Avoiding ‘Tariff Whiplash’ Requires a Robust Automation Approach

New tariff. No tariff. Tariff postponed. With the rapid pace of change, what we are calling “tariff whiplash” has many companies considering whether to absorb the cost increase, increase prices, or separately add tariffs to invoices to create transparency.

Applying sales-and-use tax to tariffs isn’t a new concept, but only a handful of states offer specific guidance in this area. Setting up a system to apply the tax to tariffs appropriately, especially when tariffs are in constant flux, presents significant challenges for tax departments.

Two Tariff Paths

When tariffs hit your supply chain, most businesses pick one of two options. They may raise the sales price to cover the tariff, making the product more expensive for the customer. Otherwise, they may show the tariff as a separate line item on the invoice, showing customers exactly how much of the cost comes from tariffs.

If you simply increase your prices, sales tax is charged on the new, higher price—and that’s usually the end of the story. Most states define the taxable sales price to include all costs necessary to get the product to the customer, so the tariff just becomes part of the total sales price. No special configuration or extra compliance steps are needed.

But if you choose to separately state the tariff, things get tricky. You then have to determine whether that line item is also subject to sales tax and the answer depends on the state, the nature of the goods, and who paid the tariff in the first place.

Separately Stated Tariffs

Let’s say you want to be transparent and show your customers exactly how much they’re paying in tariffs. Maybe you hope it will help them understand why prices are up—or maybe your customers demand it.

This means you need to figure out the sales tax treatment of that separate charge, and that treatment can vary by state. Some states, such as California and Wisconsin, include separately stated tariffs in the taxable sales price if the seller is the importer of record, even if the tariff is a separate line item.

Other states focus on who pays the tariff directly to determine whether sales tax applies to the tariff charge.

For those states, the sales tax implications for the tariff charge may depend on the taxability of the underlying item to which the tariff relates—for example, if the imported item is sales-tax-exempt medical equipment, the tariff may also be exempted from sales tax.

Automation Challenge

If you’re using a sales tax automation platform (such as Avalara or OneSource), handling separately stated tariffs isn’t always plug and play. Depending on your existing configuration, you may need to make a few updates to ensure sales taxes are applied accurately.

Taxability mapping. If tariff charges are going to be billed as a standalone line item, they will likely need their own SKU or line-item code in your billing or enterprise resource planning system. Once that new SKU is created, it needs to be mapped to a specific “tax mapping code” within your sales tax engine.

Not all leading sales tax automation platforms have a standardized tax mapping code for tariffs, which forces the business to address through a customized solution by creating a custom tax code mapping for tariffs in each applicable state to reflect the accurate sales tax treatment of tariffs.

Custom rules and system configuration. Depending on your revenue streams and where you sell, you may need to build custom rules so your automation platform can apply the right tax treatment in each state.

Custom rules generally involve default tax application, and you may need to consider situations where customers are exempt from sales tax for one or more reasons. Some platforms may require you to upgrade to a higher service tier to use custom coding to map these charges correctly.

Scalability and flexibility. As tariffs change, you need a system that lets you easily turn on and off tariff taxability rules or update them for particular products or states. Your automation engine should be able to handle new tariffs, tariff rollbacks, and changes in state taxability rules without major disruptions to your invoicing or compliance workflows.

Setting up your sales tax engine to be flexible enough to handle tariff whiplash requires careful planning and deployment by evaluating extensiveness and accuracy of the available “tax mapping codes” in the system. It also requires understanding the magnitude of the complexity to customize and implement the sales tax mapping rules in the system.

Practical Steps

To avoid compliance pitfalls and over- or under-collecting sales tax, consider several best practices.

Audit your automation system. Make sure it can handle separately stated tariff charges, assign unique SKUs, and map taxability based on the underlying product and state rules.

Work with your tax adviser. State rules change frequently, and the details matter. Get help reviewing your approach for each state where you do business.

Plan for change. Build flexibility into your tax automation so you can quickly adapt as tariffs and tax rules evolve. Businesses need solutions that can scale so they can create a process that works across all product lines and can be adjusted as tariffs are added, removed, or changed in scope.

If you’re just raising prices to cover tariffs, sales tax compliance is simple. But if you’re separately stating tariffs, you need a robust, flexible, and scalable approach to sales tax automation—one that keeps up with both federal trade policy and the patchwork of state tax rules.

In today’s tariff whiplash environment, that’s the only way to avoid compliance headaches and keep your customers (and auditors) happy.

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

Matt Graham is senior manager at Moss Adams with experience in state and local tax matters.

Mo Huda is partner at Moss Adams and leads the firm’s sales and use tax compliance services.

James Levinson is managing director at Moss Adams specalizing in indirect taxes.

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