, for SSTP volunteer sellers, TaxTools will help you complete returns and remit sales taxes.

Things To Consider

Even in the simpler origin-based states, retailers need to be aware of the expanding definitions of “nexus” (a location in a state that subjects a company to its tax laws). Several states have passed laws that require retailers with affiliates in those states to collect those states’ sales taxes. Retailers who operate an affiliate program should keep a close eye on new laws that affect their tax liabilities and responsibilities.

Last updated March 11, 2014