Sourcing is mainly a concern for businesses that ship their products to other locations, such as 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 Washington, D.C.—impose a sales tax at the state level. Only Oregon, Montana, New Hampshire, Alaska, and Delaware have no state sales tax (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. The states with the highest base sales tax rates—between 6.5% to 7.25%—include:
CaliforniaIndianaRhode IslandTennesseeMississippiMinnesotaNevadaNew JerseyArkansasKansasWashington state
Some states may have additional local tax rates that customers need to pay on top of the base state tax rates. That means the total sales tax paid may be higher.
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, if someone from Florida visits your Washington state store in person and buys an item, you would charge Washington’s sales tax because the customer takes possession of the product there. But you would charge Florida’s sales tax and file a corresponding Florida sales tax return if the person bought the item online from Florida and you shipped the product to them there. 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. The states that have a destination-based sales tax are:
AlabamaArkansasColoradoConnecticutFloridaGeorgiaHawaiiIdahoIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaNebraskaNevadaNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOklahomaRhode IslandSouth CarolinaSouth DakotaVermontWashington stateWest VirginiaWisconsinWyoming
Washington, D.C. also has a destination-based sales tax.
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. There are 11 origin-based states, including California, where sales tax laws are origin-based at the state level, but destination-based at the county and city levels. These 11 states are:
ArizonaCaliforniaIllinoisMississippiMissouriOhioPennsylvaniaTennesseeTexasUtahVirginia
Do You Have a Nexus in Another State?
Here’s another wrinkle: Your business may have a tax nexus in another state, meaning 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. Most states with sales taxes define their nexus through a monetary threshold (a certain dollar amount of sales), a transaction threshold (a certain number of sales done in the state), or both.
When the Customer Picks Up the Product
It doesn’t matter if your customer picks up or has their product delivered if you operate in an origin-based state because all your sales are subject to your state’s sales tax. But in a destination-based jurisdiction, whether an item is picked up or delivered matters. If a person comes into the store and buys an item that they take home at that moment, the sales tax is paid based on the store’s location. If a customer comes into a store and orders an item to be delivered to their home, the sales tax would apply wherever their home is located. For example, if a person walks into your brick-and-mortar furniture store in Red Bank, New Jersey, and orders a couch to be delivered to their home in Baltimore, Maryland, the sales tax you would pay on that sale would be any applicable rates in Baltimore.
Remote Internet Sellers and State Sales Tax
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.
