E-commerce still looks healthy in 2023, with almost 21% of retail purchases expected to occur online and sales expected to grow by 10.4%. With more customers shopping online, staying compliant with tax regulations has never been trickier. And with sales tax, the little things can leave you exposed, like knowing which is the right address for sales tax purposes. Since it’s one of the most common questions sellers ask online, now is the perfect time to master the science of sales tax based on shipping address.
Origin vs. Destination-Based Sales Tax
Where is it from? Where is it going? These two questions are the key to understanding origin and destination-based sales tax rules, a.k.a. “sourcing rules,” which primarily apply to in-state transactions.
But please note that origin/destination sourcing rules work differently for remote sellers based in one state and selling into another where you have nexus (an obligation to collect sales tax). In your case, sales will generally be destination-based. However, interstate transactions involving a seller without nexus in the buyer’s state typically follow origin-based rules, meaning the tax is based on the seller’s location. If you’re a remote seller, understanding the distinction is crucial to ensure proper sales tax compliance.
What is origin-based sales tax?
Understanding the nuances of origin-based sales tax is vital for businesses operating in states that follow this model. In an origin-based state, sales tax is collected based on the seller’s location. This means that the seller charges the sales tax rate of their state, regardless of where the goods are delivered.
Currently, 11 states within the US adhere to the origin-based sales tax model: Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, and Utah. In these states, sellers are legally obliged to add and send the sales tax from where they sell goods (meaning where your business is located).
Comlplyt Tip: California is a unique case, often called a “mixed sourcing state.” Here, sales taxes at the city, county, and state levels are calculated based on the origin, but district sales taxes, which are additional local taxes, are determined based on the destination.
What is destination-based sales tax?
In states that embrace destination-based sales tax, the calculation and collection of sales tax pivot on the customer’s location rather than where the seller’s business operates. In states that enforce this system, you, the seller, must apply the sales tax rate corresponding to the buyer’s shipping address, not the billing address. This can complicate your tax calculations, especially if you’re an e-commerce business selling to customers across different states.
Currently, 45 states within the United States operate under a destination-based sales tax model. If you’re selling products in one of them, you’re liable for destination-based tax and should be collecting sales tax based on the customer’s shipping address.
Here are the states in alphabetical order: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and Wisconsin.
Is sales tax calculated on shipping?
Yes, is the short answer. In many jurisdictions, sales tax can be calculated on shipping charges, but it depends on the laws and regulations of the specific state or locality. In some areas, if the shipping charges are separately stated from the cost of the products sold, they might be subject to sales tax.
But, if the shipping charges are included as part of the overall price of the products and not separately itemized, they might not be subject to sales tax. Did your eyes just glaze over? Reach out if you’re ready to put sales tax on autopilot.
What’s the difference between a shipping and a billing address?
Sales tax is based on where the product is consumed, not where the payment is made (in most cases). Sometimes, however, sales tax is based on the billing address. This can be the case when the billing and shipping addresses are in different jurisdictions, leading to potential variations in tax rates.
It’s worth noting that the rules and regulations surrounding these situations can vary between other states and localities.
Navigating Sales Tax Challenges in E-commerce Shipping Addresses
Shipping addresses. They’re the reason sales tax obligations can make your head spin. Each address serves as the point of reference for which sales tax regulations and rates are applicable. If an e-commerce business consistently ships to a state, it can create nexus.
Since shipping nexus applies when the value or frequency of the shipment meets the state’s threshold, it’s often the price e-commerce businesses pay for success. And that’s just the tip of the iceberg.
1. Putting customers at risk
Navigating tax challenges isn’t all about compliance; it’s about protecting customers, too. Even honest mistakes in tax calculations due to nexus can lead to customer overcharges or tax underpayments, with consequences for all parties.
2. Dropshipping drama
Sales tax calculation typically hinges on the shipping address, but nailing down that address for drop shippers can sometimes be complicated. The drama arises from shipping and handling disparities across states, potentially leading drop shippers to owe sales tax to the state where the manufacturer or supplier operates rather than the state where the customer delivers the products. This is known as economic nexus.
4. Staying out of hot water
E-commerce businesses must collect the correct sales tax amount, file accurate sales tax returns, and remit the sales tax to the appropriate jurisdictions. Staying compliant can become a time sinkhole when selling to customers in all 50 states, as businesses must comply with different sales tax laws depending on the state.
5. Thresholds and triggers
Different states have various thresholds determining when a business establishes nexus based on shipments. Keeping track of these thresholds and knowing when they’re met can keep the whole accounting team of a growing company struggling in the weeds.
What are the consequences of not complying with sales tax regulations?
Not complying with sales tax regulations can have many consequences, including legal penalties, financial liabilities, damaged reputation, and operational disruptions.
If you’re running an e-commerce business, many online marketplaces and platforms require sellers to demonstrate compliance with sales tax regulations, and non-compliance could result in suspending or removing your business’s listings from these platforms.
Legal penalties and fines
Tax authorities can impose fines and penalties if you don’t comply with regulations. Fines vary depending on the severity of the violation and the specific regulations of each jurisdiction. The main thing to watch out for is that punishments can accumulate over time and take a big chunk of your finances.
Interest charges
Fines aren’t the only pain in your pocket. Tax authorities may assess interest on unpaid or overdue taxes, which can accumulate quickly, leaving companies unprepared for the extra burden.
Audits and investigations
Non-compliance can trigger an audit by tax authorities. No business enjoys having its financial records, transactions, and compliance picked over since audits are time-consuming, costly, and can disrupt operations.
Legal Actions
Persistent and intentional non-compliance can lead to legal actions, including lawsuits, by tax authorities, leading to fines and legal fees having to be paid on top of the outstanding taxes.
Injunctions and seizures
In extreme cases of non-compliance, tax authorities may seek court orders to freeze business assets or seize property to satisfy outstanding tax liabilities.
Personal liability
In some cases, business owners, executives, or managers may be held personally liable for unpaid taxes if they are found to have knowingly participated in or directed non-compliance.
Exclusion from marketplaces
Many online marketplaces and platforms require sellers to demonstrate compliance with sales tax regulations. Not complying with tax regulations could result in suspending or removing a business’s listings from these platforms.
However, tax compliance doesn’t have to keep you awake at night.
Effortless compliance, wherever you are – with Complyt
To stay on top of these diverse regulations, many e-commerce businesses opt for an advanced SaaS platform like Complyt, which can automate tax calculations based on shipping addresses, relieving you of compliance pressures.
Complyt puts sales tax compliance on autopilot. It simplifies calculating and collecting sales tax based on shipping addresses, making it easier for businesses to navigate the complexities of tax compliance and the common roadblocks and manage sales tax on autopilot.
Complyt automates sales tax calculations based on the shipping address and helps businesses determine nexus and manage sales tax obligations across multiple shipping addresses. More questions? Ask our team anything, even how to calculate tax on invoices.
