When global commerce is impacted by the new and higher tariffs, companies must take into account a range of factors that affect their supply chains. For U.S.-based businesses already dealing with the complicated local and state tax laws and the tax landscape in general, consideration needs to be made for the impact of tariffs on sales and use tax obligations. In general terms, tax laws in the state and local level allow for the preemptive accounting of various kinds of surcharges and fees, and if not taken into account companies could be in danger of being liable for liability or excessive payments of sales and usage tax.
The Intersection of Tariffs and Sales Tax
U.S. businesses will most typically experience the effects of tariffs on sales as well as use in two different situations:
- (1) Payment of tariffs in the form of direct payment at point of the import
- (2) Pass-through charges that are itemized on invoices
Knowing how the tariff is repaid in the chain of distribution, the party that is paying it and who they’re paying must be taken into consideration in determining if this tariff will be subjected to any additional sales and use tax.
Direct Payment of Tariffs to U.S. Customs
If goods from overseas import into the U.S., the importer of record is legally accountable for the cost of tariffs direct to the U.S. Customs. The person who is the importer of record could be a foreign seller, the local buyer, or even a Customs Broker working as an agent for the buyer or seller.
If the tariff is directly paid by the U.S. Customs, the tariff is usually regarded as being exempt from tax on sales or use because it isn’t considered to be part of the tax-deductible selling price of the imported items which is paid by the vendor. A number of states have issued rulings that exclude direct payment of tariffs directly to the Federal Government from the tax-paying base of the goods.
Case Study: Importer of Record and Tax Implications
For instance, an international seller may sell fixed assets to the U.S. purchaser for $10 million, subject to the import tariff of $2 million. Assuming that the U.S. buyer is the importer of record or has contracted a custom broker as the agent and pay this $2 million tax in full towards the U.S. department of customs during the import clearance process, the tariff is not part of the total $10 million sale cost paid directly to the foreign vendor, and is considered a separate transaction in direct contact to the U.S. Customs. In this case, the tariff will generally be itemized as Pass-Through charges on invoices
When a seller is seeking to recover the cost of tariffs incurred through their supply chain it is expected that they’ll decide to raise the overall costs of their goods or list the cost on an invoice as an extra-stated cost or surcharge. In both cases, the majority of states will likely incorporate the tax surcharge as part of the tax-deductible sales price as long as the product that is being sold is tax-deductible.
State-Specific Considerations for Tariff Surcharges
The state sales tax laws generally identify sales as the amount of taxable merchandise that is sold. It typically includes different costs incurred by the seller regardless of whether they are separately included on an invoice for sales.
Case Study Expanded: Automated Tax Engines and Tariff Surcharges
Extending the previous scenario, suppose that an U.S. purchaser who paid the import tax of $2 million is looking to sell the tax-exempt products to end customers. To ensure that the price points are honored for its customers, but to cover costs of the import tariff, resellers from the U.S. opts to add a separately stated tariff-based charge to the product invoice of a ship-to-Texas customer.
Texas statute defines the sales price as the total amount for which a taxable item is sold, with no deduction for the items used, the labor or service employed, interest or other costs.
Because of the broad definition of sales price, which encapsulates a variety of expenses of the seller, the declared tariff surcharge could have to be a subject of Texas sales tax since it is a component in the purchase of tax-exempt goods.
Avoiding Compliance Pitfalls
U.S.-based sellers who want to add tariff surcharges must take into consideration state-specific regulations. For sellers who use automated tax engines, an appropriate examination should be conducted when mapping the surcharges with the correct taxability classification in order to ensure that they are treated appropriately in every state. Also, buyers must be aware of any surcharges in order to avoid tax liabilities in the event the seller failed to include sales tax in the calculation.
With tariffs impacting many businesses across the country, tax professionals from state governments must be aware of the complexities that are involved and decide if this tariff represents a burden for the seller or a cost that the seller has already incurred. Examining the adequacy of the sales and use tax on tariff payments is crucial to prevent potential issues with compliance such as the risk of unintentional exposure or overpayments.
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