Don’t Overlook the Impact of Tariffs on State Indirect Taxes

Accounting for tariffs can have significant impacts on state sales and use tax obligations. Without proper consideration for tariff inclusion or exclusion when calculating the sales and use tax base, businesses may risk overpaying taxes on purchases subject to tariffs.

Understanding which party is paying the import tariff and to whom they pay it is critical to tax compliance on imports. The tariff is paid by the importer of record, often the domestic purchaser of the goods, even when the purchaser engages a customs broker for assistance.

The importer of record remits the tariff directly to US Customs and Border Protection as part of the import clearance process—an important consideration. Although a tariff may seem similar to a sales tax (because it is imposed by the government and is a required cost to complete a purchase), tariffs generally aren’t line items on seller invoices and aren’t collected by the seller as an agent for the government.

Here’s one hypothetical example of a potential state tax implication of tariffs. Say a US company is building out a large-scale manufacturing facility in Santa Clara, Calif. As part of the build, the company orders $25 million in industrial equipment from China that is subject to a 54% ($13.5 million) tariff.

Let’s assume for purposes of this example that all equipment qualifies for California’s partial sales tax exemption for manufacturing machinery and equipment and would be subject to a reduced state and local sales tax rate of 5.1875%. Let’s also assume the Chinese seller isn’t registered for sales and use tax in California and that the purchaser would be required to remit use tax on the manufacturing machinery and equipment purchased for use in California.

California regulations stipulate that “the use tax applies to the storage, use, or other consumption of the property sold, measured by the sales price.” The sales price is defined as the total amount for which tangible personal property is sold, leased, or rented.

If the US purchaser is the importer of record and pays the $13.5 million tariff directly to CBP, that amount generally wouldn’t be included in the tax base subject to California use tax. This is because the tariff isn’t part of the total amount for which the tangible personal property is sold by the seller.

Because the tariff isn’t an expense of the foreign seller, it wouldn’t be factored into the tax base when incurred by the purchaser (importer of record). Direct payment of the tariff by the purchaser to the CBP generally doesn’t impact the price subject to use tax.

The exclusion of the tariff amount from the tax base is supported by rulings from several states. For example, the South Carolina Department of Revenue in 2020 issued a Revenue Ruling on tariffs that also determined that when the purchaser is the importer and directly liable for payment of the tariff to the federal government, the tariff is excluded from the price subject to use tax.

The machinery and equipment purchased here would be fixed assets, and the company likely would capitalize the cost of tariff when accounting for the purchases. This accounting treatment could easily result in the company mistakenly accruing use tax on the purchase price plus the tariff amount. Failure to recognize that the tariff may be excluded when determining the use tax base could result in a large use tax overpayment.

When the hypothetical California fact pattern above changes and the US purchaser isn’t using the imported property, but is purchasing it for resale, we would generally expect to see a different result. Several states—including California, South Carolina, and Washington—have issued guidance that a line item for a tariff or tariff surcharge on a customer’s invoice would be part of the sales tax base.

As tariff expansion impacts greater numbers of companies across the US, state tax practitioners have a unique opportunity to advise clients on proper compliance with their sales and use tax obligations on imported products.

Tax professionals must pay attention to when the tariff is paid in the supply chain, as well as who is paying it. Failure to properly evaluate whether tariff payments are subject to sales and use tax can have adverse consequences, such as unnecessary cash outflows or recurring compliance errors that are identified on audit.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Josh Howell is a director in the national state and local tax team at Forvis Mazars in the firm’s Tampa, Fla., office.

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