Sales tax rates vary by state, city, and local jurisdictions. Because of this, charging the correct amount of sales tax requires knowing your customer’s address information. This seems simple, but it can become complicated when the customer’s billing and shipping addresses are different. Which address should businesses use to calculate sales tax when selling tangible goods?
In this article, we’ll help you understand how to use your customer’s address to determine the correct sales tax rate when selling tangible goods. However, keep in mind that this is general sales tax information and you should consult a tax expert for advice specific to your business.
What’s in this article?
- Understanding sales tax sourcing
- Using shipping vs. billing address when selling tangible goods
- Charging sales tax on shipping
Understanding sales tax sourcing
Sales tax rates are based on the point of taxation, or the time and location where a transaction occurs. This varies based on the location of your customer. For this reason, physical storefronts don’t typically have to deal with this issue, because the point of taxation is at the store. The correct sales tax rate is the rate for the store’s location.
However, for businesses shipping products to customers around the US, the point of taxation happens all over the country. States usually require businesses to collect sales tax in one of two ways:
- Origin-based sales tax collection
- Destination-based sales tax collection
This concept is commonly referred to as “sales tax sourcing.” In origin-based states, sellers charge sales tax for customers in that state at the point of origin of the sale, or where the business receives the order. For example, if you run your business from an origin-based state such as Ohio, then you would charge all of your Ohio customers the sales tax rate based on the location of your business, because that’s where the order originated. In this example, the customer’s billing and shipping address aren’t relevant. However, this only applies to customers in Ohio, as interstate sales are always subject to the destination-based tax collection.
Businesses that are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the customer’s “ship-to” or other destination-based address. As the business, you are required to charge the sales tax rates where your customer is located. Most states use this type of sales tax sourcing.
Using shipping vs. billing address when selling tangible goods
With all this in mind, should businesses charge sales tax based on the customer’s billing or shipping address?
In a destination-based (or interstate) ecommerce transaction, the location where your customer takes possession of the product is the point of taxation. This is the shipping address, meaning your business would use this address to calculate sales tax, not the billing address.
Charging sales tax on shipping
Are shipping charges taxable? This varies by state, so we’ve outlined how each state manages this below.
The following states consider shipping to be taxable if you charge for it as part of an order and the item being shipped is considered taxable. It doesn’t matter whether the shipping charge is included in the price of the item or if it’s listed separately from the price of the item.
- Arkansas
- Connecticut
- District of Columbia
- Georgia
- Hawaii
- Indiana
- Kentucky
- Minnesota
- Mississippi
- Nebraska
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Vermont
- Washington
- West Virginia
- Wisconsin
The following states have ruled that shipping charges are not taxable if you list the charge separately from the selling price of the item. However, they are taxable if you include the charge as part of the item’s price.
- Alabama
- Arizona
- California
- Colorado
- Florida
- Idaho
- Illinois
- Iowa
- Kansas
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Missouri
- Nevada
- Oklahoma
- Utah
- Virginia
- Wyoming