One question customers frequently ask if “I have a customer with separate billing and shipping addresses. Should I charge sales tax on online purchases based on my customer’s billing address or their shipping address?”
If you are trying to decide which rate to charge based on either shipping or billing address, the short answer is to charge sales tax based on your customer’s shipping address. But don’t go away yet!
As with anything sales tax related, there’s always a little more to the story. This post applies to eCommerce sellers who ship products to their buyers. Below we’ll help you determine which sales tax rate to charge your buyers.
Origin vs. Destination Based Sales Tax
First of all, it’s important to note that some states are “origin-based” sales tax state and some are “destination-based” sales tax states. Rules regarding origin and destination based sales tax are called “sourcing rules,” and they vary from state to state. (Bear with me here!)
Origin-based sales tax is pretty simple. In origin-based states, sellers are required to charge sales tax at the point of origin of the sale. This is where you receive the order. So if you live and run your business from your garage in Alpine, Texas, then you would charge all of your Texas customers the sale tax rate based in Alpine – because that’s where the order originated. In other words, if you run your business in an origin-based sales tax state, you don’t have to worry about whether to charge sales tax based on your customer’s billing address or her shipping address because you would charge sales tax based on your address.
But only a handful of states are origin-based. If you are wondering whether to charge your buyer sales tax based on their billing or shipping address, then chances are you are dealing with a destination-based state. The vast majority of states are destination-based, meaning you should charge your seller the sales tax rate of the place where he or she takes possession of the product.
(To make matters even worse, most states – even origin-based states – require that out-of-state sellers charge buyers sales tax based on their destination. Confusing, right? We go into origin vs. destination-based sales tax in a lot more depth over here.)
Shipping Address vs. Billing Address: Which is Correct?
So now we get back to our question: Do you charge sales tax based at your customer’s shipping address or her billing address?
The slightly longer answer is that sales tax is charged at the point of sale. When it comes to destination-based eCommerce transactions, the location where your customer takes possession of the product is considered the point of sale.
In this case, the customer takes possession of the product at her shipping address. So you, the seller, would charge her sales tax based on her shipping address. Her billing address does not figure into your sales tax calculations.
Billing and Shipping Addresses in Different States
TaxJar users who ask us this question are often conflicted because their customer’s billing and shipping addresses are in totally different states. This scenario could mean the difference between charging sales tax or not charging sales tax.
Example: You live and run your jewelry business in Ohio, and have a regular customer who also lives in Ohio. But in this case, he wants you to ship a gift to his mother in West Virginia. You don’t have sales tax nexus in West Virginia, so in this case, you would not need to charge your customer sales tax on the transaction because you are shipping the item to a state where you don’t have nexus. The fact that your customer’s billing address is in Ohio is irrelevant in this case. (Whether or not your customer would be on the hook to pay use tax for the item is a whole other blog post!)
This can occur the other way around, too. Say the customer in the above scenario lives in West Virginia but both you and his mother live in Ohio. He may be accustomed to happily buying from you and not paying sales tax. But when he has an item delivered to West Virginia, he’s unhappy to find that you charged him sales tax due to your sales tax nexus in West Virginia. In that case, show him this post and hope he understands!
I hope this has shed some light on whether to charge sales tax based on your customer’s shipping address or billing address. Have questions or something to say? Start the conversation in the comments!