What is Origin-Based Sales Tax
Origin-based sales tax is a system where sales tax rates are determined based on the location of the seller, not the buyer. In other words, if you’re selling a product from a specific location, the sales tax rate is determined by the tax rate in your location.
For example, in Virginia, a state that follows the origin-based taxation system, businesses are required to collect sales tax at the Virginia rate and its local tax rate from all customers located within the state.
When a business is based in Virginia, it is required to charge the same combined sales tax rate to all customers located within the state, irrespective of the location where the product is being shipped. This means that the business charges the same total sales tax rate to all customers in Virginia, regardless of whether the product is being shipped to a location with a higher or lower local tax rate. The total sales tax rate is the sum of the Virginia rate and the applicable local tax rate.
How Does Origin-Based Sales Tax Work
Now that we know what origin-based sales tax is, let’s understand how it works. Imagine you’re a business with a physical presence in an origin-based sales tax state, whether it’s an office, a warehouse, an employee base, or simply the state where your business is registered.
The impact of origin-based sales tax on in-state sales
For in-state sales, the sales tax rate is based on the location of your store or warehouse or physical nexus. If you’re in a state with multiple sales tax jurisdictions, this simplifies matters somewhat for remote sellers, as sales tax is now calculated on a single origin jurisdiction’s sales tax regulations and rates.
The impact of origin-based sales tax on out-of-state sales
When you sell to out-of-state buyers, things get a bit tricky. When sales are made to another origin-sourced state, the seller charges sales tax based on their own state’s rates. When selling to a destination-sourced state, the seller has to comply with the regulations and rates of the buyer’s state.
Which States Use Origin-Based Sales Tax?
The majority of states use destination-based sourcing, basing sales tax calculations on the destination of the buyer.
But there are a handful of states who apply the origin-based sales tax system, requiring businesses to start their sales tax journeys from their own destination:
- Arizona
- California (mixed sourcing state)
- Illinois
- Mississippi
- Missouri
- New Mexico
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
Knowing if your state follows this system can significantly impact your sales tax processes.
What is a Mixed Sourcing State?
A mixed sourcing state, like California, uses a combination of both origin-based and destination-based sales tax systems.
In California, for example, the city, county, and state sales taxes are origin-based, while district sales taxes are destination-based. These district taxes are supplementary local taxes.
This mix of tax systems can add an extra layer of complexity to your sales tax compliance.
How Does Origin-Based Sales Tax Affect Your Business?
So, how does origin-based sales tax affect your business? For companies whose sales are primarily within the same state, it simplifies matters greatly.
For businesses who sell across state lines, origin-based sourcing can add an extra layer of considerations to the compliance journey.
As an eCommerce business that sells across state lines, it is doubly important to understand the position of your state’s sales tax sourcing approach.
When you’re selling to customers within your state, you’ll charge the tax rate based on your location. But when you sell to customers outside your state, you may need to charge a different rate or no sales tax at all, depending on the destination.
Destination-Based vs. Origin-Based Sales – Who’s the Winner?
In short, destination-based sales tax regulations outweigh origin-based sourcing rules.
When conducting transactions with buyers based in destination-based sales tax jurisdictions, businesses generally follow the sales tax rates and regulations of the buyer’s destination, instead of their own.
That means businesses situated in origin-based sourcing jurisdictions shouldn’t neglect their responsibility to charge and remit the correct sales tax once their customer base extends beyond its own state.
Let Complyt simplify the question of destination and origin-based sales tax
Navigating the complex world of sales tax compliance, especially as a multistate seller dealing with both destination-based and origin-based systems, can be a daunting task.
Complyt simplifies the task and ensures that you charge sales tax according to the applicable state and local regulations, error-proofing your sales tax calculation for ensured compliance no matter what happens.
Book your demo today and make sales tax simple again.