Origin- and Destination-Based US Sales Tax: What’s the difference?
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If you landed on this page, you already know that the US sales tax system is confusing.
Between all the different definitions of nexus, each of the 50 states writing their own policies (plus some local jurisdictions, too!), and the rapidly evolving landscape of taxing online businesses, it’s enough to make you want to click the X on your browser window right now. We get it.
But stick with us! We explain the tricky stuff in simple terms, so you leave with the understanding that you came here to find.
And in this case, you came to understand the difference between origin-based and destination-based sales taxes. So let’s get to it.
How does origin-based US sales tax work?
Origin-based sales taxes mean you use the tax rate from the origin of the provider. Your business is the provider. So, the tax rate you apply to the sale must be the local rate where your business is located. The total rate applied to the transaction includes all relevant levels of sales tax together: state, county, city, and district.
How does destination-based US sales tax work?
Destination-based sales taxes mean you use the tax rate of the destination of the product or service. The customer is the destination. The tax rate you apply to the sale must be the local rate where the buyer is located or where the product is headed. For physical products, charge the tax rate of the ship-to location of the physical product. For digital products, charge the tax rate of the customer’s billing address.
Now, which one of these you use depends on where your business is located. Different rules apply to in-state businesses versus out-of-state businesses.
What to do in your home state?
First, focus on the state where your business is based. Does your home state have an origin-based tax or a destination-based tax?
Origin-based in your home state
You charge all customers, who are also in your state, the tax rate of your business’ location, where you run the show.
States with origin-based taxes for home-based businesses:
- Arizona
- California*
- Illinois
- Mississippi
- Missouri
- New Mexico
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
*California has to be special! It’s a “modified origin” state. So state, county and city taxes are based on the origin, but district taxes are based on the destination.
Destination-based in your home state
Most areas in the US have destination-based sales tax laws. So if you live in one of these states, and you’re selling to a customer in the same state, you charge the local rate of the buyer.
- 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 York
- North Carolina
- North Dakota
- Oklahoma
- Rhode Island
- South Carolina
- South Dakota
- Vermont
- Washington
- West Virginia
- Wisconsin
- Wyoming
What to do when you have sales tax nexus in another state?
When you have sales tax nexus in another state, you’re a remote seller.
Usually, states want remote sellers to charge tax at the destination rate. Even if they have an origin-based tax policy for their in-state businesses, you need to charge destination-based rates.
So, when you sell to other states, you charge the tax rate of the ship-to location of the physical product or the billing address for a digital product.
Usually. When it comes to US sales tax, there’s always a catch!
There are three origin-based states who still want remote sellers to follow the origin-based tax policy.
- California
- Arizona
- New Mexico
So if you have sales tax nexus in California, Arizona, or New Mexico, then the rules are a bit different when you sell to their customers. For example, Arizona has specific taxes called Retailer’s Use Tax and Transaction Privilege Tax. New Mexico has a Gross Receipts Tax.
With the onset of new economic nexus laws, it’s likely all of these states will soon adopt destination-based tax rates for remote sellers, BUT… until we know for sure, your best bet is to check each state’s tax policy directly.
What to do when you don’t have sales tax nexus in that other state?
Sit back, relax, and just sell, sell, sell. You don’t need to worry about charging or collecting tax in a state where you have no sales tax nexus. (Not sure if you have nexus in a state? Check out our guide to US sales tax nexus.)
That said, if you are selling quite a lot in one particular state, then you’ll want to check if they have an economic nexus law and pay attention to the threshold numbers. Once you hit a certain amount of annual sales, or a certain number of transactions, you could be liable for that state’s sales tax.
Resources
- US Sales Tax Guides, by state
- The Quick Guide to US Sales Tax Nexus
- Guide to US Economic Nexus
- What You Must Know About Sales Tax if You Have Customers in the United States
- How the Wayfair decision on US sales tax will affect your business — and how it won’t?
- Sales Tax for Digital Products in the US
- US Sales Tax for eCommerce: How to comply
* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.
