Understanding what sales tax rate to charge your customers as an online seller can be challenging. To start, it’s important to understand how sales tax rates are determined and what rate you should charge customers in the state where your business is located (intrastate sales). To determine this, find out if your online business is located in an origin-based or destination-based state, a concept called “sales tax sourcing.”
What’s in this article?
- What is sales tax sourcing?
- Which states are origin-based and which are destination-based?
- Examples of the different types of sales tax sourcing
What is sales tax sourcing?
States generally require sellers to collect sales tax in one of two ways:
- Origin-based collection
- Destination-based collection
Sellers that are based in states with origin-based sales tax sourcing are required to collect sales tax at the seller’s business location. If your business is in an origin-based state, you should charge all customers in that state the combined rate for where your business is located. The combined rate is the state sales tax rate plus any county, city, or district tax rates. For example, if your business’s location is in Arizona, you charge all customers in Arizona the same combined sales tax rate. This is considered the simplest form of sales tax sourcing, because businesses only need to charge one sales tax rate to all customers in the state.
Destination-based sales tax sourcing is more complicated. Destination-based sales tax sourcing means sellers are required to charge the combined sales tax rate at the customer’s address. Since states can have hundreds of different tax jurisdictions, the rates can vary widely across customers in the state. For example, if your business is located in Washington, you charge all customers the state sales tax rate of 6.50% plus any local sales tax in effect at the customer’s location.
Which states are origin-based and which are destination-based?
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Collection method
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States
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|---|---|
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Origin-based
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Arizona, California*, Illinois, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia |
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Destination-based
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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 Mexico, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Vermont, Washington, West Virginia, Wisconsin, Wyoming |
Examples of the different types of sales tax sourcing
Here is an example of how the correct sales tax rate is calculated in an origin-based state. This business is located in Irving, Texas.
Texas state rate: 6.25%
Irving sales tax rate: 1%
Dallas MTA (Metropolitan Transit Authority that imposes a sales tax): 1%
Combined sales tax rate: 8.25%
This business should charge all customers in Texas 8.25%, even if they are located outside of Irving.
Here is how destination-based sales tax sourcing works for a business located in New York City, New York. The business made a sale to a customer located in Buffalo, New York.
New York state rate: 4%
Erie County rate: 4.75%
Combined sales tax rate: 8.75%. This is what the business would charge the customer located in Buffalo.
However, they make another sale to a customer located in Rochester, New York.
New York state rate: 4%
Monroe County rate: 4%
Combined sales tax rate: 8%. This is the rate the business would charge this customer based in Rochester.
These examples only apply to selling to customers in the state where your business is located. If you have sales to customers located in other states, then you may need to follow different rules when charging sales tax. In general, you would charge sales tax at the rate where your customer is located (destination-based sourcing for interstate transactions).