Should You Charge Sales Tax for Out-of-State Customers?
Whether you must charge your customers out-of-state sales taxes comes down to whether you're operating in an origin-based sales tax state or a destination-based sales tax state. The process of determining which tax rates apply to individual purchases is referred to as "sales tax sourcing," and it can be somewhat complicated to figure out.
Sourcing is mainly a concern for businesses that ship their products to other locations, such internet-based operations, rather than retail businesses operating out of physical locations and selling to in-person consumers.
What States Have Sales Taxes?
The majority of states—45 and the District of Columbia as of 2020—impose a sales tax at the state level. Only Oregon, Montana, New Hampshire, Alaska, and Delaware don't tax sales as of 2020, but Alaska allows local counties and municipalities to levy sales taxes of their own. Montana additionally imposes some special taxes in resort areas. Sales taxes at the local level are in place in 38 states as of 2020.
California, Indiana, Mississippi, Rhode Island, and Tennessee have the highest state-level sales taxes.
Destination-Based Tax States
Most states have a destination-based sales tax. Each sale is considered to take place in the jurisdiction where the product is ultimately used—where it’s shipped to or picked up from. For example, you would charge Georgia's sales tax if the customer takes possession of the product there if someone from Florida purchases an item from your Georgia brick-and-mortar store.
But you would charge Florida's sales tax and file a corresponding Florida sales tax return if you ship the product to Florida. You would charge the destination state's rate, in addition to any local or county sales taxes for the address to which you're shipping.
You would not additionally collect your own state's sales tax on products you're shipping out of state.
Origin-Based Tax States
Relatively few states have origin-based taxes where a sale is considered to take place at the location where it's completed, even if the product is shipped elsewhere. You would have to collect sales taxes for your state on all your retail sales if you're running a business in an origin-based state.
Do You Have a Nexus in Another State?
Here's another wrinkle: Your business may have a "nexus" in another state, meaning that you have an affiliation or some other legal connection there that effectively subjects you to its tax laws. You might be obligated to collect that other state's sales taxes and file a sales tax return there even if your primary location is in an origin-based state.
When the Customer Picks up the Product
It doesn't matter if your customer picks up their product if you operate in an origin-based state because all your sales are subject to your state's sales tax anyway. But it's considered to be a delivery if you're in a destination-based state and the customer picks the product up at your business location. The destination of the sale would be your business location, so you would not charge the customer an out-of-state sales tax.
- New Mexico
- District of Columbia
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
And then there's California. This state has a modified origin system in place in which state, county, and city taxes are origin-based, but district transaction taxes are destination-based.
Remote Internet Sellers
Many states have different rules in place for brick-and-mortar retailers and "remote sellers," those that operate exclusively on the internet. You might still have to charge out-of-state sales tax based on the tax rate of the destination state if you're a remote seller in an origin-based state, but you might be able to simplify the calculation process by charging a flat-use tax rate.
Contact the destination state's Department of Revenue to determine what you're supposed to charge.