Rates & Sourcing: Tangible Personal Property
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat discuss and answer questions about how rates and sourcing affect tangible personal property.
Here’s a glimpse of what you’ll learn:
What rates should I use?
Local Rates: Origin vs. Destination Based Sourcing
How do rates and sourcing relate to each other?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More your go-to resource for all things state tax related. Now here is your host, Michael Fleming.
Michael Fleming: Hi, Mike Fleming here, founder of Sales Tax and More, and today's co-host of the Sales Tax and More Podcast where we talk about everybody's favorite topic, which is of course sales tax. And today we're gonna talk about rates. But before we do, let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hi everyone. Thanks so much for joining us today. Please don't forget to like and subscribe to this podcast. And before we get started, quick introduction for Sales Tax and More. We are a full service consulting and solutions firm, [00:01:00] so we have a great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs.
So we do a lot of sales tax returns, sales tax registrations, consultations, research, audit defense, exemption certificate management, and like our name states more. So if you have questions about our services, please reach out. We would love to hear from you and we would love to work with you as well. And Mike, what do you say when someone asks: What rate should I use?
Michael Fleming: Is this a trick question because.
Ellie Moffat: Absolutely.
Michael Fleming: You know what my answer's gonna be? It's gonna be, it depends.
Ellie Moffat: Let's talk about it.
Michael Fleming: So in this case. It's gonna depend on what we're selling. Is it tangible personal property? Is it something digital property that's gonna be downloaded?
Is it a service? Each one of those is gonna potentially have a different rate because it's gonna be sourced differently [00:02:00] than the others. The way that it's delivered could have an impact. Is someone coming to your location to pick it up or are you shipping it out someplace else?
So that there are a whole lot of variables that come into play when, someone says what rates should I use? Let's talk about tangible personal property as an example. Tangible personal property is generally going to be sourced to the state where the customer or their agent takes possession.
I say generally because there's exceptions to everything when it comes to sales tax, but generally it's gonna be sourced, not where title transfers, but where the the customer or their representative takes possession. And that's usually gonna be the delivery address. So wherever that is being delivered, is this the rate that you should be used?
That sale is [00:03:00] sourced to the delivery location. So you use the rate at that delivery location Now, if they sent their own trucks to pick up rather than you shipping it to them, where does the client or their agent take possession? That's your loading dock. You would use the rate where you're located in that instance because that's where they're taking possession.
They're picking it up from you. It's very dependent on facts. Pretty much all of sales tax is fact dependent. Lots and lots of different variables in here that could affect it. Now, if someone's saying, I wanna say this real quick. A common carrier or the US Mail, if someone's sending them, if they're paying for it and they're ordering it and sending it to your location to pick up.
That's not considered their agent, so it's still gonna be sourced to wherever they're [00:04:00] taking possession. So if they're having it, pick it up and bringing it to their, excuse me home location. That's where the sale is being sourced, where they're taking possession. Because common carriers, someone who holds themselves out to the general public, like a FedEx or a UPS or the US Mail, are not considered agents of the buyer.
Ellie Moffat: Okay. So Mike, can you talk about local rates then a little bit in conjunction? I think that was a very good overview, and I might make you review some of this in these coming questions, but can you talk about local rates a little bit?
Michael Fleming: Yeah, absolutely. Some states have 'em, some states don't. And it used to be that if you were required to charge a sales tax or collect a sales tax, then the local rates, if they were in the state, would always be used.
And a lot of times if you were responsible [00:05:00] for collecting a use tax the local rates did not have to be collected that all changed since Wayfair. And in most states if there's a local rate, it should be collected in general. As I said, there's always exceptions to every rule, but in general, you want to be collecting the local rate as well as the state rate.
If you have a responsibility to collect and remit the tax. Now, something I do want to say this gets confused all the time. When we are talking about origin versus destination and what we gave you an example of with the tangible personal property using where it's delivered. That's destination based sourcing and on interstate sales that cross a state line, it's generally, at least when we're talking about tangible personal property, it's always gonna [00:06:00] be the destination. Where does the customer take possession? However, on intrastate, that means it never crosses a state line, some states still have destination based sourcing, but other states have what's called origin based sourcing.
In other words, you use the rate from the location where it's shipping from rather than where it's shipping to. And that is just about which local rate you should use. That's all that is. That when someone says origin based shipping, should I use this local rate or that local rate? Unfortunately people place such an emphasis. Certain software companies place such an emphasis on that. That we've had people tell us Mike, I'm in an origin based state so I don't have to collect sales tax anywhere. It doesn't work like that. Origin based sourcing is only how you choose the local [00:07:00] rate when a sale never leaves the state.
But if the sale is crossing a state line, you are never gonna use origin based sourcing. It's always going to be destination based sourcing. Nowadays, if you're required to collect the sales tax in general, you're required to collect the local tax. When you're selling for example, inside the state of Texas, you're gonna use origin based sourcing and there's a hierarchy of rules after that if the origin based sourcing doesn't work.
But that's how you choose the local rates if you're inside a state and it's an origin based state. Where it's shipping from rather than where it's shipping to. Did I make that about as clear as I might, Ellie?
Ellie Moffat: I think so. I think that we did a good job so far. If we haven't, please reach out, let us know.
We're happy to provide some clarity or put out another podcast. Mike, we're [00:08:00] gonna talk more about sourcing in the future. We touched on this a little bit, but how do rates and sourcing relate to each other?
Michael Fleming: So sourcing is how you've determined which rate to use. So where's the sale sourced?
If I'm in Texas and I'm selling to someone up in New York and I'm shipping it to New York and I'm using a common carrier, then that sale is gonna be sourced to New York. So therefore, I have to use New York's rate. And it can be the state rate as well as the local rate needs to be charged in general.
So that's what sourcing is. Sourcing is just telling us which state's rate or not only the state rate, but the local rate. Which of those do we use. There's, somewhere between 8,000 and 16,000 different taxing jurisdictions out there. So how do we determine which rates to use?
And that's by sourcing the sale correctly, making sure that we're following the [00:09:00] rules for tangible personal property, for digital property, for services. But that's all that means is what state gets the taxes, and that's the sourcing. So if the State of New York is gonna be getting the taxes, then we gotta charge New York's rates.
Ellie Moffat: All right. Thank you so much, Mike. Anything else you wanna add in here?
Michael Fleming: No we could start talking about how services are sourced and how digital property is sourced. But that's a little bit too much for this this podcast here. We'll do separate podcasts on those on a future basis. For now, let's just keep this with tangible personal property. And in general, tangible personal property is gonna be sourced to the location where the customer or their agent takes possession.
And common carriers are not considered agents, nor is the US Post Office. So you're still gonna be where the customer [00:10:00] takes possession. Now, if I have my own trucks and I pick it up in my own truck. Whole nother story because my truck means that's where me or my agent is taking possession. I think that's where we're gonna end it for today.
And like Ellie says, if you have any questions, just reach out and we'll see how we can get them answered for you.
Ellie Moffat: Yes, we offer many solutions and services and you can reach out to me directly. My email is E-M-O-F-F-A-T at salestaxandmore.com. You can also go to our website, salestaxandmore.com and thank you so much for listening today. We hope that you join us for our next podcast.
Michael Fleming: Thank you everyone. Hope to see you on the next episode of the Sales Tax and More Podcast.