Navigating Tariff Increases and Their Impact on Sales Tax

President Trump’s trade agenda has established increased tariffs on goods imported into the United States. Tariffs, which are taxes or duties imposed on specific classes of imports or exports, are expected to drive up the average cost of a wide range of imported goods. In anticipation of this, many businesses are working to import inventory ahead of the proposed increases to mitigate cost impacts. For guidance on how to navigate inventory taxation amid these changes, check out Expanding to a New Location: Leveraging the Benefits of Freeport Exemptions.

As states begin to respond to the rising costs associated with higher tariffs, it’s important to understand how sales tax treatment may vary. While sales tax laws differ from state to state, most states maintain a consistent definition of sales price and have relatively uniform rules regarding the taxability of tariffs. However, a few states have conditional taxability rulings, and in states without a sales tax, tariffs may not be subject to taxation at all. Here’s a closer look at how different states may approach these developments and what businesses can expect.

California

In California, if the seller is the importer they are legally responsible for paying tariffs to the United States. However, if the seller passes the tariff cost to the customer (adds it to the invoice), then it becomes part of the total sale price and is subject to tax. However, if the customer is the importer, the customer pays the tariff directly to the government and the tariff is not considered part of the seller’s taxable transaction. Therefore, no sales tax is charged on the tariff amount.

Illinois

Sales tax in Illinois—formally known as the Retailers’ Occupation Tax and Use Tax—is calculated based on the total selling price of an item, not just the base price. Additional costs such as freight, labor, and tariffs cannot be deducted. When the seller is the importer, they are responsible for paying the tariff to the federal government and typically pass that cost on to the buyer. In this case, the tariff is considered part of the selling price, and sales tax applies to the full amount, including the tariff—even if it is separately stated on the invoice. However, if the buyer is the importer and legally responsible for the tariff, the tariff is not considered part of the selling price. As a result, sales tax is only due on the base price of the goods, excluding the tariff amount.

Texas

In the state of Texas, the taxability of tariffs is based on the taxability of the items sold. If the imported item is taxable, the corresponding tariff is also taxable. Conversely, if the item is exempt from tax, the tariff associated with it is likewise exempt.

Virginia

In Virginia, the taxability of tariffs depends on how they are presented on the invoice. If the tariff is separately stated from the price of the goods, it is not subject to sales tax. However, if the tariff is combined with the price of the goods as a single charge, the entire amount becomes taxable.

States Without Sales Tax
Delaware, Montana, New Hampshire, and Oregon do not impose general sales or use tax. As such, businesses operating in or importing goods into these states do not need to consider tariff taxability in the context of sales tax.

As tariff rates rise, it’s critical for businesses to evaluate how these additional charges may affect their overall tax obligations. The taxability of the product being sold often determines whether the tariff is also subject to tax. Because each state has its own regulations, understanding the specific statutes in each relevant jurisdiction is essential for maintaining compliance and managing costs effectively.

Contributor: Megan Bryarly

 

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How can our Trade Compliance Team Help?

Allyn’s trade compliance team understands the complexities and uncertainties surrounding international trade. If you have specific questions regarding tariffs, Allyn International’s service suite includes consultation on current and developing issues in the US trade community. Reach Allyn here for a consultation or, contact us sales@allynintl.com  or 239-489-9900. For the latest updates visit Tariff Corner: https://www.allynintl.com/en/trade-compliance-services/tariff-corner/

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About Allyn International

Allyn International provides high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit  www.allynintl.com.