In my 20+ years of sales tax consulting, it’s not often that a completely new question comes across my desk. But last week, someone asked something that made me pause:
“Are tariffs subject to sales tax?”
It might seem straightforward at first glance, but the answer, as with so many things in sales tax, is nuanced, state-dependent, and evolving.
With global trade playing a bigger role in supply chains and import duties making daily headlines, I suspect this question will only become more common. So this month, I’m taking a slightly different approach and dedicating the entire edition of Making Sales Tax Easy to unpacking this one topic.
Let’s explore how five key states, California, New York, Washington, Texas, and Illinois handle tariffs in the context of sales tax.
While each state has its own set of rules and interpretations, they all point in a similar direction: in most cases, tariffs that are passed on to the customer as part of the sale price are subject to sales tax.
But, of course, the details matter. And because this is such a pressing and current topic, new state guidance is being released regularly. We’ll continue to keep you up to date as things evolve.
Here’s an overview of what we’ll cover:
- California Sales Tax Tariffs: The Role of the Consignee
- When tariffs are included in the taxable sale price
- Consignee vs. buyer: Who is the importer of record?
- How brokers and agents affect sales tax compliance
- New York Sales Tax Tariffs: Broad Definitions, Broad Exposure
- No specific rule, but an inclusive “sales price” definition
- The risk of bundling tariff costs into the sales invoice
- Washington: Explicit Guidance on Taxable Surcharges
- Tariff-related surcharges as taxable surcharges
- Full invoice value, including tariff lines, is taxable
- Applies to goods and services alike
- Texas: Total Revenue Definition Includes Tariffs
- Texas’s inclusive take on what constitutes taxable revenue
- Separately stated fees often still taxable
- The seller’s burden to prove exemption
- Illinois: Clear Direction That Tariffs Are Not Deductible
- Tariffs passed on by the importer of record are taxable
- Inclusion applies even when itemized separately
- What happens when the buyer pays the tariff?
- What This Means for Your Business: Practical Takeaways
- Evaluating how tariffs appear on customer invoices
- Preparing for audits in states with differing sales tax laws
- Aligning sales tax strategies with evolving international procurement practices
Would you like more information? Reach out to us at info@milesconsultinggroup.com.
1. California: The Consignee Is Key
California is one of the few states that provides clear guidance on this matter. According to the California Department of Tax and Fee Administration (CDTFA), tariffs are subject to sales tax in California when they are passed on to the customer. If an importer incurs a tariff and includes it in the sale price, that amount must be included in the taxable base.
But California goes a step further and provides clarity around who pays the tariff. The identity of the importer of record, also known as the consignee, determines whether the tariff should be taxed.
If the seller is the importer of record and passes the cost of the tariff on to the buyer, then that charge is part of the taxable sale. However, if the buyer is the importer, and thus pays the tariff directly, then the tariff is not included in the seller’s taxable sales amount.
California also considers scenarios where a broker is involved. If the broker is the consignee and is acting on behalf of the seller, the tariff is taxable. But if the broker is the customer’s agent, then it is not.
This distinction is subtle, but significant. Businesses operating in California must be crystal clear on how their import transactions are structured and who is legally responsible for each part of the supply chain.
2. New York: Broad Definition of Sales Price Implies Taxability
New York does not provide tariff-specific guidance, but instead relies on well-established principles of sales tax law. The state’s definition of “sales price” includes all receipts received by the seller, without any deduction for expenses or charges including shipping, delivery, or other fees. This includes, arguably, tariffs that are incorporated into the total price charged to the purchaser.
New York’s laws emphasize that even transportation and distribution charges, whether provided by the seller or a third party, are included in the taxable base unless they are separately stated and meet exemption criteria. So while tariffs aren’t specifically called out, their nature as a non-deductible seller cost, when passed through to the buyer, means they likely fall within the taxable “sales price” umbrella.
This matters for businesses importing goods into New York and passing along costs to customers. Even without a direct reference to tariffs, businesses must understand that bundling these charges into the sales invoice could result in increased sales tax exposure.
3. Washington: Explicit Guidance Confirms Taxability
Washington has now issued direct guidance stating that surcharges added to invoices to cover expenses like tariffs, fuel, or credit card processing fees are generally subject to tax.
Washington Department of Revenue has made it clear that these charges are not deductible from the selling price, even if they appear as a separate line item. The entire amount billed, including the tariff, is subject to both retail sales tax and B&O tax, and must be reported accordingly.
For example, if a business imports sweaters and adds a $5 tariff surcharge to a $60 sale, the entire $65 is taxable. Similarly, surcharges related to services, such as legal or moving services, are also fully taxable when included in the invoice.
This updated guidance leaves no ambiguity for Washington sellers. If you’re invoicing customers for imported goods and adding tariff-related surcharges, those charges must be included in your sales tax calculation.
4. Texas: Revenue-Focused Definitions Lead to Inclusion
Texas takes a slightly different route. While not directly commenting on tariffs, Texas tax law hinges on the concept of “total Texas revenue” for determining sales tax obligations. That definition includes all receipts related to the sale of tangible personal property and related services, such as handling, transportation, and installation.
Even if these fees are separately stated on an invoice, they are considered part of the taxable base unless a specific exemption applies. Tariffs, if passed through to the customer as part of the sale price, fall squarely within the kinds of costs that are likely to be included in Texas’s expansive definition of taxable revenue.
Additionally, Texas presumes that any sale of tangible personal property delivered in the state is taxable unless proven otherwise. The burden is on the seller to demonstrate a valid exemption, something that becomes even more important when importing goods that may be subject to additional charges like tariffs.
5. Illinois: Tariffs Are Not Deductible
Illinois has recently issued a General Information Letter (GIL) that confirms tariffs are not deductible when calculating sales tax.
Specifically, when a seller is the importer of record and passes the cost of the tariff along to the customer, whether itemized separately or included in the total price, the tariff becomes part of the gross receipts and is subject to Illinois’s Retailers’ Occupation Tax.
Illinois law does not allow deductions for costs of doing business, including importation taxes. Therefore, the full amount charged to the customer, including any separately stated tariffs, must be included in the sales tax calculation.
If the customer is the importer of record and pays the tariff directly, however, the seller is not required to include the tariff in the taxable amount.
This clarification reinforces the need for businesses importing goods into Illinois to carefully assess their invoicing practices and ensure that tariffs are properly treated for tax purposes.
6. What This Means for You and Your Business
Across the board, we see a commonality: when tariffs are included in the sales price and passed on to the buyer, they are typically subject to sales tax. However, the specific taxability can hinge on a variety of factors – who the importer is, whether charges are separately stated, and how each state interprets its sales tax laws.
For your business, this isn’t just a compliance box to check. It impacts how you invoice customers, how you handle international procurement, and how you prepare for potential audits.
If tariff charges are making their way onto your customer invoices, it’s critical to evaluate whether you’re applying sales tax correctly, especially if you’re dealing with multi-state filings or complex supply chains.
This is where having the right sales tax advisor makes a real difference. If you’re unsure how your business should be handling tariff-related charges, or want a fresh look at your taxability strategy, I’d be happy to help.
Need guidance tailored to your business?
Let’s talk. You can reach us at info@milesconsultinggroup.com or visit www.milesconsultinggroup.com to learn more.
