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Are Tariffs Subject to Sales Tax?  It Depends on the Details.

Are Tariffs Subject to Sales Tax? It Depends on the Details.

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As companies continue to navigate the cost of doing business globally, one question often arises: Are tariffs subject to sales tax? The answer isn’t always straightforward and depends largely on who is legally responsible for paying the tariff and how that cost is passed along.

The Key Question: Who Pays the Tariff?

Whether or not a tariff is subject to sales tax hinges on one main factor: Is the tariff a liability the seller is obligated to pay, or is the seller simply passing through a cost that’s already been paid?

  • If the seller is the importer and obligated to pay the tariff, then it is likely not subject to sales tax.
  • However, when the seller passes the cost along to the customer, either by increasing the sales price or listing it as a separate line item, many states will treat that amount as part of the sales price, and therefore subject to sales tax, if the item being sold is taxable.

Two Common Scenarios

When sellers aim to recover the cost of tariffs, they typically choose one of the following approaches:

  1. Increase the sales price of the goods to include the cost of the tariff.
  2. Itemize the tariff on the customer invoice as a pass-through charge.

In both cases, states are likely to include the tariff in the taxable sales price, provided the seller was responsible for paying the tariff and the product itself is taxable.

How States Approach It: Two Examples

California: Taxability Depends on the Importer of Record

For example, a business in California is importing wood products, such as shakes and shingles, from Canada. These goods are subject to an ad valorem tariff imposed by the U.S. government. At first glance, this might seem like a straightforward cost of doing business. However, the party legally responsible for paying the tariff plays a pivotal role in determining whether that tariff is subject to California sales or use tax.

Under federal law, the consignee of the imported goods is considered the importer of record and is legally responsible for paying the tariff. In practical terms, this means:

  • If the seller is the consignee (and thus the importer) and passes the cost of the tariff on to the customer, the tariff becomes part of the taxable sale price. California tax law requires that amount be included in the sales or use tax calculation.
  • Conversely, if the customer is the consignee and directly pays the tariff as the importer, the tariff is not considered part of the sale price and is therefore not subject to tax.

The situation can become more complex when a broker is involved. If a broker is listed as the consignee, the key question becomes: on whose behalf is the broker acting?

  • If the broker is acting as an agent of the seller, the tariff is taxable.
  • If the broker is acting as an agent of the customer, the tariff is not taxable.

South Carolina: Focus on Seller vs. Buyer Responsibility

Let’s say a retailer is selling imported goods in South Carolina. To offset a federal tariff imposed on those products, the retailer increases the sales price. Here’s the key question: Is the amount attributable to the tariff subject to South Carolina sales tax?

In this case, South Carolina considers the tariff to be part of the gross proceeds of sale, and therefore subject to sales tax, if the retailer is responsible for paying it and incorporates the cost into the final sales price.

However, if the purchaser is the importer and buys the product directly from a foreign entity, the situation changes. Because the purchaser, not the seller, is liable for the tariff, the payment is treated as a separate transaction from the sale itself. As a result, the tariff is not included in the gross proceeds of the sale and is not subject to sales tax in South Carolina.

In essence, South Carolina distinguishes between tariffs that are built into a seller’s price and tariffs paid separately by the buyer. Understanding who is responsible for the tariff, seller or purchaser, can significantly impact tax obligations.

Every Situation is Unique

State interpretations can vary, and the specific facts of your transaction, such as who the importer is and how the cost is invoiced, can make a significant difference. If your company deals with imported goods and tariffs, we recommend reviewing your sales tax exposure carefully.

Need help evaluating your specific scenario?

Frazier & Deeter’s SALT team understands the nuances of multi-state tax laws and how they apply to your real-world transactions. Let’s talk through your situation and develop a strategy that aligns with your operations.

Contributors

Brian Strahle, Tax Partner & National SALT Practice Leader

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