Global companies expanding into the U.S. market and U.S. companies with global suppliers are increasingly encountering not only a rapidly changing landscape of federal import tariffs but also the complexity of US state sales tax systems. The interaction of tariffs and state-level sales and use taxes can significantly affect pricing, invoicing and state compliance obligations.
In response to rising tariff rates in recent years—and the ongoing volatility in tariff levels driven by shifting trade policies—some importers have chosen to separately state tariff-related surcharges on customer invoices to transparently recoup costs. This strategy raises an important question: Are these separately stated surcharges subject to US sales tax?
This article looks at actions taken by several states—California, Illinois, New Jersey, South Carolina, Wisconsin and Washington—and proposes some action steps for companies navigating this period of uncertainty.
A tariff—also referred to as a customs duty, duty rate or import fee—is generally a federal-level tax imposed on products manufactured in other countries and paid by the business importing those products into the US. Under the US Constitution’s Import-Export Clause, states are prohibited from levying their own import or export duties without Congressional approval, except for charges associated with enforcing their inspection laws. Any net revenue from such duties collected by states must be deposited with the federal government.
The inclusion of the cost of tariffs in the sales tax base varies across states, but a common factor is which party is the designated importer, i.e., the person primarily responsible for paying the tariff or the authorised agent acting on its behalf. If the seller is the importer and passes the tariff cost on to the consumer, that cost is generally included in the taxable sales price. Conversely, if the purchaser is the importer, the tariff amount is generally excluded from the sales tax base.
The following states have issued guidance in this area:
Angela Acosta
Ilya Lipin
BDO in United States
In response to rising tariff rates in recent years—and the ongoing volatility in tariff levels driven by shifting trade policies—some importers have chosen to separately state tariff-related surcharges on customer invoices to transparently recoup costs. This strategy raises an important question: Are these separately stated surcharges subject to US sales tax?
This article looks at actions taken by several states—California, Illinois, New Jersey, South Carolina, Wisconsin and Washington—and proposes some action steps for companies navigating this period of uncertainty.
Overview
A tariff—also referred to as a customs duty, duty rate or import fee—is generally a federal-level tax imposed on products manufactured in other countries and paid by the business importing those products into the US. Under the US Constitution’s Import-Export Clause, states are prohibited from levying their own import or export duties without Congressional approval, except for charges associated with enforcing their inspection laws. Any net revenue from such duties collected by states must be deposited with the federal government.The inclusion of the cost of tariffs in the sales tax base varies across states, but a common factor is which party is the designated importer, i.e., the person primarily responsible for paying the tariff or the authorised agent acting on its behalf. If the seller is the importer and passes the tariff cost on to the consumer, that cost is generally included in the taxable sales price. Conversely, if the purchaser is the importer, the tariff amount is generally excluded from the sales tax base.
State Examples
The following states have issued guidance in this area:
- California: The key factor in determining whether sales or use tax applies to the amount of a tariff is who is legally responsible for paying the tariff under federal law, i.e., who is the importer of record. If the seller is the importer of record and passes the tariff costs on to the customer, the tariff becomes part of the sale price and must be included in the taxable measure for sales or use tax purposes. However, if the customer is the importer of record, the tariff is not included in the taxable sale price. The same rules apply if a broker is involved in the transaction, i.e., if the broker is the seller’s agent, the amount of the tariff is subject to sales tax and if the broker is the customer’s agent, the amount of the tariff is not subject to sales tax.
- Illinois: When computing Retailers’ Occupation Tax, tariffs are not deductible from the gross receipts from tangible personal property sold at retail. If the seller is the importer and includes the tariff in the sales price, the tariff must be part of the gross receipts. Tariffs are considered business costs for the importer and are not deductible, even if listed separately on the customer's invoice. However, if an end-user customer is the importer, the tariff is not part of the sales price and thus is not subject to tax.
- New Jersey: Tariff costs passed on to consumers by a seller are subject to sales tax as part of the taxable sales price, regardless of whether they are separately stated on the invoice to the purchaser. New Jersey’s definition of "sales price" includes the total consideration—such as cash, credit, property and services—for which personal property is sold, without deducting the seller’s cost of goods sold or charges by the seller for any services necessary to complete the sale.
- South Carolina: If the customer is the importer and, therefore, personally liable for the tariff, the cost of the tariff is not included in the gross proceeds of the sale or the sales price because the purchase of the goods and the customer’s payment of the tariff to the federal government are two separate and distinct transactions. The customer's sales and use tax liability is based on the gross proceeds of sales or the sales price of the transaction. It does not include the tariff the paid to the federal government. If a person other than the customer is responsible for the tariff (such as when the seller is the importer and any or all of the tariff is recovered from the purchaser), the charge is included in the gross proceeds of sales or the sales price. It also is subject to sales and use tax unless the retail sale of the goods is otherwise exempt.
- Washington: Tariffs are included in the sales price and are subject to tax because they cannot be deducted from the sales price even if separately stated on an invoice. Tariffs are taxable under the same tax classification used to report the payment of the product purchased.
- Wisconsin: If an importer passes tariff costs on to its customers, the tariffs are included in the importer’s taxable sales price, regardless of whether they are separately stated on the customer’s invoice. However, If the importer's purchase is subject to Wisconsin sales or use tax (e.g., the products are not purchased for resale), the tariffs are not included in the importer's purchase price if the tariffs are legally imposed on the importer and are separately stated on the invoice, bill of sale or similar document that the seller gives to the importer. Similarly, tariffs paid directly to customs are not included in the importer's purchase price that is subject to use tax.
Key Takeaways and Recommendations
State guidance generally supports the principle that tariff-related charges are taxable when imposed by the seller or importer. Considering current trends global businesses importing goods in the US and US businesses with global supply chains should work with a sales tax professional to:- Determine the importer of record for each transaction, as this affects taxability, and maintain clear documentation including import responsibilities to support the tax position;
- Review state-specific rules, as interpretations vary; and
- Do not assume that separately stating tariffs from the taxable sales price will make tariffs not subject to tax, especially in states with published guidance.
Angela Acosta
Ilya Lipin
BDO in United States