With the U.S. government imposing new tariffs on imported goods, businesses are quickly reevaluating how they price products and apply sales tax. These changes are especially impactful for retailers importing goods, as they navigate whether to absorb the cost or pass it along to customers. If your business is passing tariff costs to customers, how you handle sales tax could mean the difference between compliance and a costly audit.

Quick Takeaways

• Tariffs are federal taxes on imported goods, not state-imposed sales taxes.
• Sales tax is generally applied to the full selling price, including any tariff passed to the customer.
• Whether you include the tariff in the product price or list it as a separate line item, it’s usually still taxable.
• Use tax rules vary depending on whether the purchaser is the importer and who is legally responsible for the tariff.

Retailers are facing the business decision of increasing the sales price charged to their customer or adding a tariff surcharge to the customer’s invoice. Further, complicating this decision is the consideration of sales tax.

What is a Tariff?

A tariff is a tax imposed by the federal government on the importation of goods. Tariffs are collected by U.S. Customs and Border Protection.

Do I Need to Charge Sales Tax if I Pass the Cost of the Tariff to My Customer?

States that impose a sales tax generally tax gross receipts and do not allow a vendor to deduct costs related to procuring an item for sale, including tariffs. Since tariffs are taxes imposed on the importer, and the importer is the party legally responsible for paying the tariff, the tariff becomes part of the taxable base of the sale if passed on to the customer.

Therefore, if the item is subject to sales tax, the tariff should also be included in the taxable amount. This is true regardless of if the seller increases the selling price or charges a separate fee to recoup the tariff, the amount remains part of the taxable base. The taxability of the tariff surcharge will follow the taxability of the item being sold.

Example:

You import a product for $100 and pay a $10 tariff. Whether you sell it for $110 or $100 + $10 surcharge, sales tax applies to $110.

Do I Owe Use Tax on a Tariff as a Purchaser on an Item Imported for My Own Use?

It depends. If the purchaser is the importer and is responsible for paying the tariff directly to the Federal government, the tariff is generally not part of the tax base and use tax would not be owed on the tariff. However, if the purchaser is not the importer and is not directly responsible for paying the tariff, but the seller includes a tariff surcharge, the tariff surcharge is part of the tax base. In this case, use tax would be owed if the product is otherwise subject to tax.

FAQs

1. Does it matter how I show the tariff on the invoice?
   No. Whether it’s part of the product price or a separate surcharge, it’s still generally taxable if passed to the customer.
2. Are there any exceptions where tariffs aren’t taxable?
   Only when the importer (typically the purchaser) pays the tariff directly to the Federal government and the product is for their own use, then it’s often excluded from the taxable base.
3. What if my state doesn’t tax services, do I still have to worry?
   This applies to tangible goods. If you're dealing in services, check whether your state taxes tangible personal property bundled with services.
4. Can I itemize the tariff to avoid tax on that portion?
   Unfortunately, itemizing the tariff won’t remove it from the taxable base in most states that tax gross receipts.

In summary, Tariff surcharges represent a cost being passed along to a customer and should be included in the taxable base of a product if the product itself is subject to sales tax. However, if the purchaser is the importer legally responsible for paying the tariff, the tariff is typically excluded from the taxable base. Understanding these nuances is essential for businesses to ensure proper tax compliance and avoid potential sales tax liabilities.