Origin vs. Destination-Based Sales Tax
Understanding when to charge customers sales tax, and how much to charge, takes more than simply knowing where your business has nexus. You also need to know if your home state (where your business is based) is origin-based or destination-based. Then you need to determine the same thing for any other states where your business has nexus.
This may sound confusing, but it’s pretty simple once you get the hang of it. Here is everything you need to know about origin vs. destination-based sales tax.
Most states are destination-based. This means that the decision to charge sales tax, and how much sales tax you charge, is determined by the destination of your goods. In other words, the sales tax rate is determined by where the buyer is located, not the seller.
As an example, let’s say your business is in Washington, a destination-based state. When you sell a product to a customer online, you will determine sales tax based on the state where your customer lives. So if your customer lives in Texas, and you don’t have nexus there, you don’t need to charge sales tax. Washington is taken out of the equation because it’s the destination that matters.
Some states, however, are origin-based. In these states, your sales tax is based on the origin of your product, not the destination. So if we stick with the same example, you will charge customers sales tax based on Washington’s tax rate, since that’s where your business is located, and the sale originated.
The following states are origin-based:
- New Mexico
All other states that have sales tax are destination-based. Delaware, Montana, Oregon, and New Hampshire don’t have sales tax at all. Alaska does not have a statewide sales tax, but it is a Home Rule state, which allows local jurisdictions to charge sales tax, which are all destination-based.
It’s a smart move to check and make sure your business’s home state is still a destination or origin-based tax state, as states do change from time to time. Most states have tended to be destination-based, but some are making the switch to origin-based as a way to retain more tax revenue as online businesses grow.
Destination-based sales tax tends to get a little more complicated than origin-based sales tax. This is because tax rates vary so dramatically from state to state, and vary even more within each state, since the county and local taxes are a factor. If you have nexus in several different states, these varying tax rates can be a headache to keep track of. It’s worthwhile to get a handle on which tax rates to charge, to avoid fines and other possible penalties.
To summarize, states are either origin-based (you charge customers sales tax at the rate of the seller’s location/origin of the product) or destination-based (you charge sales tax at the rate of the buyer’s location/destination of the product).
All of this can be simplified if you use Taxify to organize your sales tax compliance, as we maintain up to date rates on all localities. Join a demo to find out how Taxify can simplify your sales tax.