Sales Tax and Tariffs: Understanding the Impact Across States

Tariffs are not new, but dramatic increases in their rates have drawn attention to them. 

To mitigate the effects of those levies, some businesses have chosen to separately state tariff-related surcharges on their invoices, raising questions about whether such separately stated charges are subject to sales tax.

While the inclusion of tariffs in the sales tax base varies across states, a common consideration is which party bears responsibility for the tariff. If the seller is the importer and passes the tariff cost to the consumer, that cost generally is included in the taxable sales price; however, if the purchaser is responsible, the tariff often is not included. Although many states have yet to provide specific guidance on this topic, some have addressed it. 

Consider some illustrative guidance from South Carolina and New Jersey.

In 2020, South Carolina specified in Rev. Rul. 20-4 that for sales and use tax purposes, when the purchaser is the importer and therefore personally liable for the tariff, the cost of the tariff is not included in the gross proceeds of sales or the sales price. That is because the purchase of the item and the purchaser’s payment of the tariff are two separate transactions.¹ The purchaser's sales and use tax is based only on the gross proceeds of sales or the sales price of the transaction with the seller. It does not include the cost of the tariff the purchaser pays to the federal government.

If someone other than the purchaser is responsible for the tariff (such as when the seller is the importer and any or all of the cost of the tariff is recovered from the purchaser), the charge is includable 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 tangible personal property is otherwise exempt.

In May, New Jersey published guidance on the sales tax treatment of tariff markups. The guidance states that if a seller passes tariff costs to the consumer, the charges are subject to sales tax as part of the taxable sales price, even if the purchase invoice separately states the tariff. To illustrate that concept, the guidance offers the following example:

If the U.S. government imposes a tariff on furniture imported from another country, that tariff is passed along to the furniture seller. A seller may increase the sales price of the furniture sold to customers to maintain its profit margins. If the seller marks up the price of the furniture, even if it is billed as a separately stated fee, the increased cost and/or fee is subject to Sales Tax since it is part of the taxable sales price.

Understanding the impact of sales tax and tariffs across states requires careful consideration of which party bears the responsibility for the tariff and how that is reflected in the taxable sales price. The variability in state regulations means businesses must stay informed about local tax laws to help ensure compliance and refine their financial strategies. As demonstrated by the examples from South Carolina and New Jersey, whether the seller or purchaser is responsible for the tariff can significantly affect the tax implications. 

References

¹The tariff in this example stems from a transaction between the purchaser (importer) and the federal government.