Understanding sales tax rates can be tricky. But there’s one quick way to help you begin to understand what you should be charging your customers in your home state.

The first thing you need to do is find out if you run your business out of an origin-based state or a destination-based state.

In origin-based states, sales tax should be collected based on where you, the seller, are located.

In destination-based states, sales tax should be collected based on where the buyer is located, meaning the sales tax rate is determined by the buyer’s shipping address or location.

Important Note: Use this information to find the sales tax rate you should be charging in your home-base state only. States have different rules for out-of-state sellers who are selling into their states.

Origin Based States

California is unique. It’s a modified origin state where state, county and city taxes are based on the origin, but district taxes are based on the destination (the buyer).

If you live in one of the above states, you should be charging everyone in your state the rate for where your business is located. That rate could include a combination of state, county, city, and district tax rates.

Example: Texas

If you operate your business out of Houston, Texas, and sell to customers anywhere in Texas, you must charge the sales tax rate applicable at your business location.

For instance, Houston has a combined sales tax rate of 8.25% (which includes the state rate of 6.25% plus local city/county taxes).

So, if a customer from Dallas (where the total rate might be different, say 8%) buys from your Houston-based location, you still charge them 8.25%, the rate at your business location, not theirs.

Destination Based States

If you live in one of the above states, you should be charging everyone in your state the rate where the item is being delivered. That could include a combination of state, county, city, and district tax rates.

Example: Florida

If you run your business out of Florida (a destination-based state), you charge Florida customers the sales tax rate for their delivery address.

The above is fairly simple to understand. Now let's add some complication.

If you have sales coming in from across the US, this means you could have sales tax nexus in multiple states because you are not only selling in your state but across multiple states in the US, in which case you are a remote seller.

A state considers you a remote seller if you have sales tax nexus in that state but are not based out of that state. (In the state’s terminology, they call this “use tax.” But “use tax” is basically the same thing as sales tax, only as applied to remote-sellers).

Confusing? Let's break it down.

A state calls you a remote seller if you have sales tax nexus there but don’t actually live or run your business from that state.

Some states use the term "use tax" instead of sales tax for remote sellers. But don’t worry, use tax is basically the same as sales tax, just for sellers who aren’t based in that state.

Think of it like this: If you live in Florida but store inventory in Texas, Texas considers you a remote seller

Let’s take an example of a seller based out of Florida:

You sell via Amazon FBA and live in Florida, but your products are shipped to a warehouse in Arizona. Arizona considers you a remote seller because your business and you are based in Florida.

If you were based in Arizona, you would normally collect sales tax based on the rate at your business’s location because Arizona is an origin-based sales tax state.

However, since you not based in Arizona and are based in Florida, you will follow the rules of your state, Florida, which is a destination based sales tax state and you will charge your customer's sales tax, based on their location (destination).

So you will charge your customer in Arizona, the sales tax rate of his/her location.

How to Determine the Right Sales Tax Rate for Your Business?

Step 1: Is Your State Origin-Based or Destination-Based?

The first thing you need to do is check whether your state follows origin-based or destination-based sales tax rules.

Step 2: Find Out If You Are a Remote Seller in Another State

If you only sell in your home state, you simply follow its tax rules.

However, if you sell to other states and have nexus there, you are a remote seller in that state.

For remote sellers, destination based sales tax rules will apply and have to be followed.