Sales Tax Sourcing

Destination-based sourcing: the default

The Streamlined Sales and Use Tax Agreement sets out the standard hierarchy in Section 310. A sale is sourced to the seller’s business location if the buyer receives the product there. Otherwise it goes, in order, to “the location where receipt by the purchaser … occurs,” then to an address for the buyer in the seller’s records, then to an address obtained during the sale, “including the address of a purchaser’s payment instrument.” Only if none of those is available does the sale fall back to the place the product was shipped from or, for a digital good or software, where it “was first available for transmission by the seller.”

For an online seller, that means the buyer’s address decides the rate. A software subscription sold to a customer in Denver is taxed at Denver’s combined rate, wherever the seller is. The hierarchy also explains why the billing address on a card can matter: when a seller has no delivery or account address for the buyer, the payment instrument’s address is the next step down.

Origin-based sourcing: in-state sales only

Section 310.1 of the Agreement is an “Election for Origin-Based Sourcing.” A member state with local sales taxes may source retail sales of tangible goods and digital goods “to the location where the order is received by the seller,” but only if the seller receives the order in the same state where the buyer receives the product. If the two are in different states, “the sale must be sourced pursuant to the provisions of Section 310,” which is the destination hierarchy. The section also says the ship-from location “shall not be used in determining the location where the order is received by the seller.”

Ohio’s statute follows that election closely. Section 5739.033 of the Ohio Revised Code sources sales of tangible goods and digital goods “to the location where the vendor receives an order” where “the vendor receives the order in this state and the consumer receives the property or goods in this state.”

Utah shows the split in a single chart. Publication 25 sources an in-state retailer’s sale of goods to the “Seller’s fixed place of business (whether or not the goods or services are delivered).” Sales from outside Utah are different: the Tax Commission says they “should be sourced to the buyer’s location (the place the buyer receives the service or property), based on the buyer’s ZIP+4.”

Texas and California work differently

Texas doesn’t use the word origin. The Comptroller’s guide to local tax says “You must collect local tax at the location where the sale or use is ‘consummated,’ which may be where the order is received, fulfilled, delivered, or stored, used, or consumed.” For a Texas seller, an order received and fulfilled at its Texas place of business is consummated there. Remote sellers get a choice instead: “A remote seller may choose to collect either local use tax based on the ship-to location; or the single local use tax rate.” The Comptroller puts that single rate at 1.75 percent, and “Businesses located in Texas are not remote sellers and cannot use” it.

California splits the rate itself. The CDTFA’s guide to district taxes says the combined rate of a special tax district “generally applies to sales delivered or shipped into the district,” but a seller not engaged in business in a district may use the statewide rate of 7.25 percent. The CDTFA adds that a retailer required to register with it that meets its 500,000 dollar threshold “is engaged in business in every district in California.” Stripe describes the outcome for a California head office: “state, county, and city taxes are based on the head office, while district taxes are based on the customer’s location.”

What Stripe Tax does

Stripe’s United States guide sets out three cases. If your head office is in a different state from your customer, “Stripe always calculates tax based on your customer’s location.” If it is in the same state, “Stripe generally calculates sales tax based on your customer’s location,” with exceptions:

“In Arizona, Illinois, Missouri, Pennsylvania, Tennessee, and Virginia, Stripe applies tax based on your business location. In California, state, county, and city taxes are based on the head office, while district taxes are based on the customer’s location. In Mississippi, Ohio, Texas, and Utah, Stripe applies tax based on the head office for physical and digital goods. Sales of services are taxed at the destination address.”

The origin Stripe uses is your head office address, which by default is your Stripe business address. Stripe says it “generally uses the address where your business is located as the origin of a transaction,” and that ship-from addresses for goods sent from somewhere else “are available only through the Stripe Tax API.” So if your Stripe business address is a registered agent or an old office, a same-state sale in an origin state will be taxed at that address’s local rate. Check the head office address in your Stripe Tax settings before relying on the calculation.

Note that Stripe’s head office test is not the same legal test as Section 310.1, which uses the place the order is received. For a business with one location they are the same place. For a business with several, ask an adviser which location your state treats as the origin.

Sourcing in your QuickBooks books

Sourcing changes the rate on each sale, not the accounting. Whatever rates apply, the tax you collect is a liability to the state until you pay it, and a single sales tax payable account can hold tax for dozens of local jurisdictions at once. What it can’t do on its own is tell you how much of the balance belongs to each city or district.

That breakdown is what a state return asks for, so file from Stripe’s detail rather than the QuickBooks balance. Stripe’s itemized tax export has a line for each jurisdiction, with a jurisdiction_level of country, state, county, city or district. Its state column, in Stripe’s words, “represents the line item’s origin state for origin-based tax collection or destination state for destination-based tax collection,” and the origin address Stripe used is in its own columns. Totalling the export by jurisdiction gives the figures for the return. Tying that total to the liability account each period is the reconciliation.