Many companies are surprised to learn about the difference between origin-based sales tax rules and destination-based sales tax rules. There is a misunderstanding that sales tax is charged based solely on the destination of a product. Unfortunately, it’s not that simple. Currently, 12 states (CA, IL, MI, MS, NM, OH, PA, TN, TX, UT and VA) are origin-based states.
Origin-Based Sales Tax
In general, origin-based sourcing rules require companies located within a state to collect sales tax based on the in-state location. For example, a company located in Scottsdale, AZ would charge the Scottsdale sales tax rate on all sales in Arizona. Companies with multiple locations will need to review each states rule’s regarding the definition of “located in the state.” For example, a New York company that simply stores inventory in an origin-based state may still be considered a remote seller and not an in-state seller for sales tax. In that case, they would have to charge sales tax based on the destination within each state.
Destination-Based Sales Tax
Most states use a destination-based system in determining sales tax. These states require sellers to collect and remit sales tax based on where the final destination of the product or service is located. This can be complicated as it requires sellers to know and calculate sales tax for different locations across the state depending on where the buyer is located. Currently, there are 34 states that use destination based sales tax including New York, Florida, Nevada and Colorado.
Like all sales tax laws, each state has variations. Feel free to contact us at firstname.lastname@example.org with any questions.