Tariffs, Interstate Commerce and Unexpected Sales Tax Costs

The proliferation of tariffs on imported goods can impact far down the supply chain, which means increased costs to sellers and customers. But these costs are not solely related to the price of imports; hidden costs in the form of sales taxes may also apply.

Recent tariffs are typically “ad valorem” taxes ; i.e., duties imposed on the value of the goods entering the United States.¹ Whether a tariff is subject to sales tax depends on who is legally required to pay the tariff – this could be the purchaser, the importer/consignee or broker.² Since very few states have issued formal guidance on the taxation of tariffs, a close review of the tariff and the purchase agreement is critical to determining how and if sales tax applies.

While goods that remain in interstate commerce or are located in foreign trade zones may be constitutionally protected from the imposition of state sales tax, any break in the stream of interstate commerce (such as staging goods for delivery or loaning goods to potential buyers) can result in sales tax.³ Care must be taken that goods do not “come to rest” in any state.

Companies should also be wary when warehousing imported goods. It may be tempting to store goods in a state without a sales tax, but this does not avoid sales tax when the goods are removed from the warehouse and put to use, even if that use is in a different state.⁴ Property tax on warehoused goods is another unexpected imposition that should be considered.

Finally, companies will need to recover tariff costs. Increasing product prices is an easy approach but can result in an increase in sales tax that customers may not expect. Billing the tariff as a separate item on the customer invoice explains the higher price but will not avoid sales tax. Passed through tariffs costs are still part of the product price in most states.

States are now only addressing how sales tax applies to tariffs, but with careful tax planning, companies can successfully navigate these new taxes and protect themselves from unexpected sales tax costs. Kroll can aid you in dealing with the impact of tariffs on your business. To discuss further contact Michael James at [email protected].

 

Sources
¹See, e.g., Adjusting Imports of Aluminum and Steel into the United States – The White House
²California Sales and Use Tax Annotation, No. 325.0000
³Ark. Code Ann. § 26-53-106  (b) (Supp. 2019)
⁴Tex. Admin. Code 34 §3.346