Selling Into the U.S. - Understanding How Customer Location Impacts Which Sales Tax Rates and Rules You Apply

The United States has possibly the world’s most complex sales tax regime. This is because each state sets its own sales tax rules, and states often take widely varying approaches. As a result, each state has a different tax framework, with varying rules around everything from tax liability and tax rates to exemption categories and reporting requirements. On top of this, some local area tax jurisdictions also have powers over some aspects of taxation and can set different rules for their area.

Given the wide variety of rules and the rapid rate of change, every business selling into the US faces several practical compliance challenges. Here are a few to consider when looking at building your US sales tax approach.

Destination or origin-based sales tax rules?

As a remote seller, you will 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 you have a physical presence in a state and are seen to make sales from within a state. For example, when consigned inventory is held in a warehouse in a state you are creating a physical presence. If you have a physical presence in a state, and that state applies origin-based tax rules, and you sell to a customer in that same state, then origin-based tax rules apply.

Origin-based tax rules

Origin-based sourcing applies to intrastate commerce. When a seller ships from within an origin-based state to a destination within the same origin-based state, the sale is sourced to the origination point and sales tax applies at the origination point.

Destination-based/remote seller tax rules

Destination-based sourcing applies to interstate commerce. When a seller ships into any state from a location outside that state, the sale is sourced to the destination point and sales tax applies at the destination point.

Location determination

In the US, the applicable tax rate is based on a specific geographic location. In most situations, businesses use the 5-digit US zip code. For more accurate sales tax rates 'ZIP + 4' code can be used. This means that additional address details are supplied such as a street address, city, and state; and then address validation is performed to match the supplied address to the United States Post Office address database. Utilizing a specific latitude and longitude to identify the rooftop level accuracy of what tax rate applies is even more accurate.

Selling into the states, especially when you do not have a physical presence, can be extremely difficult to manage alone. If you’re looking for help with managing a multi-state sales tax obligation, it’s often best to work with a sales tax expert to ensure you are maintaining compliance and not putting your business at risk for penalties and fees.

Contact TaxConnex to learn how we can help alleviate the burden managing sales tax.

This blog is an excerpt from a longer eBook – Selling into the US – A practical Guide to Implementing a US Sales Tax Strategy – read it now!