Tariff Considerations for State Sales and Use Tax 2025

In today’s political climate, tariffs have become a heightened concern for many businesses. Ultimately, increased tariffs may be a cost that sellers of goods cannot easily absorb; therefore, this cost may be passed on to their customers in the form of higher prices at the cash register or on the invoice. Although tariffs have been around for centuries and sales taxes have existed for decades, the current high-tariff environment raises the question of whether the charges to a customer for the tariffs paid by the seller can be excluded from the sales and use tax base. Few states have directly addressed this issue, and of those that have, all have stated that the tariff is part of the tax base where the purchaser is not also the importer of the product.

How Do States Mange Sales Taxes to Cover Tariff Costs?

Tariffs are paid upfront by the importer of record for foreign goods, and the amount varies depending on the type of tariff, the value of the goods, and the country of origin. The tariff can, in turn, be fully or partially added to the final price of the goods resold to consumers. If the importer and seller of the goods choose to itemize the tariff as a separate charge from the regular price charged for the goods, the states will rarely, if ever, permit that the itemized tariff be deducted in computing the sales tax base. Most, if not all, states with a sales tax do not provide for such a deduction, instead requiring that sales tax be charged on the entire lump sum price charged to the buyer, inclusive of import tariffs.

California, Illinois, and Washington, for example, maintain that whether a tariff is to be included in the sales or use tax base depends on who pays the tariff. Sellers who are the importer of record of goods that pass the tariff onto the customer must charge sales tax on the tariff as it is part of the taxable price, whether it is separately stated or not. For instance, a steel distributor imports $1 million in specialty steel product from Japan and pays a 30% tariff of $300,000. It then delivers the steel to a Los Angeles construction company for a price of $1.8 million. It must charge California a sales tax of 9.75% on the $1.8 million sale price with no deduction for the $300,000 tariff paid, even if it is separately stated on the invoice.  

Buyers who are the importer of record of goods and pay the tariffs themselves instead of through the seller typically do not pay sales or use tax on the tariff. Using the same example above, presume the California contractor itself imported the steel from Japan for $1 million and paid a $300,000 tariff directly to the U.S. Customs & Border Protection Agency. California use tax would be due on the $1 million purchase price of the steel product, but not on the $300,000 tariff. Other states may follow the same pattern in the future or choose to offer their own specific guidance on the issue.

Understand the Risks in Reporting Tariff-Based Sales Tax

Since sales tax is the final retail purchaser’s tax, retailers who want to separately state the cost of tariffs built into the total price of a product and not charge sales tax on them do so at their own risk. They must ensure that the state’s tax laws applicable to the transaction allow for such treatment. Otherwise, they are taking on significant risks for underreporting taxable sales and being held liable for taxes they should have collected from their customers but did not. If the customer believes that they have paid tax on a tariff charge that they should not have paid, states have remedies available to address that through a refund or credit claims process.

Additionally, it should be noted that most software programs that prepare and process sales tax returns and issue invoices to customers do not provide any mechanism for deducting tariffs from the sale price and simply apply sales tax to tariffs passed onto buyers if sales tax is being charged on the price of the goods. Tariffs for taxable items such as children’s toys are included in taxable gross receipts, while tariffs on nontaxable medical supplies do not result in any tax being charged. Most programs do not have any way to differentiate the tariffs charged on taxable and nontaxable goods together in mixed transactions. Sales tax preparation software, as well as software used to issue invoices, needs to be properly configured or customized to properly charge, or not charge, sales tax on tariffs charged to the customers, and corporate tax departments need to raise this issue with their providers.

As tariffs continue to rise, they are likely to become a significant issue in sales and use tax preparation. Companies that sell or broker imported goods will need to make sure that tax is charged, or not charged, on these tariffs based upon the taxability of the underlying product, that policies in charging sales tax accurately reflect who is legally responsible for the tariffs, and that they understand the taxability of the goods and specific rules of the jurisdictions where the goods are purchased. This can be a rather burdensome compliance issue for businesses operating and selling goods in multiple states, as the software used to prepare sales tax returns and issue invoices may not be readily configured to compute the sales tax on items where tariffs have been charged. 

For more insight into your company’s unique tax situation as it relates to tariffs, contact a CBIZ tax professional.