Does sales tax get charged based on customer location or purchase location? You know our favorite saying – IT DEPENDS! This question is another one of those conundrums that sales tax likes to throw at businesses and in this blog we’ll be examining just that by looking at “destination-based” or “origin-based” rules for sales and use tax purposes. Right to the source
“Sourcing” is important when you determine your sales tax obligations. Sourcing refers to the location where a sale is taxed.
Most states follow destination-based sourcing rules meaning you must apply the sales tax rules and rates based on the customer’s location. Additionally, for interstate commerce, when a seller ships into any state from a location outside that state, the sale is sourced to the destination point and the sales tax rate applies at the destination point.
There are some states that go against the grain and are considered origin-based states. If you are based in one of these states or you ship from within one of these states to a destination within the same origin-based state, you collect and remit sales tax according to the rules and rates applicable at the business location, which means “origin-based.”
Those are the general rules for origin based tax and destination based tax.
Variation in destination-based sales tax rules
Even if you assume that sales tax applies at the destination for all interstate commerce, there are variations. For example, in Texas, certain types of software receive a 20% exemption – essentially reducing the effective sales tax rate. Similarly, Connecticut has a reduced sales tax rate for SaaS when sold to businesses which is a different sales tax rate when sold to consumers. In most other situations, following the destination-based sourcing rules for interstate commerce is a safe bet.
Origin based states
Major origin-based states include Texas, Pennsylvania, Ohio, Virginia and California. Most states and Washington, D.C., are destination-based requiring you to apply sales tax at the location of the customer. In destination-based states you might have to consider numerous tax jurisdictions and their impact on your sales tax obligations.
California is a “hybrid-origin” state that applies certain state and local taxes based on the origin of a transaction but also applies certain district level sales taxes based on the destination.
One good rule to help cut through the confusion: Determine if your home state and where you ship from is destination or origin-based. If your home state and where you ship from are destination based, then you can be safe in applying destination-based sourcing to all of your transactions. If your home state or where you ship from is origin-based, then you will need to follow the origin-based sourcing rules in those states and follow destination-based sourcing in the remainder of the states.
Contact TaxConnex to learn how we can help alleviate the burden managing sales tax. If you would like more information on origin vs destination, click here - Selling Into the U.S. - Understanding How Customer Location Impacts Which Sales Tax Rates and Rules You Apply.
Written by Robert Dumas
Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.
