Is Sales Tax Based on Shipping or Billing Address?

Sales tax, a consumption tax levied by state and local governments, plays a significant role in funding public services. For physical goods, sales tax primarily depends on the shipping address, though several complexities and exceptions exist. Understanding these nuances is important for proper tax calculation and compliance.

The Primary Determinant: Shipping Address

Sales tax is applied based on the “destination principle,” meaning tax is calculated where goods or services are received or consumed by the buyer. For tangible products, this location is almost always the shipping address. This principle ensures that tax revenue is directed to the jurisdiction where the economic activity culminates in the actual possession of the item.

For example, if an individual in one state purchases an item online and has it shipped to a relative in another state, the sales tax applied will be based on the sales tax rates of the recipient’s location. The business selling the item must collect tax based on where the product is delivered. This means that even if the billing address for the credit card is in a different state, it typically has no bearing on the sales tax calculation for the physical good.

The billing address is primarily used for payment verification and processing. While it confirms the purchaser’s identity and financial information, it does not determine the taxing jurisdiction for sales tax on physical goods. The distinction between the shipping address (where goods are received) and the billing address (where payment originates) is crucial, with the former almost always dictating the sales tax for tangible items.

Beyond the Shipping Address: Sourcing Rules and Nexus

Once the shipping address identifies the state and locality of receipt, sales tax sourcing rules determine the specific rate. Two primary types exist: origin-based and destination-based. Destination-based sourcing, common for interstate sales, dictates the sales tax rate is determined by the buyer’s “ship-to” address. Most states adopt this approach for interstate shipments.

In contrast, origin-based sourcing means the sales tax rate is determined by the seller’s location, such as where the order is taken or fulfilled. While most states use destination-based sourcing, a limited number of states, including Arizona, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia, employ origin-based rules for intrastate sales. Some states, like California, use a hybrid approach where certain taxes are origin-based and others are destination-based.

A business’s obligation to collect sales tax in a state is tied to “nexus.” Nexus signifies a sufficient connection or presence between a business and a state that triggers a sales tax collection requirement. This connection can be physical, such as having a store, office, warehouse, employees, or storing inventory in a third-party fulfillment center.

E-commerce led to “economic nexus,” obligating businesses to collect sales tax based on their economic activity in a state, regardless of physical presence. This occurs when a business exceeds a certain threshold of sales revenue or transactions within a state, often around $100,000 in sales or 200 transactions annually, though thresholds vary. If a business lacks nexus in the buyer’s state, it is not required to collect sales tax, leaving the consumer responsible for remitting “use tax” directly to their state’s tax authority.

Complex Scenarios and Exceptions

While the shipping address typically governs sales tax for tangible goods, certain scenarios present complexities. For digital products and services, which lack a physical shipping address, sales tax often depends on the buyer’s billing address or IP address. Over 30 states impose sales tax on digital goods and services, but definitions and taxability vary significantly.

For online orders designated for in-store pickup, also known as “click-and-collect,” sales tax is based on the physical store’s location where the item is picked up. The point of sale is considered the store’s location, meaning the tax rate applied will be that of the pickup location.

When purchasing a gift to be shipped directly to a recipient, sales tax is determined by the recipient’s shipping address, not the gift giver’s billing address. This reinforces the destination principle where tax is levied at the point of consumption.

Marketplace facilitator laws introduce an exception for sellers using platforms like Amazon or eBay. Under these laws, the marketplace itself, rather than the individual third-party seller, is often responsible for calculating, collecting, and remitting sales tax on transactions. This simplifies compliance for many sellers, as the marketplace assumes the tax obligation, provided it has nexus in the relevant state.