With destination-based sales sourcing, sellers must follow the sales tax rules of the state where the product is sent. In a small number of states, sellers must follow the rules where they are located. This is called origin-based sourcing.
Sales tax rules are complicated because sales tax rates and requirements differ not only by state, but also by county and district.
This means that sellers shipping outside of their local area must determine whether to charge sales tax based on where the seller is located or where the buyer is located.
Sourcing rules determine which sales tax rates and requirements apply. Sourcing rules also differ depending on where the sale occurs and whether your customer is in the state where you're based or in a different state.
Sourcing rules are either:
Most states are destination-based, but a small number of states are origin-based, including Arizona, Illinois, Mississippi, Missouri, Ohio, Tennessee, Texas, Utah, and Virginia.
California is a hybrid state that applies origin-based rules for state, county, and city taxes but destination-based rules for voter-approved district taxes.
Unfortunately, sellers who get sourcing wrong may charge the wrong tax and could find themselves out of compliance with their legal obligations.
This guide explains how sourcing works and provides a state-by-state guide to destination vs. origin-based sourcing. We’ll cover sourcing for remote sellers, how to determine which tax rate to apply, what happens if you make a mistake, and how Numeral can help.
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Sales tax laws vary across the country and even within different regions of a state. However, when you are selling within your state, the first step is knowing whether your state is origin-based or destination-based.
The table below shows whether a state uses origin-based or destination-based sourcing.
This applies only to sales made in-state. When a seller is selling remotely to a different state, destination-based rules almost always apply.
Five states don’t appear in this table: Alaska, Delaware, Montana, New Hampshire, and Oregon. Those states don't charge a statewide sales tax (although Alaska allows local sales tax), so sourcing rules don't apply within them.
As you can see, destination-based sourcing is far more common than origin-based sourcing.
In some states, the distinction matters more than in others. For example, in Connecticut and Kentucky, there are no local sales taxes, so the tax rate won't change regardless of where items are sent. In Idaho, on the other hand, some resort cities charge local sales tax at separate rates.
The rules for remote sellers also differ. Remote sellers are companies with nexus in a state, but no physical location there, and destination-based sourcing is almost always used in this scenario.
This is true, in part, because states that are members of the Streamlined Sales Tax (SST) Program follow the uniform sourcing framework established under Article III, Section 310, which adopts destination-based sourcing.
Some states also impose special rules in these circumstances.
For example, in Illinois, as of January 1, 2026, if a seller doesn't provide the necessary information to determine the proper location, the Department of Revenue will assess a 15% tax on the gross receipts of sales to undetermined tax locations.
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Origin-based sourcing is simpler. For in-state sales, the seller uses its local sales tax rules to determine the sales tax rate to charge.
As Missouri's rules state: "Cities, counties and certain districts may also impose local sales taxes as well, so the amount of tax sellers collect from the purchaser depends on the combined state and local rate at the location of the seller."
For example:
California has different sales tax rules because it uses a modified origin system.
For example, if a Los Angeles seller ships an item to a buyer in another city in California, LA rules determine the state, county, and city taxes due. But if the buyer lives in San Francisco, the city’s district taxes are added to the bill.
Sellers must blend both rules to ensure they are in full compliance, which means they must know the special district rules in any locations in the state where they are selling items.
Destination-based sourcing works differently because it uses the customer's location to establish sales tax rules.
As New Jersey states, "New Jersey is a destination state, so whether a sale of property is subject to New Jersey sales or use tax is generally based upon where delivery occurs."
This is more complicated for two reasons:
The specific process of determining a customer's location (and thus the applicable sales tax rates) depends on whether the items being sold are physical or digital. The seller's knowledge about the buyer can also play a role.
While the rules can differ by state, in general, when a seller determines a buyer's location for purposes of charging sales tax, the seller will use:
Sellers must have proper documentation of the specific sales tax rates they applied for each transaction.
Digital goods don't have a ship-to address, so there are different requirements for determining the buyer's location for purposes of charging sales tax under a destination-based system.
