A Beginner’s Guide To Sales Tax Sourcing For Ecommerce - Taxify
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A Beginner’s Guide To Sales Tax Sourcing For Ecommerce

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Sales Tax Sourcing For Ecommerce

Sales tax sourcing is something with which every ecommerce business needs to be familiar. It determines the sales tax rate that must be collected on each sale. Based on the sourcing employed by a state, the rates to be collected will almost certainly be affected. Why is sourcing so important, and why should an ecommerce business be concerned with it?

Sales tax sourcing is used to describe which tax rates are applied to a given sale and to where the money collected must be remitted. For the most part, this doesn’t affect brick-and-mortar stores like it does ecommerce. In a brick-and-mortar transaction, the sales tax is based on the rate where the store is located. Simple. Understanding sourcing becomes much more critical for ecommerce retailers who ship products to other locations. When you ship a product to another address, the necessary knowledge of relevant tax rules is important for purposes of sales tax calculation and where your tax returns must be completed.

There are two types of sourcing regimes: origin and destination. Most states have a destination-based sales tax, which means that the sale is considered to take place at the location where the product is ultimately used (where it’s shipped to or picked up from).  A few states have an origin-based sales tax, which means the sale is considered to take place at the location where the sale is completed (the seller’s business location).

If located in an origin-based state, you would collect sales taxes for your state on all of your retail sales. However, if located in a destination-based state, which most states currently are, collection of your state’s sales tax would not occur on sales that are shipped out-of-state. You would also not collect sales taxes for a customer in another state unless you have nexus, or a physical presence, in that state. In that situation, the customer would be responsible for paying the use tax on that purchase.

The other way in which sourcing is important is the concept is heavily relied on in all forms of proposed federal legislation. The MFA is based on destination sourcing, whereas alternatives employ origin sourcing. While no federal legislation has gained enough traction to be approved and implemented, there has been a lot more focus placed on it in recent months. If MFA were to pass, most of the current infrastructure in place would remain unchanged.

However, and this could be a real possibility, an origin-based alternative would shake up everything the sales tax world has become used to. Any alternative based on origin concepts would require a complete overhaul of current sales tax regulations and rules.  If that were the case, Taxify would absolutely adapt–and we promise to keep you informed as legislation progresses, and update our solution to make it easy for your business to adjust for any changes.

Any proposed major tax legislation changes remain to be seen, but keep in mind that even if no federal legislation ends up being approved, sourcing is a concept that affects all ecommerce businesses and needs to be considered when collecting sales tax and remitting returns.

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