In origin-based states, sales tax should be collected based on where you, the seller, are located. If you live in one of these states, you should charge everyone in your state the rate for where your business is located. If you live in a destination-based state, you should charge everyone in your state the rate where the item is being delivered.
California has a unique sales tax system where it is both an origin-based sales tax state and a destination-based sales tax state. This means that 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).
Here's what you need to know in order to figure out what taxes you're liable for when selling from California:
- Residency of buyer (your customer) and seller (you)
- Whether the property is tangible (retail product) or intangible (like software)
- The state in which the product is consumed or used
As an example, consider a Los Angeles, CA based company that sells their product outside of CA to a buyer in another state.
- Is such a purchase subject to state and local taxation in CA?
- If not, is the seller liable for sales and local taxation in the other jurisdiction?
- If the state sales tax is not applicable, then the local tax will not be applicable.
- If title to the product transfers from seller to buyer outside of CA, then to the extent that the product is used in a state other than CA, the sale would not be subject to state or local sales taxation in CA (CA Reg. Secs. 1802(a)(1) and 1803(a)(1)).
- If title to the product transfers from the seller to the purchaser outside of CA but the product is then shipped by the seller and is used in CA by the purchaser, then the seller will have to collect and remit use tax from the purchaser unless certain exceptions apply (CA Reg. Sec. 1803(b)).
- Please note that if there is a sales and use tax regime in the other jurisdiction, the seller (you) may be required to register and pay tax in that jurisdiction. However, the rules applicable to each jurisdiction where sales are occurring will need to be examined to make such a determination.
Remember to reach out to your inDinero team if you're ever unsure about your tax liability in this type of situation. As evident in the above sections, your tax liability can depend on a lot of factors that change over time and only a tax professional can fully evaluate your responsibilities.
Our comments may not contain a full description of all the facts or a complete exposition and analysis of all relevant authorities. Furthermore, the use of certain words such as “should, would, or will” is merely for grammatical convenience, is not intended to indicate a specific level of authority regarding a particular issue, and no explicit or implicit references should be taken there from. Our comments expressed herein are based upon the provisions of the Internal Revenue Code and Regulations in force on the date hereof, all proposed amendments to these Acts, Regulations and treaties publicly announced by the relevant authorities. Each and all of these authorities are subject to change at any time. Any such change could be given retroactive effect with respect to the transactions described herein and could cause the conclusions provided to become invalid, in whole or in part, with respect to any entity involved. There can be no assurance that these authorities will not disagree with, or challenge, the views set forth in this memorandum or that any such challenge will be unsuccessful.