Sales tax is calculated at the location tied to each transaction, and in most of the country that location is wherever the buyer receives the goods. Roughly 40 states plus Washington, D.C., use this destination-based approach; about eight states instead base the tax on the seller’s location for in-state sales; and five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — impose no statewide sales tax at all. Where sales tax is calculated matters because it sets not just the state rate but the combined state, county, city, and special-district rate, which can vary block by block.
Destination-Based Sourcing: The Default
In destination-based states, the tax rate is whatever applies where the buyer takes possession. Walk-in sales are sourced to the store’s address. Shipped orders are sourced to the delivery address. That’s the rule in the majority of states.
The complication is that a “delivery address” isn’t a single number. State, county, city, and special-district taxes stack on top of each other, and combined rates across the U.S. run from under 3% in low-tax areas to over 10% in the highest. A delivery across a city boundary can shift the total by a full percentage point or more because a transit or school district tax applies on only one side of the line.
When the delivery location isn’t obvious, the Streamlined Sales and Use Tax Agreement — followed by its 24 member states — sets a fallback order. If the buyer picks the item up at your location, the sale is sourced there. If you ship it, source it to the delivery address. If neither works, use the buyer’s address in your business records, then the address associated with their payment method. Only when none of those apply does the sale default to the seller’s location. 1Streamlined Sales Tax. General Sourcing Rules – Section 310
Origin-Based Sourcing: The Seller’s Location
A smaller group of states flips the default. Under origin-based sourcing, the tax rate is set by the seller’s address. Around eight states use this model for at least some transactions: Arizona, Illinois, Missouri, Ohio, Pennsylvania, Tennessee, Utah, and Virginia. A business in one of these states selling to a customer in the same state charges its own local rate rather than the buyer’s.
This simplifies compliance for in-state sales. You track one rate instead of thousands of local jurisdictions. But the simplification stops at the state border. Origin-based sourcing almost always applies only to sales within the same state; ship across state lines and you’re back to destination rules. A seller in an origin-based state still needs destination-rate infrastructure for out-of-state customers.
The tradeoff shows up for buyers too. A customer in a high-tax city who orders from a seller in a low-tax rural area of the same state pays the lower rate, while a neighbor buying locally pays more. That’s how origin-based systems are designed to work: administrative simplicity for the seller, at the cost of geographic equity for the buyer.
Selling Across State Lines
Before 2018, a state could only require sales tax collection from a business with a physical presence there — a store, a warehouse, an employee. The Supreme Court changed that in South Dakota v. Wayfair, Inc., holding that states can require collection from sellers who reach a threshold of economic activity in the state even without physical presence. 2Legal Information Institute. South Dakota v. Wayfair, Inc. Every state with a sales tax now has some version of this economic nexus rule.
The most common threshold is $100,000 in sales into the state during the current or prior year. South Dakota’s original law paired that with a 200-transaction alternative, and many states copied both. The transaction count has been fading — more than 15 states have dropped it in recent years, keeping only the dollar threshold.
Once you cross the threshold, tax is calculated using destination-based rules regardless of whether your home state is origin-based. You charge the combined state and local rate at the buyer’s address. Ignoring the thresholds doesn’t erase the obligation; the uncollected tax accumulates as a liability with interest.
When the Platform Calculates It for You
If you sell through Amazon, Etsy, Walmart Marketplace, or a similar platform, you may not be the one calculating sales tax on those transactions. Nearly every state with a sales tax has a marketplace facilitator law shifting the collection and remittance duty from the seller to the platform. The platform sources the sale, applies the correct local rate, and files the returns.
The relief only covers sales made through the platform. If you also sell through your own website, at trade shows, or from a physical location, those sales are still your responsibility. Most states also expect you to keep your sales tax permit active and file returns — sometimes zero-dollar returns — for periods when everything went through a facilitator.
Where Services Are Sourced
Physical products go somewhere concrete. Services don’t, and not every state taxes them in the first place. Among states that do, the sourcing rules vary more than they do for goods.
The most common approach looks at where the customer receives the benefit of the service. A consultant in one city advising a client in another would source the tax to the client’s location. Other states look at where the service is physically performed, especially for hands-on work like repairs or installations. A few use a hierarchy that starts with the customer’s location and falls back to the place of performance only when the customer’s location can’t be determined.
For work that crosses state lines, a single engagement can touch several jurisdictions whose rules point to different locations. The safer approach is to check the sourcing rules of every state where you have customers or perform work rather than assume one state’s logic travels.
Where Digital Products Are Sourced
Downloaded software, e-books, streaming subscriptions, and SaaS create a sourcing puzzle because nothing physical moves. There’s no shipping address, and the buyer could be accessing the product from anywhere.
Most states that tax digital goods use the customer’s billing address as the primary indicator of where to source the tax. When only a five-digit zip code is available from the payment processor, that often isn’t precise enough for the correct local rate, because a single zip code can straddle jurisdictions with different rates. 3Streamlined Sales Tax Governing Board. Digital Goods Sourcing Workgroup Recommendation Sellers who can capture a full street address are in a much better position to get the rate right.
Enterprise software used across multiple locations adds another layer. If a company buys a license and employees in several states use it, some states let the buyer issue a Multiple Points of Use certificate. That shifts the tax duty from the seller to the buyer, who apportions tax based on where the software is actually used. Without the certificate, the seller typically charges tax on the full price using the single address on file.
Bundled Sales
When a single price covers both a taxable product and a nontaxable service — a phone with a service plan, or software with installation labor — the sourcing question turns on whether the whole thing is taxable or only part.
Under the framework followed by most states, two or more distinct products sold for a single, non-itemized price are treated as “bundled,” and the entire price becomes taxable if any component is taxable. There’s an exception: if the taxable portion is 10% or less of the total price, many states treat the whole transaction as nontaxable. 4Streamlined Sales Tax. Bundled Transactions Another exception applies when a tangible item is merely incidental to the service, such as a small part replaced during a larger repair; the service is the “true object,” and the transaction follows service sourcing rules.
The practical move: if you can itemize the taxable and nontaxable portions separately on the invoice, do it. Bundled pricing doesn’t lower anyone’s tax bill. It just makes the whole transaction taxable and harder to source.
What Happens if You Source It Wrong
Charging tax at the wrong rate isn’t something states let slide. If you undercollect because you applied the wrong jurisdiction’s rate, you owe the difference plus interest running from the original due date, not from when the state catches it. Late-payment or failure-to-remit penalties typically range from 5% to 25% of the unpaid amount, depending on the state and how long the deficiency goes unaddressed. Some states escalate penalties for returns filed more than 60 days late or for willful non-compliance.
If you discover you should have been collecting in a state where you never registered, most states offer a Voluntary Disclosure Agreement that limits the lookback period to three or four years and reduces or waives penalties in exchange for coming forward. You still owe the back tax and interest. States share data, and the transaction records that marketplace platforms and payment processors already report are the same records used to track economic nexus thresholds. A state that finds you on its own has little reason to be generous.