Sourcing

To determine what sales tax rate to apply a sale must be sourced to a specific location. There are two types of sourcing applicable to sales taxes:

Destination-based sourcing 

Destination sourcing looks to the location of the purchaser and where that purchaser is receiving and using the product. For tangible goods, the “ship-to” address is the most common way to determine and source a sale.

For SaaS companies, sourcing based on destination can be more challenging given the information sellers may have on the purchasers. Most jurisdictions provide a hierarchy of preferred addresses to use for the sale of SaaS and services, depending on what information is available to the seller. These may include: where the purchaser is using the SaaS product or the billing address of the customer if better information is unavailable. Check out the Anrok guide “Why is sales tax so hard to get right for SaaS?” for more on address hierarchy.

Origin-based sourcing

Origin sourcing means a business charges sales tax at the place where an item originates or comes from, provided the purchaser is also in the same jurisdiction as the seller.

Sourcing rules place a high burden on sellers to both know the rules and which ones are applicable to which transactions, as well as have good address data for their customers so they can properly apply the rules to each transaction.

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