When dealing with customers based in the US, you might find yourself having to pay sales tax as dictated by the state your customer is located in. Sales tax in the US is not uniformly implemented throughout the entire country but is instead given to each state to govern. Therefore, each state has its own tax, making the US tax system complicated to navigate.

Fortunately, Deskera Books software is able to determine the sales taxes required for products and services sold to a customer.

The US Taxation article series is to help you understand how US sales taxes are being calculated. However, there is no need for you to worry about manually calculating the sales taxes as you can always hire someone to calculate the sales tax for you.

There are some factors to consider when calculating US sales tax:

  1. Nexus
  2. Product Classification
  3. Exemption from sales taxes
  4. Out of state transaction - Origin VS Destination State Tax

In this article, we will be discussing out of state transactions. This primarily boils down to whether the states involved in the transaction practice origin or destination sales tax.

What is the difference between origin and destination sales tax?

When navigating the US Sales tax system, it is crucial to understand sourcing - also known as the location where the transaction is taxed. As a seller, you must be aware of whether your state is destination-based or origin-based.

Destination sales tax means that the transaction will be taxed with the sales tax rates of the state where the buyer takes ownership of the product.

Origin sales tax means that the transaction will be taxed with the sales tax rates of the state where the seller is based.

Most states and the District of Columbia are destination-based. The remaining 11 states are origin-based.

The 11 origin-based states are:

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

*For the state of California, they have a mix of destination and origin sales tax. The city, county, and state sales taxes are origin-based while district sales taxes are destination-based.

In contrast to origin-based tax, destination-based tax is the tax rate depending on the destination of the products and services. In short, the destination is the place your customer resides in. Thus, the tax rate imposed on the customers must be local rate based on the location the buyer is living in or where the product is going. Your buyer address plays a significant role in the sales tax calculation.

Most of the states in the US have a destination-based sales tax, and the states are listed below.

  • Alabama
  • Arkansas
  • Colorado
  • Connecticut
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Nebraska
  • New Jersey
  • Nevada
  • New York
  • North Carolina
  • North Dakota
  • Oklahoma
  • Rhode Island
  • South Carolina
  • South Dakota
  • Vermont
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Collecting, filing and reporting taxes can be tricky. Before you start your business in the US, it’ll be great for you to read and research more on the US tax.

Make sure you adhere to the tax compliance of each state and even local jurisdictions to prevent any repercussions.

Get a tax consultant if you’re couldn’t fully comprehend and grasp the meaning of the content. A tax consultant will help you gain a better understanding of how the sales tax operates in the US.