Origin-based vs. destination-based sales tax rates: understanding the impact on businesses and consumers

Are you aware of the differences between origin-based and destination-based sales tax rates? These two types of sales tax rates significantly impact on businesses and consumers across the United States.

Currently, there several origin-based sales tax states, where the sales tax rate is determined by the location where the product or service is sold or shipped from. On the other hand, there are destination-based sales tax states, where the tax rate is determined by the location where the product or service is being delivered or consumed.

Origin-based sales tax rates

Origin-based sales tax rates are based on the location where the product or service is sold or shipped from. This means that the tax rate is determined by the departure address where the product or service was stored. For example, if a business located in Illinois store goods in a warehouse and send them to a customer in Florida, the sales tax rate would be based on the warehouse’s tax rate, not the customer’s address in Illinois. This rule is for intra-states sales only. 

Give our sales tax calculator a try, free of charge, and discover the variation in sales tax from one zip code to another.

To help you stay informed on this issue, I have compiled a list of states that currently use an origin-based sales tax rate:

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

*California has a distinctive tax system that deviates from the norm. The state operates as a modified origin state, meaning that state, county, and city taxes are determined based on the location of the seller. However, when it comes to district taxes, they are based on the destination of the goods or services, which is the location of the buyer.

Destination-based sales tax rates

Destination-based sales tax rates, on the other hand, are based on the location where the product or service is being delivered or consumed. This means that the tax rate is determined by the address where the product or service is being delivered, rather than where it is dispatched. For example, if a business located in New York sells a product to a customer in New York and ships it to them, the sales tax rate would be based on the customer’s address’s tax rate, not the seller’s address.

To further help you understand the impact of destination-based sales tax rates, I have compiled a list of states that currently use this type of sales tax rate:

• Alabama
• Arkansas
• Colorado
• Connecticut
• District of Columbia
• 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
• West Virginia
• Wisconsin
• Wyoming

The impact of Internet sales tax laws on online retailers

In addition, many states have implemented Internet sales tax laws, which require online retailers to collect and remit sales tax on purchases made by residents of their state.

Internet sales tax laws can have a significant impact on businesses that sell products online. For instance, let’s say you own an online retailer based in Ohio and sell products to New York customers. If you sell over the threshold to New York I, you will be required to register for sales tax and collect and remit sales tax on purchases made to New York residents, even though your business is located in Ohio. In this case, you don’t need to use the origin principle as soon as this sale is intra-state. It is always the destination principle for cross-border sales. 

In conclusion, the difference between origin-based and destination-based sales tax rates can have a significant impact on businesses that sell products or services within a  state. While origin-based sales tax rates are based on the location where the product or service originates, destination-based sales tax rates are based on the location where the product or service is being delivered or consumed.

Lovat is here to assist you in managing your tax responsibilities, whether you are registered in a US state or any tax system across the globe.