Knowing whether you're operating a business in a state with an origin-based sales tax or a destination-based sales tax can make a big difference in sales tax compliance for your business.
Most states have a destination-based sales tax, which means that the sale is thought to take place in the jurisdiction where the product is ultimately used (where it’s shipped to or picked up from). A few states have an origin-based sales tax, which means the sale is considered to take place at the location where the sale is completed (the seller’s business location).
Which Sales Tax Rate Do I Charge My Customers?
If you are running a business in a origin-based state, you would collect sales taxes for your state on all of your retail sales.
However, if you are running a business in a destination-based state, you would not have to collect your state's sales tax on sales that are shipped out-of-state. You would also not have to collect sales taxes for the customer’s state unless you have Nexus, or a physical presence, in that state. The customer would simply pay the sales/use tax on their own.
What if the Customer Picks the Product Up?
If you are in an origin-based state, this doesn't matter because all of your sales are subject to sales tax reguardless of where they're shipped to or picked up from. But, if you are in a destination-based state, and the customer picks the product up from your business location, that is considered delivery. In that case the destination of the sale would be your business location and you would charge the customer sales tax for your state.
Which States Are Origin-based and Which Are Destination-based?
The majority of states with a sales tax are destination-based states, but there are a few who have an origin-based system. Here's how it breaks down:
- California - this state has a modified origin system in which state, county and city taxes are origin-based, and district transaction taxes are destination-based.
- New Mexico
- District of Columbia
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia