Understanding Origin vs. Destination Sales Tax

In your operation, how you apply sales tax depends on where you are based. Most states use a destination-based tax strategy. A handful of others use rates at the point the product originates.

Then, taxes being taxes, businesses are asked to navigate special cases. Here’s a quick overview.

Destination-based sourcing rules, which are the most common, apply the sales tax rules and rates based at the customer’s location. 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.

In some states though, known as origin-based states, if you are headquartered there or ship from there, you collect and remit sales tax according to the rules and rates applicable in that state.

Major origin-based states include Texas, Ohio, Virginia, California, and Pennsylvania.

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.

And, even though the destination model of sales tax applies to interstate commerce, there are variations. In Texas, for example, certain types of software receive a 20 percent exemption, essentially reducing the effective sales tax rate.

To cut through the confusion, determine if your home state and shipping location or destination-based or origin-based. If you are in an origin-based location, you will need to follow the origin-based sourcing rules and follow destination-based sourcing in the remainder of the states. If not, you are safe to apply destination-based sourcing to all of your transactions.

Source: TaxConnex