Accounting for tariffs is a critical component of managing state sales and use tax obligations, yet it is often overlooked by businesses. An understanding of how tariffs are integrated or excluded in calculating tax bases can significantly affect tax compliance, potentially leading to overpayments if not correctly handled. Companies must pay close attention to who bears the tariff cost and to whom it is ultimately paid to ensure accurate state tax reporting.
Import tariffs are typically paid by the importer of record, who is often the domestic purchaser, even when a customs broker is used. The Consumer of Record pays tariffs to the U.S. Customs and Border Protection, not treated as an ordinary sale tax item on seller invoices. Despite their similarities to sales tax, tariffs should not be classified as such for tax calculation purposes. Understanding the distinction is vital to preventing errors in tax obligations.
Consider a scenario involving a US company constructing a manufacturing facility in California, importing $25 million in equipment from China, subjected to a 54% tariff. The implications for the company’s state tax liabilities are complex. Due to California’s tax regulations, tariffs paid directly by the importer to the CBP are typically excluded from the use tax base. This exclusion significantly impacts the overall tax burden.
Rulings from various states, such as a 2020 advisory by the South Carolina Department of Revenue, reinforce that if the purchaser of record pays the tariff, it should be excluded from the taxable amount for use tax purposes. However, should the purchaser opt to resell the imported goods, the landscape changes, potentially including tariffs as part of the sales tax base.
For state tax professionals, there’s a crucial opportunity to advise clients on compliance given the expanding reach of tariffs across US companies. Meticulous attention to who pays the tariff and at what point in the supply chain is necessary to avoid unwarranted costs and audit issues. As tariffs become more prevalent, precise analysis and clear communication about these tax nuances can prevent significant financial missteps as highlighted by experts like Josh Howell of Forvis Mazars.