What is Destination-Based Sales Tax?
Once again, “location, location, location” lies at the heart of business success. But this time round, it’s your clients’ locations that matter.
Destination-based sales tax is a system where the rate and rules for sales tax are determined by the buyer’s location, or more precisely, the destination the purchased goods will be sent to. This means that when you, as a seller, make a sale, you need to charge sales tax based on where the buyer is receiving the product, not where you are located.
In other words, if your eCommerce business is based in Idaho, but you sell and ship a product to a customer in New York (both destination-sourcing states), you would charge New York’s sales tax rate, not California’s.
It’s all about ensuring that the sales tax dollars go to the state where the buyer gets to enjoy the product.
And with most states, along with Washington, D.C., opting for the destination-based sourcing route, it’s an important compliance element to master.
How Does Destination-Based Sales Tax Work?
Destination-based sales tax operates on a simple principle: the sale is taxed at the buyer’s location. This means that you, as the seller, need to identify the buyer’s tax rate, collect the appropriate tax, and then remit it to the respective state.
For those businesses that sell online and to customers in multiple states, this can quickly become a labyrinth of varying rates, rules, and compliance obligations. Each state’s rules might differ, including tax rates, exemptions, and even what products or services are taxable.
Navigating this intricate web can be a nightmare for businesses; but fear not, there is light at the end of the tunnel.
Which States Have Destination-Based Sales Tax?
There are 12 origin-based states:
- Arizona
- California (considered a “mixed sourcing state” as city, county, and state sales taxes are origin-based, while district sales taxes – supplementary local taxes – are destination-based)
- Illinois
- Mississippi
- Missouri
- New Mexico
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
How Does Destination-Based Sales Tax Affect Remote and Out-of-State Sellers?
So, how does destination-based sales tax impact remote sellers, like eCommerce companies, and out-of-state sellers? Well, it’s a game-changer. For remote sellers, particularly eCommerce businesses, the challenge is twofold.
First, you must understand and keep up with the tax rules in every state where you have customers. With over 12,000 sales tax jurisdictions in the United States, that’s no small feat. Even with in-state sales, sellers have to comply with the sales tax rates of the destination of their buyers, something that can get complicated quickly when working in a state with multiple local jurisdictions.
Second, you need to account for variations in taxability. What’s taxable in one state might be exempt in another. For example, clothing may be taxable in one state but tax-free in another. This means you need to keep a detailed record of what you sell and where, to ensure you’re collecting the right amount of tax.
Destination-based sales tax sourcing also plays a big role in the charging of sales tax on shipping, as sellers may need to collect sales tax based on the destination’s regulations no matter its sales tax nexus status in the state.
Origin-Based vs. Destination-Based Sales Tax: Which One Does Your Business Fall Under?
Understanding whether your business falls under origin-based or destination-based sales tax is crucial. Origin-based sales tax is a method where the tax rate is determined by the seller’s location. In contrast, destination-based sales tax, as mentioned earlier, is all about the buyer’s location.
But how do you determine which method applies to your business? The key factor is where you have a significant presence, or “nexus.” States generally apply their own rules regarding nexus, and these rules can vary widely. In some cases, if you have a physical presence, like a store or warehouse, you may be subject to origin-based sales tax.
For remote sellers, though, destination-based sales tax is the key to sales tax compliance. Because even though eCommerce sellers have to comply with their own state’s sales tax laws, they also need to be aware of the laws within the states of their buyers.
To add another layer of complexity, some states may use a hybrid system, with a blend of origin and destination-based rules. That’s why it’s essential to stay informed about the rules in each state where you do business.
How Can Sales Tax Automation Software Simplify Destination-Based Sales Tax Compliance?
Now, the good news: you don’t have to navigate the intricacies of destination-based sales tax manually. Comply is here to simplify the compliance process of sales tax sourcing.
Complyt’s sales tax automation platform determines the right tax rates and taxability rules for each sale, based on both your business’s and your clients’ locations, making destination-based sales tax one less concern on your plate.
Destination-based sales tax compliance can be a daunting task, but with us, you can streamline your operations and focus on growing your business without the headache of complex tax calculations and the maze-like journey of multi-state sales tax compliance.