Is the sales tax rate is based on origin or destination in the states where you do business?

based on origin or destination

based on origin or destination

By Charles F. Spielmann

It’s important for businesses to know not only which sales tax laws apply to the products and services they provide, but also whether the source of the sales tax rate is based on origin or destination.

origin or destination sourcing

Sales tax is based upon the origin of the sale in just a few states. The majority of states base the sales and use tax upon the destination.

Destination-based systems can be complicated for retailers because the burden of staying up to date with ever-changing tax rates for all jurisdictions within the state or states in which they have nexus falls upon the retailer. Filling tax returns in these states can be doubly complicated since some require the retailer to precisely track and break their sales down for each jurisdiction.

As of this writing, the following states are destination based: 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 York, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Vermont, Washington, West Virginia, Wisconsin and Wyoming.

There are several states where sales taxes are origin based. Sales taxes in these states originate from the point of purchase regardless of where the customer receives the merchandise. This method is much simpler for the merchants.

The origin-based states are: Arizona, Illinois, Mississippi, Missouri, New Mexico, Pennsylvania, Texas, Utah and Virginia.

In an interesting exception to the two sales tax sourcing bases already mentioned, California is considered a modified origin state. While sales taxes are origin based at the state, county, and city levels, special districts are destination based.

Alaska proves to be its own special case. The state doesn’t impose any sales or use tax, but various boroughs and municipalities do. There is no uniformity between these municipalities and no ordinance can be considered “typical,” so Alaska is essentially non-classifiable at a state-wide level.

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26 comments

  • MO Taxpayer says:
    Avatar for Chuck

    I believe you are incorrect with regards to MO taxation.

    Rules of
    Department of Revenue
    Division 10—Director of Revenue
    Chapter 113—Sales/Use Tax—Use Tax

    (B) Unless otherwise agreed by the parties,
    when a Missouri seller delivers tangible personal
    property to a third-party common or
    contract carrier for delivery to an out-of-state
    location, title does not transfer in Missouri
    and the sale is not subject to Missouri sales
    tax. A buyer that carries its own goods is not
    acting as a common or contract carrier.

  • Avatar for Chuck

    Is this map also for taxes on services or just on sales? If only on sales do you have one for services, I have found this map to be of great help.

  • Avatar for Chuck

    Ohio is origin based for goods when we are selling within the state, but destination based when we sell to other states.

    • Avatar for Chuck

      I have found several conflicting sources – some say Ohio is Destination, some say Ohio is origin. I will ask the tax research department to look more deeply into this and we’ll make corrections to the map as necessary. Thanks for the information.

      • Avatar for Chuck

        Did your tax department come to a conclusion? I work for a trucking company in WV that has a rock yard as a subsidiary company across the river in OH. We routinely deliver rock in both WV and OH and I am getting conflicting information from our head office as to which states taxes apply for customers.

        • Avatar for Chuck

          Ohio claims to be Origin if the transaction is intrastate or Destination if interstate and West Virginia is Destination. Your affiliation in both states probably creates nexus for your company with both states meaning your company probably should register to collect sales taxes for both states. It is advisable to go directly to each state’s department of revenue to confirm: Ohio 800-282-1780; West Virginia: 304-558-3333. You would collect WV taxes for WV transactions and OH taxes for OH transactions.

          • Avatar for Chuck

            Thanks! That’s how I read the rules too but needed a sanity check. Sometimes the legal language starts to twist me about after a while.

  • Avatar for Chuck

    I live in Missouri. Can I use my tax exempt status to purchase consumer type goods used in the practice of my profession and then pay a consumer use tax in my home state instead of paying sales tax in the state I purchased the goods from?

    • Avatar for Chuck

      Sally, your question depends entirely upon what type of consumer goods you are talking about and what Missouri’s regulations regarding those types of goods are. Generally, you should provide the retailer a copy of your tax exemption certificate for any tax exempt purchases that are directly related to your businesses. Many times, the retailer will let you know if you qualify or don’t. If you do qualify, you would then determine if the transaction is taxable or tax exempt according to Missouri’s laws and pay your Missouri use tax accordingly.

