In real estate they say, “Location! Location! Location!” Same is true for sales tax – except the word can have different meanings.
For example, when it comes to sales tax, do you need to follow “destination-based” or “origin-based” rules?
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.
Variation in destination 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.