Components of Tax Calculation

Accurate sales tax calculation requires more than just plugging in an address and retrieving a rate. TaxCloud determines tax based on a combination of factors that work together to produce the correct result, with each having its own rules, nuances, and implications for your integration.

Understanding these core components will help you:

• Interpret API responses correctly.
• Structure your requests with the right data.
• Troubleshoot unexpected tax results.

Each section below gives you a high-level overview of a component and links to our dedicated pages for deeper guidance.

Locations in a Transaction

Both the seller’s and buyer’s locations play critical roles in determining which jurisdictions have authority to tax a sale.

Seller’s Location (Origin Address)

The seller’s location refers to the origin address for a transaction — typically where the order ships from or where the sale is fulfilled.

This is not necessarily your headquarters or every location where you have nexus; it’s the specific address associated with the sale.

The origin address helps determine whether the transaction follows origin-based or destination-based sourcing rules and which jurisdictions have the authority to tax the sale.

Buyer’s Location

The buyer’s location typically refers to the shipping destination for tangible goods, or the billing address for certain digital products and services.

Why they matter

Sales tax rules depend on how states source transactions:

• Destination-based sourcing — Tax is calculated based on the buyer’s address (most states follow this rule).
• Origin-based sourcing — Tax is calculated based on the seller’s address (a few states apply this for intrastate sales).
• Mixed sourcing — Some states use a hybrid approach depending on the product type or fulfillment method.

TaxCloud uses both the seller’s and buyer’s locations to identify all relevant jurisdictions and determine the correct tax rates for each transaction.

Nexus and Jurisdictions

Nexus is the legal connection between a seller and a state that requires the seller to collect and remit sales tax there.

Jurisdictions are the taxing authorities within those states such as counties, cities, and special tax districts.

There are two main types of nexus:

• Physical nexus: Created by having a physical presence (store, warehouse, employees, inventory).
• Economic nexus: Triggered when your sales into a state exceed certain dollar or transaction thresholds, even without a physical presence.

Important note for developers

If a merchant does not have nexus in a given state, the TaxCloud API will:

• Return a tax rate of 0% for transactions shipped there.
• Still record the order data to track toward the state’s economic nexus thresholds.

This is crucial because once thresholds are reached, nexus is established and tax must be collected. Even “no-tax” transactions are significant and should be sent to TaxCloud.

Product Taxability (TICs)

Not all products are taxed the same way; some are exempt, some are taxed at reduced rates, and others vary by jurisdiction. TaxCloud uses Taxability Information Codes (TICs) to classify products so the system knows the correct rules to apply.

Why does this matter?

If you don’t assign the correct TIC, your tax calculation may be wrong. You can read more about Product Taxability and TICs here.

Exemptions

Some transactions are exempt from sales tax, either because of who the buyer is or how the purchase is used.

Common exemption types:

• Sales to government agencies
• Sales to non-profits with valid exemption certificates
• Resale purchases

In TaxCloud

• You can pass exemption information in your API calls.
• We handle storage of the exemption certificates for reuse.

Why it matters

Failing to apply valid exemptions can cause overcharging and customer service issues. Also, incorrectly applying exemptions can cause compliance problems. You can read more about our Managing Exemptions guide here.

Putting It All Together

When you send a transaction to TaxCloud, all five of these components work together to determine the correct tax outcome:

1. Seller’s location
2. Buyer’s location
3. Nexus and jurisdictions
4. Product taxability
5. Exemptions

Even a small change in one component like selling a new product type or surpassing an economic nexus threshold, can affect your tax results.

Best practice: Always send complete and accurate transaction data to TaxCloud, even for sales where you believe no tax applies. This ensures accurate threshold tracking and compliance.