As global commerce reacts to new and increased tariffs, businesses must account for a variety of factors impacting the supply chain. For U.S.-based businesses already navigating the challenging state and local tax landscape, additional consideration needs to be made for the impact of tariffs on sales and use tax obligations. Broadly written state and local tax laws preemptively account for various types of fees and surcharges, and if not properly considered, businesses may be at risk for exposure or overpayments of sales and use tax.
The Intersection of Tariffs and Sales Tax
U.S. businesses will most commonly experience the impact of tariffs on sales and use in two situations:
- (1) Direct payment of the tariff at the point of import
- (2) Itemized pass-through charges on invoices
Understanding when the tariff is paid in the supply chain, which party is paying it and to whom they are paying it to should all be considered when determining whether the tariff is subject to additional sales and use taxes.
Direct Payment of Tariffs to U.S. Customs
When overseas goods are imported into the U.S., the importer of record is legally responsible for paying the tariff directly to U.S. Customs. The importer of record can be the foreign seller, the domestic purchaser or a customs broker acting as an agent on behalf of the seller or purchaser. At the time the tariff is paid directly to U.S. Customs, the tariff will generally be viewed as not subject to sales or use tax, as it is not considered part of the taxable sale price for the imported goods paid to the seller. Many states have issued rulings excluding the direct payment of a tariff to the Federal government from the taxable base of goods.
Case Study: Importer of Record and Tax Implications
For example, a foreign seller sells fixed assets to a U.S. purchaser for $10 million, which is subject to a $2 million import tariff. Assuming the U.S. purchaser is the official importer of record or contracts a custom broker as their agent and pays the $2 million tariff directly to U.S. Customs during the import clearing process, the tariff is not part of the $10 million sales price paid to the foreign seller and viewed as a separate transaction directly with U.S. Customs. In this event, the tariff would generally not be considered part of the taxable base subject to use tax.
Itemized Pass-Through Charges on Invoices
Now, when a seller seeks to recover the costs of tariffs incurred in the supply chain, the expectation is that they will choose to increase the overall sales prices of the goods and/or itemize the tariff on a customer invoice in the form of a separately stated fee or surcharge. In both instances, most states are likely to include the tariff surcharge in the taxable sales price, assuming the underlying item being sold is taxable.
State-Specific Considerations for Tariff Surcharges
State sales tax laws generally define sales price as the total amount for which a taxable item is sold and typically include various costs incurred by the seller, regardless of whether separately stated on a sales invoice.
Case Study Expanded: Automated Tax Engines and Tariff Surcharges
Expanding on the previous example, assume the U.S. purchaser who paid the $2 million import tariff seeks to resell the taxable goods to end consumers. To honor price points for its customers but to cover costs of the import tariff, the U.S. reseller opts to add a separately stated tariff-based surcharge to the goods’ invoice for a ship-to-Texas consumer.
Texas statute defines the sales price as the total amount for which a taxable item is sold, without a deduction for the materials used, labor or service employed, interest losses or other expenses.
Due to the broadly defined sales price encapsulating various seller expenses, the separately stated tariff surcharge would presumably be subject to Texas sales tax as part of the sale of the taxable goods.
Avoiding Compliance Pitfalls
U.S.-based sellers seeking to add surcharges for tariffs will need to consider state-specific guidelines. For those sellers utilizing automated tax engines, specific review should be performed in mapping these surcharges to the appropriate taxability category to ensure proper treatment in each state. In addition, purchasers should be mindful of surcharges to avoid potential use tax exposure in the event the seller did not account for sales taxes.
With tariffs affecting many companies nationwide, state tax professionals need to understand the complexities involved and determine whether the tariff is a liability for the seller or an expense already incurred by the seller. Evaluating the applicability of sales and use tax on tariff payments is important to avoid potential compliance issues, such as unintended exposure or overpayments.
Your Guide Forward
As international trade policy continues to evolve, Cherry Bekaert’s Sales & Use, Tax Policy and International Tax professionals will continue to bring you the latest updates and insights.
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