“Sourcing” or as we often call it, situsing, is key when you determine sales tax obligations: It refers to the location where a sale is taxed. According to the Sales Tax Institute there may be changes on the horizon– and though the aim appears to lean towards improving life for remote sellers, the changes only seem to make meeting sales tax obligations harder.
Most states follow destination-based sourcing rules, where remote sellers must apply the sales tax rules and rates based on the destination of where they are shipping product. 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 there.
Of course, nothing’s easy in sales tax: Some states are origin-based. If you’re based in one of these states or 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 (aka “origin-based”).
Though destination rules can vary, following destination-based sourcing rules for interstate commerce is a safe bet (though you might have to consider numerous tax jurisdictions and their impact on your sales tax obligations). Major origin-based states include Texas, Pennsylvania, Ohio, Virginia and California.
Note that California is also 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.
Could it be the Golden State has a level of sales tax complexity that other states are now trying to emulate?
Many sourcing changes have cropped up in recent months. In Illinois, for instance, the Leveling the Playing Field for Illinois Retail Act kicked in on Jan. 1, 2021, making a change from origin to destination sourcing for remote sellers for the state’s retailer’s occupation tax (ROT) and local ROT. Rather than level anything the Act puts remote sellers at a significant disadvantage to in-state sellers.
Other states are also changing:
- New Mexico switched to destination-based sourcing for both in-state and out-of-state sellers almost a year ago. Previously, remote sellers were required to collect only the statewide use tax rate on online sales to customers in New Mexico, and New Mexico businesses were required to pay the local rate at their business location.
- Effective last Oct. 1, Texas changed the sourcing of internet-based transactions for Texas retailers, shifting them from an origin-based to a destination-based sourcing model. (This change has since been challenged with no answer yet.)
- Colorado has reportedly green lighted extension of sales and use tax destination sourcing rules for in-state businesses with less than $100,000 in retail sales until this Oct. 1; it was previously set to expire last February.
Rules to depend on
As we said, remote sellers normally follow destination-based tax rules, meaning you must, in theory, apply the sales tax rules and rates of the customer’s location. But there can be cases where remote sellers are seen to make sales within a state – for example, when goods are held in a warehouse in the state. In this case, origin-based tax rules could apply depending on the state. You must then collect and remit tax according to the rules and rates applicable at the business location.
One good rule to start: 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, you safely apply destination-based sourcing to 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 of managing sales tax amid constantly changing legislation.