The specifics for digital goods and SaaS sales tax can vary by state, but generally the relevant location is where the buyer took possession of, or used, the goods (depending on which occurred first). This could be based on (in order of priority):
While some states have origin-based rules for intrastate sales, those rules usually do not apply to out-of-state sellers. When an out-of-state seller sells into a state where it's not located, destination-based rules almost always apply.
Out-of-state sellers historically did not have to collect sales tax unless they had a physical presence in a location. However, in 2018, a Supreme Court ruling in a case called South Dakota v. Wayfair changed the rules.
In Wayfair, the court ruled that a physical presence (physical nexus) was no longer required for a state to compel a seller to collect and remit sales tax. States could also impose sales tax collection requirements on companies with economic nexus, or sufficient economic connections.
Most states responded to Wayfair by requiring sellers to register to collect sales tax once they reached a certain volume or number of transactions.
The rules vary, but many states define economic nexus using a $100,000 sales threshold, a 200-transaction threshold, or both (though a growing number of states have dropped the transaction-count threshold in recent years).
Once states began requiring sellers outside of their borders to collect sales tax, it generally became clear that destination-based rules made the most sense for remote sellers.
As the New Mexico Taxation & Revenue Department explained, after Wayfair, remote sellers who were selling to customers in New Mexico were subject to the state's gross receipts tax (its alternative to a sales tax). "But they still had a tax advantage under origin-based sourcing."
This advantage existed because they paid only the state-level GRT rate, then 5.125%. To ensure the local option gross receipts tax rates applied, New Mexico shifted to destination-based sourcing in 2021. This eliminated the tax advantages for out-of-state companies, leveling the playing field.
Unfortunately, this requires sellers to understand local tax rules in any jurisdiction where they have economic nexus, which can mean hundreds of local districts.
To determine which sales tax rate to charge, take these steps:
If you charge the wrong rate, you could end up:
This can have significant consequences at scale. If you don't apply the correct rules in origin- or destination-based states, you could incorrectly charge sales tax on every sale within that state and end up with substantial tax liability.
If you don't want to track sourcing rules for dozens of states and hundreds of local jurisdictions, you can turn to Numeral.
Numeral automatically applies the correct sourcing method and rate for every transaction, so you always charge the correct amount of tax without spending endless time managing tax compliance.
Numeral takes care of all your other tax obligations as well. Just connect your store or platform to Numeral, and we'll:
All of our services are backed by the Numeral Guarantee: your sales tax is filed on time, or we’ll pay your penalties and interest. And returns are always reviewed by a U.S. tax expert before filing, adding to your peace of mind.
Get started today or book a demo with Numeral to learn how we can help.
Sales tax is sometimes based on where the seller is located and sometimes based on where the buyer is located.
Sellers who offer goods or services in multiple U.S. jurisdictions may need to know hundreds of different local tax rules due to destination-based sourcing.
Arizona, Illinois, Mississippi, Missouri, Ohio, Tennessee, Texas, Utah, and Virginia use origin-based sales tax. California uses a modified origin-based rule.
This is for sales made by a seller to an in-state buyer. Remote sellers selling into these states generally use destination-based rules.
California uses a modified system for sales tax sourcing. State, county, and city taxes are origin-based, but district taxes are destination-based.
Remote sellers are sellers with nexus in a state, but no physical location. They generally use destination-based sourcing, even if that state uses origin-based sourcing for intrastate sales.
Sourcing rules for SaaS and other digital products vary substantially by state and by the type of digital product or service. Some states use the customer's billing address. Some states impose tax based on the rules in the area where the digital product or service is received or first used.
Rules vary more for digital products than for physical goods, so confirm with the relevant state’s department of revenue to avoid noncompliance.
Numeral calculates origin- and destination-based rates automatically. Numeral integrates with your sales platforms and applies the correct sourcing method and rate to every transaction. This eliminates the need to track which of your nexus states use origin, destination, or modified sourcing.
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The trusted solution for U.S. sales tax, VAT, and GST compliance, used by 3,000+ global businesses.
