Sales Tax Q&A: Home Rule States
- Sales and Use Tax
- November 2, 2015 | Gail Cole
We field a lot of interesting questions about different sales tax scenarios. This one deals with sales tax rules in home rule states.
There appear to be two different ways that destination based taxing states administer local taxes. For example, in Colorado, nexus is determined at the local level. If you only have a physical presence in Denver, you do not need to collect local taxes for an item shipped via common carrier to, say, Boulder (only state level taxes apply). In Arkansas, however, nexus is determined at the state level. If you have a physical presence anywhere in the state, you need to collect local taxes for an item shipped via common carrier to any destination in the state.
Is there a list anywhere of which states are treated in each manner?
Great question! Before answering, let’s unpack some of the terms involved.
Nexus: Nexus is the connection between a taxing jurisdiction and a business that triggers an obligation to collect sales tax. Once limited to some sort of physical presence (i.e., either buildings or employees), some states now consider other activities to be "nexus-creating."
Sourcing: Sales tax rates are generally based on either the location of the seller (origin sourcing) or the location of the buyer (destination sourcing). When you buy something on-site at a brick-and-mortar store, the location of the seller and the location of the buyer are the same and the rate in effect at the store applies. When you purchase something online or from a catalog and have it delivered, the rate of tax depends on whether origin souring or destination sourcing rules are in effect. Read more about sourcing roles in Part 1 of Avalara’s Definite Guide to Sales & Use Tax.
Home rule: A handful of states allow local tax jurisdictions to establish home rule, whereby they can establish their own sales tax rates, rules and regulations (while abiding by state laws). Not all localities choose to adopt home rule. In general, once you have established nexus in a home rule state, you are required to collect the appropriate tax in all localities administered by the state. If you establish nexus in a home rule locality, you are required to collect the appropriate taxes in that locality but not necessarily in other localities in the state. Sales tax compliance in home rule states is notoriously complicated because nexus-creating activities can differ by locality.
Now, back to the question.
All home rule states treat their localities as distinct government entities. Four states allow total rule by localities: Alabama, Arizona, Colorado and Louisiana.
In these ‘home-rule’ states, local jurisdictions may make their own determination of nexus (while adhering to state laws). In some local jurisdictions in these states, the obligation to collect is based on the activities and connections a business has with the locality, not the state at large. Bear in mind that local jurisdictions that choose to have their local tax administered by the state will follow state nexus rules.
However, in some states that are not technically ‘home-rule,’ local collection obligations are linked to local nexus. Alaska falls on this list, because while there is no state-wide sales tax, many local jurisdictions can and do collect local sales taxes. By the very nature of Alaska’s system, local jurisdictions are all separate nexus determinations.
Other state-specific examples:
- In Arizona, fewer than 20 cities collect their own taxes.
- California uses a mixed sourcing regime. State and county level taxes are due in all locations based on state nexus, but local jurisdictions are not linked.
- Idaho and Mississippi only obligate collection of local taxes based on local nexus.
- Texas uses a complicated formula when determining intrastate transactions. It doesn’t arise much because it relies on the nexus type activities of a Texas seller in local jurisdictions, but local nexus matters.
Learn more about nexus and home rule states in Nexus 101, a complete tutorial on nexus and how it affects sales tax collection and remittance.
Still confused about sales tax rules? Check out the taxability rules section in our Q&A forum. If you don’t see what you need, ask a question!