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 state or a destination-based tax state. The process of determining which tax rates must be applied to individual purchases is called "sales tax sourcing," and yes, it can be daunting. Sourcing is mainly a concern for businesses that ship their products to other locations, such Internet-based operations, as opposed to retail businesses operating out of physical locations.
Charging Out-of-State Sales Taxes in 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 or picked up from. If someone from Florida purchases an item from your Georgia brick-and-mortar store, you would charge Georgia's sales tax because the customer takes possession of the product there.
But if you ship the product to Florida, you must charge Florida's sales tax and file a corresponding Florida sales tax return. 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 state's sales tax on products you're shipping out of state.
Sales Taxes in Origin-Based 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.
If you're running a business in an origin-based state, you will collect sales taxes for your state on all your retail sales.
Does Your Business Have a Nexus in Another State?
Here's another wrinkle: Your business may have a "nexus" in another state, meaning you have an affiliate or some other legal connection there that effectively subjects you to its tax laws.
Even if your primary location is in an origin-based state, you may be obligated to collect that other state's sales taxes and file a sales tax return there.
What if the Customer Picks up the Product?
If you operate in an origin-based state, it doesn't matter if your customer picks up his product because all your sales are subject to your state's sales tax anyway. But if you're in a destination-based state and the customer picks the product up at your business location, this is considered delivery. The destination of the sale would be your business location, so you would not charge the customer an out-of-state sales tax.
Which States Are Origin-Based and Which Are Destination-Based?
Here's how it breaks down:
- 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.
Many states have different rules for brick-and-mortar retailers and "remote sellers," those that operate exclusively on the Internet. If you're a remote seller in an origin-based state, you may still have to charge out-of-state sales tax based on the tax rate of the destination state, but you may 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, exactly, you're supposed to charge.