Tariffs and sales tax

Tariffs have been in the headlines recently. What is the relationship between tariffs and sales tax?.

Essentially, tariffs are fees nations impose on each other’s imported goods and services. Tariffs are one way to rectify perceived imbalances in cross-border trade. American tariffs are almost as old as the country itself, but the current administration in Washington recently leveled them on a quantity of nations rarely, if ever, seen before.

Most experts agree that tariffs will make many items cost significantly more, at least in the short term. The higher prices supposedly will make consumers buy more goods made at home.

What does this mean for sales tax?

States and tariffs 

Importers’ and other businesses’ tariff costs are treated differently in different states.

“Surcharge(s), including tariffs, are included in the selling price and are taxed. These surcharges can’t be deducted from the selling price, even if they’re listed separately on the invoice,” said the state of Washington in recent guidance. “Surcharge(s), including tariffs, are taxable under the same tax classification used to report the payment of the good or service purchased. This means that when the sale is considered a retail sale, the business must also collect retail sales tax on the total selling price, including the surcharge or tariff fee.”

Other states addressed sales tax and tariffs years ago. “Tariffs that are imposed directly on an importer and passed on to the importer’s customer in a subsequent sale are included in the importer’s sales price and subject to Wisconsin sales and use tax,” Wisconsin said in 2019.

“The tariff charge is included in the importer’s sales price regardless of whether the importer separately states the tariff amount on the invoice to its customer. If the importer’s purchase is subject to Wisconsin sales or use tax (e.g., products are not purchased for resale), the tariffs are not included in the importer’s purchase price if the tariffs are legally imposed on the importer and are separately stated on the invoice, bill of sale or similar document that the seller gives to the importer … Tariffs that are paid directly to the customs authority (i.e., U.S. Customs and Border Protection) are not included in the importer’s purchase price that is subject to use tax.”

Sans states’ guidance, the common sense of sales tax and invoicing still prevails. For most businesses, this means either incorporating tariff costs into the final price or when adding it as a separately stated expense on the invoice, tax associated with the tariff will follow the same taxability of the item the tariff is associated with.

Causes and future effects 

Tariffs – and their associated costs for importing an item or a component of manufacturing – can resemble inflation. When the cost of bringing a product to market rises, companies usually pass the cost on to consumers with higher prices. (U.S.-China tariffs are expected to raise the price on everything from kitchenware to solar panels.) Higher prices often tighten consumer spending.

Tariffs’ effects on tax jurisdictions are tougher to call. Reduced consumer spending can produce less sales tax revenue. (“We have seen some slight softening in sales tax revenue, but I would caution against jumping to conclusions based on limited data from a single month,” Texas Comptroller Glenn Hegar recently told news outlets.)

Experts predicted such a hit to states’ coffers during the pandemic some five years ago, except e-commerce stepped in to ignite unexpected banner revenues.

The flip side to the tariffs and tax revenue question: Higher prices also increase tax revenues, since the sales tax rate remains steady on a higher price.

If ever there was a wait-and-see topic concerning sales tax, tariffs are it.

TaxConnex provides services to become your outsourced sales tax department. If you think your business may be impacted by the ever-changing world of sales tax, contact TaxConnex today.