Sales Tax FAQs #11: Rates & Sourcing (Part 2)
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 answer some of your frequently asked questions about sales tax.
Here’s a glimpse of what you’ll learn:
Which rate should someone use when collecting tax? And do states and local jurisdictions have the same rates?
What is the difference between origin based and destination sourcing?
Where are tangible personal property (TPP) and digital property sourced? Are there differences between how they are sourced?
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, I'm 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 go over some of the questions we've been asked during our webinars.
And as a matter of fact, these questions came from today's webinar. We just got finished doing the webinar and we took the questions right out of it. But before we get into these questions and give you some answers, let me first introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey [00:01:00] everyone, it's great to be here. Thank you so much for listening if you happen to be at that webinar today. Thank you for attending the webinar. We have a lot of really great resources for people who are looking for more information about all things related to state tax. So I'll do a quick introduction for Sales Tax and More. We are a full service consulting and solutions firm.
We have a really 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 or you'd like to work with us, please reach out.
We would love to hear from you, and we would love to work with you as well. And all of that being said, don't forget to like and subscribe to this podcast. But now Mike, I'll get into these questions and we're gonna just jump right in. Which rate should someone use when collecting [00:02:00] tax? And do states and local jurisdictions have the same rates?
Michael Fleming: That's a fairly loaded question. You know what my answer's going to be? What's my answer?
Ellie Moffat: I think at this point, hopefully we all know: it depends.
Michael Fleming: Absolutely. Let's answer that second question first. Do states and local jurisdictions have the same rates? That's an easy one. That's not a depends. It's a no.
States and local jurisdictions have different rates. Now, which rates should I use when collecting tax? That's the depends question. It depends on so many things. And you know we've gotta look at which state has the right to tax this. That's really what you're asking here when you say which rate should I use when collecting a tax?
Where would that sale be sourced? In other words, which state has a right to tax it? There are a number of different things to look at when we're trying to source a [00:03:00] sale. But when we're talking about tangible personal property, the sale is going to be sourced generally to where the customer or one of their representatives takes possession of the item.
If it's being shipped, especially by a common carrier. Common carrier is someone who holds themselves out to the general public, is someone who's in the business of doing shipping like a FedEx or a UPS. It's the delivery address. Because that's usually where someone's gonna take possession of it. Very often, or most often, it's going to be the delivery address when we're talking about tangible personal property.
And we're doing the shipping or the customer's ordering the shipping, but utilizing a common carrier. It doesn't matter who's ordering the shipping. It doesn't matter who's paying for the shipping. Common carriers are not considered representatives of the customer. When the common carrier picks it [00:04:00] up, it's still in transit. And when the customer receives it or an agent or a representative of the customer receives it, that's where that sale is going to be sourced. And where they're located is therefore the rate that we're going to use. Now, whether or not we need to collect a local rate is gonna depend, in addition to the state rate, local rates consist of city, county, special districts. They're all lumped together. And whether they're going to be charged in addition to the state rate is gonna depend on things like what type of tax are you registered for. You've registered for a sales tax or an out-of-state use tax.
A seller's use tax, a consumer use tax. It's gonna depend on the state. Some states don't even have local rates. A lot of things come into what you should be collecting. But if the state has the local rate. And it's an interstate [00:05:00] transaction. In other words, there are two states involved.
Then the destination rate is what we're going to be using. And if there is a local rate, then we're gonna use the destination based rate for that also. Now, if it's all within one state, that's where it gets a little bit more layered. We have what's called origin based sourcing, and we have destination based sourcing.
And origin based sourcing simply means something like where the order was taken or where the item is being shipped from. Different states like Illinois and Texas too. There are more, but these are two that make a distinction. Nowadays most states use destination based sourcing, but origin based sourcing would mean if it's all happening within the state of Texas and I've got a location in Texas and I'm taking more than [00:06:00] two orders from that location, that's generally the local rate I'm gonna use. So it's where it's shipping from rather than where it's being shipped to. There are instances where I would use destination. Say the order came from outside the state, but it was being shipped inside the state.
Then we'd use the destination based sourcing. Does that sort of give you a little bit of idea of what states rates we should use, or did I just jumble it up even more?
Ellie Moffat: You know what? I think it gives us a pretty good idea. And you really have been touching base on our second question here.
So maybe we just use a little bit of clarity or take it whatever direction you want. But the next question we had was, what's the difference between origin and destination sourcing?
Michael Fleming: Oh I'm way ahead of myself here. I gave you a little bit of an intro on that last question.
Ellie Moffat: Sure did.
Michael Fleming: All right. So as we said, origin is based upon the location of the seller. Destination is based upon the location of the [00:07:00] buyer or the buyer's representative. Most states nowadays, as I mentioned, use destination based sourcing. And whenever something is crossing a state line, you're going to use destination based sourcing.
You cannot use origin based sourcing if it's crossing a state line. A lot of people tell me, Mike, I was talking to the software company and they told me I'm in an origin state. That means I don't have to collect sales tax anywhere. No, that doesn't mean that. They think that they only have to collect in their own state.
