Origin-Based and Destination-Based Sales Tax Rate
Sales tax rate navigation can be a challenge. To determine the correct sales tax to charge your customers in your home state, first determine if your business operates in an origin-based or destination-based state.
Note: This information applies only to determining the sales tax rate in your home state. States have different rules for out-of-state sellers.
This guide will help you answer key sales tax questions:
- How much sales tax should I charge buyers in my home state, and at what rates?
- Do I charge the same rate for every customer?
- Should I charge a rate based on the customer’s location?
- How much sales tax should I charge buyers in states where I am considered a “remote seller”?
In origin-based states, sales tax is collected based on the seller’s location.
For example, if you live and sell out of Carlisle, Pennsylvania, you charge all customers in PA the same sales tax rate of six percent, regardless of their location within the state. However, if you live and sell out of Philadelphia, you must charge the state’s six percent sales tax plus an additional local tax of two percent, totaling eight percent, to all customers in PA.
List of Origin-Based Sales Tax States
Here is a list of all origin-based states. If you operate your business in one of these states, you should charge all customers within your state the sales tax rate based on your business location. This rate may include a combination of state, county, city, and district tax rates.
- Arizona
- California*
- Illinois
- Mississippi
- Missouri
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
*California is unique. It’s a modified origin-based state where state, county, and city taxes are based on the origin (the seller’s location), but district taxes are based on the destination (the buyer’s location).
Unfortunately, most states follow the more complex destination-based system. In destination-based states, the correct sales tax rate is determined by the buyer’s location (the destination of the sale). This can be confusing because states can have numerous tax jurisdictions, requiring you to charge various tax rates.
For example, if you live and/or sell in Columbia, South Carolina, and sell a taxable product to a customer in Chesterfield, SC, you must charge an 8% sales tax. This rate includes the state rate of 6% plus a 2% local tax, as required by the South Carolina Department of Revenue.
List of Destination-Based Sales Tax States
Here is a list of destination-based states. If you live in one of these states, you should charge sales tax based on the delivery location of the item. This rate may include a combination of state, county, city, and district tax rates.
- 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 Mexico (as of 7/1/21)
- New York
- North Carolina
- North Dakota
- Oklahoma
- Rhode Island
- South Carolina
- South Dakota
- Vermont
- Washington
- West Virginia
- Wisconsin
- Wyoming
Origin vs. Destination Based Sales Tax for Remote Sellers
But wait! If you have sales tax nexus in multiple states, there’s more to consider.
States have different rules for “remote sellers.” A state considers you a remote seller if you have sales tax nexus there but are not based in that state. This is often referred to as “use tax,” which is essentially sales tax applied to remote sellers.
For example, you sell via Amazon FBA and live in Georgia, but your products are stored in a warehouse in Tennessee. Tennessee considers you a remote seller. If you were based in Tennessee, you would charge sales tax based on your business location because Tennessee is an origin-based sales tax state for in-state sellers. However, for remote sellers, Tennessee follows destination-based rules. So, if your business is based in Georgia but has sales tax nexus in Tennessee, you would either:
- Charge sales tax at the rate of your buyer’s ship-to location.
- Charge a flat 9.25%.
Rule of thumb: States treat in-state sellers and remote sellers differently. Typically, if you are a remote seller, the state wants you to charge the sales tax rate at your buyer’s destination. Some states allow out-of-state retailers to charge a flat use tax rate. Contact the state’s department of revenue for specific rate questions.
Summary: What Sales Tax Rate Should I Charge?
As an online seller, the first step to sales tax compliance in your home state is to ascertain whether it follows an origin-based (charging at the seller’s location) or destination-based (charging at the buyer’s location) approach.
Next, if you have sales tax nexus in other states where you qualify as a “remote seller,” you need to decide whether to collect sales tax at an origin-based or destination-based rate in those states. (Remember, in most cases, you will collect at a destination-based rate in remote states.)
Frequently Asked Questions
1.) From which customers am I required to collect sales tax? Only customers in my state, or in multiple states?
You must collect sales tax from customers in states where you establish sales tax nexus. Nexus refers to a connection or presence in a state, which can be created by having an office, store, warehouse, or other physical presence (including working from home), employing staff or contractors, engaging affiliates, meeting economic nexus thresholds, or storing goods in a warehouse. If you establish nexus in a state, you are required to collect sales tax from all buyers within that state. Many online sellers find themselves having sales tax nexus in multiple states simultaneously.
2.) I believe I was incorrectly charged sales tax. What might be the reason for this?
Businesses must charge sales tax in states where they have sales tax nexus, meaning a presence or connection. This is one reason why you might be charged sales tax unexpectedly. Additionally, sales tax is based on the destination or ship-to address. For example, if you live in a state without sales tax but order an item for delivery to a state with sales tax, you may be charged sales tax according to the rate at the delivery address. These are a couple of reasons why you might encounter unexpected sales tax charges.
3.) I was charged sales tax on the shipping charges for my online order. Why did this happen?
It depends on state laws. Some states mandate that merchants charge sales tax on shipping and handling charges, while others do not. Certain states may require sales tax on shipping and handling under specific conditions. For further details, you can explore more about Sales Tax on Shipping Charges here.
4.) I sell on Amazon FBA. Where do I need to collect sales tax?
Amazon FBA sellers must navigate sales tax nexus both in their home states and in remote states.
Do you have any other questions?
To summarize, understanding and applying sales tax rates depend on whether your state follows an origin-based or destination-based system, as well as whether you qualify as a remote seller in other states:
- Home State Sales:
- Origin-Based States: Charge sales tax based on your business location.
- Destination-Based States: Charge sales tax based on the buyer’s location.
- Remote Sales:
- States typically follow destination-based rules for remote sellers.
- Some states may allow a flat use tax rate for remote sellers.
- Key FAQs:
- Sales tax collection is required in states where you have nexus.
- Unexpected charges may result from destination-based tax rules or state-specific requirements on shipping charges.
- Amazon FBA sellers must comply with tax laws in their home state and states where their inventory is warehoused.
For further insights, explore the Startxpress Help Center and Blog. If you have questions or need support, reach out anytime at support@startxpress.io!
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