      I recommend that you get more guidance directly from the Missouri Department of Revenue at 573-751-2836. They are the definitive source of sales and use tax law for the state of Missouri.

  • Avatar for Chuck

    For a state like South Dakota, one has to pay sales tax on all services also. So, is that also contingent on destination? For example, I am a South Dakota resident, but I provide a service to someone in Minnesota. Do i have to pay sales tax? Or is that up to the consumer (Minnesotan) to pay the sales tax on the service provided?

    • Avatar for Chuck

      Sales tax on the service could depend on a couple of factors such as the nature of the service and where the service took place. Normally you would not charge sales tax on a transaction that takes place in any other state, including Minnesota, unless your business has nexus in that other state. Be careful, performing services in other states frequently DOES create nexus in that state, so check with that state’s department of revenue and see if you need to file to collect taxes for that state. If the service took place in your home state, then the sales tax rate would be charged at the rate of the location the service occurred regardless of the consumer’s home address.

  • Avatar for Chuck

    I live in Chicago, IL where it’s origin-based. If I ship within the state to, say, Springfield, IL, do I collect sales tax of Chicago or Springfield?

    • Avatar for Chuck

      Since Illinois is origin based, as you pointed out, you would charge sales tax at the rate of your Chicago location where the sale originated.

      Good questions. Thanks for contributing.

  • Avatar for Chuck

    I work in Oak Forest, IL but we ship to a customer in Kentucky. Because we are shipping out of state, are we to charge his location tax rate or Oak Forest tax rate? I know Illinois is an origin based state, but I’m only finding info on shipping within the state, not out of state

    • Avatar for Chuck

      Great question! I think you need to determine if the sale to the customer in Kentucky is taxable for your Illinois company. Does your company have nexus in Kentucky? If so, the tax rate would most likely be that of the location causing your Kentucky nexus. If your company does not have nexus in Kentucky then your customer would be responsible for paying use tax to his state and you have no sales tax to collect on this transaction.

  • Avatar for Chuck

    I have a business that is located in Missouri. Certain business activities required us to register in Tennessee (an origin-based state). Since we are not domiciled in Tennessee, and do not have a single location for the origin-based tax, do I have to charge the tax per each counties rate?

  • Avatar for Chuck

    Our home office is located in IL (origin based), however we have stores in multiple states including MN (destination based). We purchased an item from a vendor located in MN and had the item shipped to one of our stores in MN. I believe we should have been charged MN sales tax on this invoice. The vendor says we were not since the sale took place in IL. Which is correct?

    • Avatar for Chuck

      Great question Jamie! I believe you are correct. Your vendor’s invoicing system probably reads your headquarter’s address in Illinois on the purchase order and probably isn’t sophisticated enough to understand that the “ship to” in MN is altering the taxability of this sale. They have no practical way to know that you have nexus in that state. For simplicity’s sake, you are probably best off just paying Minnesota use tax on this transaction which is the same rate as MN sales tax. Since I have no special certification allowing me to provide tax advice, you should always check with the Illinois and Minnesota departments of Revenue to be sure you are in compliance.

  • Avatar for Chuck

    if you have a business in Missouri and also the same business in Indiana what sales tax would you charge if a customer from Indiana calls the Missouri store and orders from Missouri store and ships the part to customer’s location in indiana? Would it matter where the inventory is located or is it only based on the store location?

    • Avatar for Chuck

      Your situation is too complicated for my limited knowledge, so I will begin by saying you need to consult with the departments of revenue for both Missouri and Indiana. Having said that, here are some possible scenarios: With Missouri being an origin state, the tax rate could be determined by the location of the Missouri store. Normally, Missouri businesses have no legal standing for taxing an Indiana resident. But, since you do have nexus in Indiana as well, and Indiana is a destination state, it could be possible that this transaction might be taxed at the purchaser’s location. And, yes, it very well could matter where the inventory is located. It could also matter how the item is delivered to the purchaser. I am sorry that I am unable to offer you any clarity here. A good CPA may be of more help.

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