Origin based sourcing only has to do with interstate sales that never leave the state. And they only have to do with figuring out which local rate to charge. That's what origin based sourcing deals with. Destination based sourcing are interstate sales. States that do cross a state line.
And there are going to be destination based. And whether you charge a local rate or not [00:08:00] is gonna depend on what type of tax and what state it is. Some states don't have local rates and some types of use taxes. You don't collect the local rates. Origin and destination where we get a big problem is a lot of software companies make such a distinction that between origin and destination that you get people thinking that they don't have to collect tax anywhere but their home state because the software company's telling them, oh, you gotta know the difference , you're in an origin based state, and it just doesn't work that way.
So easy to get confused, especially if people aren't explaining it well to you. And hopefully I've been able to explain it well. Origin is to determine the local rate. If the sale is totally within a state and destination is where the customer is located, and most states are gonna use that where the customer or an agent of the customer takes possession.
Now in our first answer, we talked about [00:09:00] common carriers, but what happens if someone sends their own trucks to pick up from the seller? Remember we said only a common carrier is not considered the seller. So if we're using the definition of a sale of source to where the customer or their representative takes possession, if I'm sending my own trucks, I'm taking possession at the seller's location.
Again, it's still destination. Where is the seller taking possession? He just happens to be at the seller's place. So that's the destination. That's where the seller or the representative is taking possession. So that's the important phrase. Where is the seller taking possession? And common carrier, which is FedEx or UPS or even the US Mail, not exactly a common carrier, but the US Mail is considered the same.[00:10:00]
They're not considered to be the customer or a representative of the customer. Wherever the customer takes possession would be at the customer's house or place of business or some designated site. But if I'm sending my own trucks or I hire my buddy Bob to go and pick it up then again where are we taking possession? Could be at the seller's place of business. Could be at a third party, but wherever we're taking possession is where that sale is going to be sourced.
Ellie Moffat: Thank you so much, Mike, and really you're just doing a great job at leading into these next questions here.
You touched on this briefly for a second, a couple minutes ago, but the question we have is where are tangible personal property TPP services and digital property sourced? Are there differences between how they are sourced? And you briefly inched towards this, but let's expand on it a little.
Michael Fleming: Yeah, there are differences in how they're sourced. So we've done a fairly good [00:11:00] job, I think of explaining how tangible personal property is sourced. It's gonna be where the seller takes possession or representative of the seller. Services, on the other hand, there's not always the taking of possession.
So services, where is the benefit received? Where's the service performed? Or a third one is at the headquarters of the service consumer, the person that the services are being done for. But most often than not, that's something that you're gonna see in Texas a lot, but more often than not, it's either gonna be where the benefit is received or where the services are performed.
And a lot of services, that's gonna be the same place. If I go in and get a haircut, that's a service. It's being performed on my head. Where in the world, not that I get too many haircuts anymore, but where in the world is the benefit gonna be received? Obviously on my person. So the service being performed in the same place that [00:12:00] the benefit is being received.
Now, an example I used today was from Connecticut, an employment services company, in today's webinar. And in that instance, we had a company that was located in one state that was hiring for a new location in the state of Connecticut. And they were utilizing an employment services company in another state.
Neither of those companies were in the state of Connecticut and they were interviewing people from four different states, none of which were actually in Connecticut. So where was that service being performed? You could say that it's being performed where the employment company was actually hired to do these hiring.
Or you could say the service is being performed where the people are being interviewed. Where's the benefit being received? You could say the company that's hiring these people that's where the benefit [00:13:00] is being received. But in this particular instance, the job was actually in Connecticut.
And that's where the benefit was being received. So sometimes it's really easy to source a service. Hey, wherever I get a haircut, where my pool is being cleaned, the benefit is being received where the pool is. Janitorial services, there are lots of services that by design the benefit is gonna be re received in the same place of services being performed.
But as we can see from the employment services in Connecticut, sometimes it's not so easy to figure it out. So you gotta go through a step-by-step process and sometimes it takes a little bit of deeper digging. You get a look at how similar services have been sourced in the past and be able to draw inferences from that.
Digital property is different from services. It's different from tangible personal property. There's really a hierarchy of knowledge. If [00:14:00] you knew this, then you use this. If you knew this, then you use this and you just go down the list until you see something that you knew.
Now, nowadays with all the online sales, the one that you usually know if you don't know anything else is the information that's gathered during the transaction. For example a lot of times you gotta enter your address to confirm the credit card, and that's the address of where the sale is often sourced.
Hierarchy of knowledge is the important terms to know when it comes to digital property, and now we're done, Ellie. Now we can leave and get on to the next.
Ellie Moffat: Now we can go. And I'll just close it out by saying if you have sales tax needs, we have a lot of services and solutions.
We put out a lot of really valuable educational content for you to look at for free that's on our website. So take a look around and if you have questions about our services or solutions, please contact me. My email is emoffat, that's [00:15:00] E-M-O-F-F-A-T at salestaxandmore.com. And we hope that you listen to the next episodes and all of the episodes for that matter. So thank you so much for joining us today.
Michael Fleming: Thank everyone and we know that sales tax is your favorite topic, so we expect to see you on future installments of the Sales Tax and More Podcast. Thanks everyone. Bye-bye.