Tariffs have long been used as a strategic tool in international trade policy, helping governments manage the flow of goods across borders, protect local industries, and promote fair competition in global markets. An often-overlooked aspect of tariffs is their influence on state and local taxation, specifically sales tax. 

As a refresher: A tariff is a federal tax imposed on the importation of goods into a country. It is collected by customs authorities located at designated points of entry. Although a tariff is a federal tax, when an importer passes the tax expense to customers as a separate charge or by raising the price of the good, the tariff could be subject to sales tax at the state and local level. 

To clear a common misunderstanding: It’s the importer of record, not the exporter, that pays the tariff. Properly identifying the importer of record and understanding the intended use of the imported goods are essential in determining the correct sales tax treatment of the tariff cost. 

In general, sales tax is imposed on the total sales price of a taxable good or service. In determining if a tariff is subject to sales tax, the primary concern is whether the tariff could be included in the state’s definition of “sales price,” either directly or indirectly. Generally, states define the sales price as the total amount for a product, which typically includes the cost of goods sold, associated services, and transportation charges, just to name a few.

Because state laws and definitions vary, it is important to examine jurisdiction-specific rules to determine accurate application.

The Streamlined Sales Tax Governing Board’s approach

The Streamlined Sales Tax (SST) initiative is an alliance of 23 full member and one associate member states with the goal of reducing state sales tax complexities.

The SST Governing Board recently issued guidance clarifying the approach its member states will take when determining the application of sales tax on federal tariffs:

• SST states “consider tariff costs passed from an importer to a customer as part of the importer’s sales price and subject to the same sales and use tax as the product being sold.” Whether the tariff is itemized on the invoice is irrelevant. If the importer does not charge sales tax, the customer must self-assess and remit use tax on the sales price, including the tariff.
• When the importer is the consumer of the product, the tariff paid by the importer is not subject to sales tax. However, the SST considers the consumer to be responsible for any applicable use tax on the sales price of the product, excluding the tariff paid to the customs authority.

State treatment of tariffs in sales tax

While the SST provides a standardized framework for its 24 members, a large majority of non-member states follow similar principles when determining if tariffs passed on by the importer of record are included in the state’s definition of sales price. Here we take a look at some of the largest and most complex states.

• California: According to the California Department of Tax and Fee Administration, when the seller is the importer of record and passes the tariff cost to the customer, the tariff is considered part of the sales price and is subject to sales tax when the product sold is taxable. In situations in which the end user is the importer of record, the tariff is not considered part of the taxable purchase price and tax should not be paid on the tariff.
• Illinois: When the seller is the importer of record, the Illinois Department of Revenue has clarified, tariffs are not deductible when calculating the Retailer’s Occupation Tax. Therefore, if the seller passes the tariff cost to the customer, it becomes part of the taxable sales price, and sales tax must be collected on the full amount charged, including the tariff. When the consumer imports the product and pays the tariff directly, the tariff is not included in the purchase price for the purposes of computing use tax liability.
• New Jersey: The New Jersey Division of Taxation recently issued guidance clarifying that when the seller is the importer of record and passes along the tariff costs to the purchaser, those charges are considered part of the taxable sales price. This applies even if the tariff is separately stated on the invoice.

Best practice compliance considerations

To effectively navigate the impact of tariffs on sales tax and compliance, consider the following best practices:

• Identify the importer of record: It is essential to determine if the buyer or seller is the importer of record. This determination directly influences the taxability of the tariffs.
• Review contractual obligations: Agreements should clearly identify which party is responsible for any tariff costs and how those costs affect the sales price.
• State-specific guidance: Monitor state-specific guidance regarding the inclusion of tariffs in the sales price to avoid potential tax exposure.
• Coordinate internally: Engage sales, legal, and accounting teams to align on how tariffs impact pricing, contractual terms, and sales tax compliance. 

What does CohnReznick think?

As policies continue to evolve, tariffs are becoming a regular part of doing business. While many states, including the SST member states, have issued guidance on how tariffs should be treated for sales tax purposes, several states have yet to do so. In such cases, it is important to look at how the state defines “sales price,” as this definition directly impacts whether tariff charges must be included in the taxable amount. In states in which sales price includes the total amount paid for the product, without deductions for costs such as materials, labor, or other expenses, any tariff passed through to the customer should be included in the taxable base and subject to sales tax. 

Proactively understanding your business’s state sales tax footprint and how your relevant states tax tariffs will help you make sure sales tax is properly applied to the full transaction value – and avoid potential tax exposure. 

Contact your tax advisors with any questions or to start assessing your tariff tax obligations.