How To Charge Sales Tax for Out-of-State Customers

Woman holding credit card while shopping online on laptop while sitting at home
Photo: Maskot / Getty Images

Key Takeaways

  • Charging customers out-of-state sales tax depends on the kind of state in which you operate your business: destination-based or origin-based.
  • Destination-based sales tax is levied in the jurisdiction where the product is ultimately used.
  • Origin-based sales tax is less complicated and is levied where the good or service is sold.
  • Some states also require you to pay sales tax if you meet certain sales thresholds, even if you are not located there.
  • Known as "sales tax sourcing," determining which tax rates apply to individual purchases can be somewhat complicated.

Whether you must charge your customers out-of-state sales taxes comes down to whether you're operating in an origin-based sales tax state or a destination-based sales tax state. The process of determining which tax rates apply to individual purchases is referred to as "sales tax sourcing," and it can be somewhat complicated to figure out.

Sourcing is mainly a concern for businesses that ship their products to other locations, such as internet-based operations, rather than retail businesses operating out of physical locations and selling to in-person consumers.

What States Have Sales Taxes?

The majority of states—45 and Washington, D.C.—impose a sales tax at the state level. Only Oregon, Montana, New Hampshire, Alaska, and Delaware have no state sales tax (but Alaska allows local counties and municipalities to levy sales taxes of their own). Montana additionally imposes some special taxes in resort areas. Sales taxes at the local level are in place in 38 states.

The states with the highest base sales tax rates—between 6.5% to 7.25%—include:

  • California
  • Indiana
  • Rhode Island
  • Tennessee
  • Mississippi
  • Minnesota
  • Nevada
  • New Jersey
  • Arkansas
  • Kansas
  • Washington state

Some states may have additional local tax rates that customers need to pay on top of the base state tax rates. That means the total sales tax paid may be higher.

Destination-Based Tax States

Most states have a destination-based sales tax. Each sale is considered to take place in the jurisdiction where the product is ultimately used—where it’s shipped to or picked up from. For example, if someone from Florida visits your Washington state store in person and buys an item, you would charge Washington's sales tax because the customer takes possession of the product there.

But you would charge Florida's sales tax and file a corresponding Florida sales tax return if the person bought the item online from Florida and you shipped the product to them there. You would charge the destination state's rate in addition to any local or county sales taxes for the address to which you're shipping.

Note

You would not additionally collect your own state's sales tax on products you're shipping out of state if your state is a destination-based state when it comes to state sales taxes.

The states that have a destination-based sales tax are:

  • Alabama
  • Arkansas
  • Colorado
  • Connecticut
  • 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 state
  • West Virginia
  • Wisconsin
  • Wyoming

Washington, D.C. also has a destination-based sales tax.

Origin-Based Tax States

Relatively few states have origin-based taxes where a sale is considered to take place at the location where it's completed, even if the product is shipped elsewhere. You would have to collect sales taxes for your state on all your retail sales if you're running a business in an origin-based state.

There are 11 origin-based states, including California, where sales tax laws are origin-based at the state level, but destination-based at the county and city levels.

These 11 states are:

  • Arizona
  • California
  • Illinois
  • Mississippi
  • Missouri
  • Ohio
  • Pennsylvania
  • Tennessee
  • Texas
  • Utah
  • Virginia

Do You Have a Nexus in Another State?

Here's another wrinkle: Your business may have a tax nexus in another state, meaning you have an affiliation or some other legal connection there that effectively subjects you to its tax laws. You might be obligated to collect that other state's sales taxes and file a sales tax return there even if your primary location is in an origin-based state.

Most states with sales taxes define their nexus through a monetary threshold (a certain dollar amount of sales), a transaction threshold (a certain number of sales done in the state), or both.

When the Customer Picks Up the Product 

It doesn't matter if your customer picks up or has their product delivered if you operate in an origin-based state because all your sales are subject to your state's sales tax.

But in a destination-based jurisdiction, whether an item is picked up or delivered matters. If a person comes into the store and buys an item that they take home at that moment, the sales tax is paid based on the store's location. If a customer comes into a store and orders an item to be delivered to their home, the sales tax would apply wherever their home is located.

For example, if a person walks into your brick-and-mortar furniture store in Red Bank, New Jersey, and orders a couch to be delivered to their home in Baltimore, Maryland, the sales tax you would pay on that sale would be any applicable rates in Baltimore.

Remote Internet Sellers and State Sales Tax

Many states have different rules in place for brick-and-mortar retailers and "remote sellers," those that operate exclusively on the internet. You might still have to charge out-of-state sales tax based on the tax rate of the destination state if you're a remote seller in an origin-based state, but you might be able to simplify the calculation process by charging a flat-use tax rate.

Contact the destination state's Department of Revenue to determine what you're supposed to charge.

If you're unsure how to keep track of your sales tax, consider using an online sales tax service. Some can be integrated with marketplaces such as Amazon, Etsy, and eBay. If your tax situation is more complicated, look for a certified public accountant that can help with sales tax issues.

Frequently Asked Questions (FAQs)

If I pay sales tax, do I have to charge it to my customers?

Sales taxes are charged to customers, but it's the seller's responsibility to collect that tax. If you don't want to charge extra for sales taxes, you could consider rolling the tax cost into the price of the product or service.

Where do I pay sales tax if I buy a car out of state?

If you're buying from a dealership, it will likely be able to help you settle your tax liability with the proper authorities. If you're buying a car in a private transaction, then you will probably pay sales tax in the state where you plan to register the car. If there are any complications, such as temporarily registering the car in another state so you can drive it home, then you may want to clarify your responsibilities with your home state's DMV.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Alaska Department of Commerce, Community, and Economic Development. "Alaska Sales Tax Information."

  2. Montana Department of Taxation. "Financing Districts - Resort and Local Option Taxes."

  3. Federation of Tax Administrators. "State Sales Tax Rates and Food and Drug Exemptions."

  4. Washington State Department of Revenue. "Overview: Destination-Based Sales Tax."

  5. TaxJar. "Origin-Based and Destination-Based Sales Tax Rate."

  6. Office of the Chief Financial Officer, DC.gov. "Tax Rates and Revenues, Sales and Use Taxes, Alcoholic Beverage Taxes and Tobacco Taxes."

  7. Journal of Accountancy. "A Practical Guide to Economic Nexus."

  8. Tennessee Department of Revenue. "Sales and Use Tax Manual." Page 30.

  9. Progressive. "What's the Process for Buying a Car Out of State?"

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