As retailers, manufacturers, and consumers address a wider array of expanded tariffs, a common question is whether they’re being taxed twice on imported goods. The answer to this question is generally yes, but typically not in a way that is clearly discernible on a purchase invoice or receipt.
Because sales tax is charged on the sales price of taxable goods or services to consumers after import duties have been imposed, the result is a compounding tax effect in which sales tax is charged on a sales price that has been increased to recoup tariff costs.
While new or increased tariffs ultimately compound the tax burden of consumers due to higher prices and/or surcharges subject to sales tax, sellers are at an increased risk of sales tax exposure. Sellers will need to ensure sales tax calculations are accounting for new tariff surcharges and price changes correctly.
New or increased tariffs can also lead consumers and businesses who have historically relied on importing goods to begin buying or selling in new states, which can create sales and use tax responsibilities in these states and local jurisdictions.
Understanding Tariffs and Sales and Use Taxes
Tariffs are taxes or duties imposed on imported goods. Nations use them to protect domestic industries, generate revenue, and provide leverage in trade negotiations. Tariffs are based on the declared value of an item when it’s imported.
When goods arrive at a port of entry, the importing company must pay the tariff (a percentage of the product’s value or a set fee) to customs authorities before the goods are released for sale or further distribution. The government of the importing country collects these payments, not the country where the goods were produced.
Different methods can be used to calculate declared values, with some approaches including insurance, freight, and shipping charges.
Sales taxes are levied by state and local jurisdictions on the sale of goods and services or the transfer of goods or services for consideration. The seller collects them at the point of sale on taxable goods and services for remittance to the appropriate jurisdictions.
Use taxes are imposed on a taxable item’s consumption, sale, storage, or use when a sales tax isn’t collected. This may apply, for instance, to taxpayers who import products for their own use in a state and are not charged sales tax by the international seller. Use taxes are self-assessed and paid by the consumer or business.
The Basis for Sales and Use Tax
Under the general principle followed in most jurisdictions, the cost of the imported product, which includes the tariff, becomes the basis for calculating sales or use tax.
Sales and Use Tax General Examples
Example #1: Sales Tax
Consider a product with a declared value of $100 imported into the United States from a nation subject to a 20% tariff rate. Due to the added tariff, the importer’s cost becomes $120. Importer purchased and imported goods for resale and therefore would not owe sales tax on its purchase. Since the importer will likely pass the tariff cost on to the buyer via a price increase or surcharge, this means that the buyer effectively pays sales tax on the tariff amount in most cases.
Example #1: Use Tax
Consider a similar example, but where the importer maintains possession of the item in the U.S. for their own use. The importer would be required to remit use tax to the state where they make use of the item. Depending on the state and which party is considered the importer of record, the amount subject to use tax would generally be for the $100 declared value of the item.
State-Specific Considerations
Several states have regulations regarding how tariffs are treated for sales and use tax purposes. The taxability of tariffs often depends on who pays the tariff (importer or purchaser) and how the cost is passed along in the transaction.
In most cases, if the tariff is part of the sales price charged by the seller/importer, it is taxable. If paid directly by the purchaser/importer, it is not.
California, South Carolina, Wisconsin, and Washington have issued clear guidance on how tariffs should be treated for sales and use tax purposes. The tariff’s taxability depends on who pays it and how it is invoiced.
In California, for instance, any tariff surcharge or reimbursement would be taxable if the seller is the importer of record and passes the tariff cost to the customer, regardless of whether they are stated separately on the customer’s invoice.
For example, say a California company is the importer of record who pays a tariff directly and intends to resell the product. They would provide the seller with a California resale certificate and pay no sales and use tax. On the subsequent sale, they would collect California sales tax on the taxable product and the tariff surcharge, which may be stated separately on the invoice or combined with the original product price.
An exclusion is available for a buyer who imports goods and is considered the importer of record and a consignee. In this instance, the tariff would be imposed on the buyer. Any amount paid related to the tariff is not considered part of the purchase price of the goods.
If the buyer/importer of record is the product’s end-user, they would owe use tax on the taxable product purchased. If the buyer is not the importer of record and the seller is the importer of record, the entire charge (including tariff) may be subject to use tax.
Relevant regulations that apply to California companies include:
The California Department of Tax and Fee Administration (CDTFA) offers resources for clarification.
Deductions and Credits
Tariff costs are generally deductible as business expenses:
- Cost of Goods Sold (COGS): Tariffs are treated as part of the cost of acquiring inventory. Tariffs increase inventory costs and are deductible when the goods are sold.
- Operating expenses: If tariffs are not directly tied to inventory but are considered part of operational costs (e.g., fees related to importing), they may still be deductible as ordinary and necessary business expenses.
- State-specific rules: While federal tax law allows tariff deductions, state tax laws may vary and must be reviewed.
A company’s response to the imposition of tariffs may also qualify it for Research and Development Credits. If a company, for instance, is looking at onshoring production and starting to manufacture state-side while also updating or revamping the production process, that could trigger an eligible process for the R&D credit. Design changes or the construction of a new facility may warrant an R&D tax credit evaluation.
Similarly, if a company looking to reduce costs makes engineering design or manufacturing process changes as a result, that can be a qualified activity.
Practical Implications
In dynamic trade environments, companies must understand the value and importance of accurate cost accounting. Understanding how tariffs affect their landed costs, for instance, is crucial for developing effective pricing strategies and forecasting profitability.
Companies should document their tariff payments for tax purposes:
- Retain official import documentation, including bills of lading, customs declarations, and other forms from U.S. Customs and Border Protection (CBP).
- Maintain proof of tariff payment. If the seller charged a tariff, document this as well.
- Make sure documentation is traceable to the purchase and sale of specific products. This may include purchase orders, contract numbers, and similar documents.
- Consult with tax professionals to ensure compliance with state-specific regulations.
- Factor tariffs into their pricing models.
- Evaluate the potential impact of changing trade policies on import costs and sales tax.
To learn more about the sales and use tax implications of tariffs for your business, contact us.
