Should I use the Billing Address or Shipping Address for Sales Tax?

Sales tax is a consumption tax. That’s the key to understanding which address to use for sales tax calculations in a situation where the billing address isn’t the same as the shipping address. It’s a common problem for companies which have a billing address which is different from their shipping address. In fact, some companies have played games with these differences in the past, like airlines in the Chicago area. How should you handle multiple addresses when it comes to sales tax?

When does this question arise? When customers have offices in different locations than shipping and receiving. When customers buy a gift for someone and have it shipped directly. When customers have their billing address at work and have items shipped to their homes, or vice versa. In each of these examples the customer is asking your business to send the product to a location other than the one related to banking transactions, such as the address for their credit card. Sales tax is about where the goods are being consumed.

For example, when a gift is sent to a friend, the friend is the one consuming the gift, not the purchaser. The sales tax due is for where the friend is located, not the location of the purchaser. To better manage addresses, make sure that your invoicing procedures ask for both the billing and shipping address at the point of sale. Keep in mind that drop shipping can create special scenarios too, so keep good records on the drop shipment points as well as the ultimate location to which you deliver the goods. If you were ever audited, the auditors will look for this information and good records are the best defense.  Sales tax software should also be able to easily and readily calculate sales tax based on the shipping location, not the billing location, and adapt to any special scenarios you encounter with shipping processes. Ideally, your sales tax software will be able to handle future changes, too — just because you haven’t encountered an issue yet doesn’t mean you won’t encounter it in the future.

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