How tariffs impact sales and use tax across states

Understanding taxes can be complicated, especially when it comes to tariffs and sales tax. These two types of taxes can significantly impact businesses, particularly those that rely on global suppliers, import raw materials, or distribute finished goods across state lines.

While this article highlights examples specific to manufacturers and contractors, the guidance applies broadly to any business that imports goods. Below, we break down key concepts and clarify common tax treatment issues to help you navigate this complex topic with more confidence.

The Difference Between a Tariff and a Tariff Fee

A tariff is a tax paid to the U.S. government by the importer when goods are brought into the country. The company that imports the goods is responsible for paying the tariff directly to the federal government. Tariffs can apply to certain products, specific countries, or both.

In contrast, a tariff fee is a separate charge that a seller may pass on to the buyer to recover the cost of the tariff. While the tariff itself is not part of the retail transaction and is generally not subject to sales or use tax, the tariff fee, if passed on to the purchaser, may be taxable depending on how the transaction is structured and the rules of the state where the goods are sold.

Why Sales Price and Gross Proceeds of Sale Matter

When manufacturers and contractors calculate how much sales or use tax they owe, or whether a transaction is taxable at all, two terms often come into play: sales price and gross proceeds of sale. These definitions determine how taxes are assessed on a transaction and can affect your bottom line more than you might expect.

In South Carolina, for example:

• Sales Price refers to the total amount a buyer pays for tangible personal property. Typically used for retail sales, it includes charges for things like materials, labor, services, and interest if they are part of the sale. It also includes federal excise taxes, which are often imposed at the manufacturer or wholesale level.
• Gross Proceeds of Sale is defined more broadly and used in calculating use tax or contractor tax. It refers to the entire value received from a sale, lease, or rental of tangible goods, without allowing any deductions for the seller’s costs or expenses. Like sales price, it includes federal excise taxes.

Note: Excise taxes are not the same as tariffs, and in many states, how the tariff fee is presented on the invoice determines whether it’s considered part of the taxable amount.

When Tariff Fees are Subject to Sales and Use Tax

Understanding when tariff fees are taxable depends on how goods are imported, how fees are passed along, and the rules of the state where the transaction occurs. These factors impact contractors and manufacturers in different ways.

Considerations for Contractors

Contractors typically do not charge sales tax on their services. Instead, they are treated as the end users of materials and supplies and are responsible for paying sales or use tax at the time of purchase. Even if a resale certificate is used during the transaction, use tax is still owed in the state where the work is performed.

Let’s consider an example:

A North Carolina contractor building a distribution center imports $5 million in prefabricated steel components from a South Korean supplier. These materials are subject to a 25% tariff ($1.25 million), paid directly by the contractor to the U.S. Customs and Border Protection (CBP) as the importer of record.

North Carolina imposes a 4.75% state sales tax on tangible personal property, with local taxes potentially adding up to 2.75%.

If the foreign supplier isn’t registered to collect sales and use tax in North Carolina, the contractor must remit use tax to the state based on the sale price. However, since the tariff was paid directly to CBP and not as part of the purchase price, that $1.25 million is generally not included in the taxable base.

Tax Tip: If you’re a contractor who imports materials directly and pays tariffs separately, exclude those tariffs from the taxable base to calculate use tax.

Contractors importing goods indirectly may also be subject to tariffs. If a contractor buys from a U.S. company that passes along the tariff as a separate fee, whether that fee is subject to sales or use tax depends on how the transaction is structured and the applicable state laws.

Impacts on Manufacturers

When manufacturers pay tariffs on imported raw materials or parts, they may pass those costs to customers as a tariff fee. When selling to wholesalers, a resale certificate may exempt the transaction from sales tax, but it is not always clear whether the tariff fee is also exempt.

• If a product is taxable to the end consumer, and the manufacturer or distributor adds a tariff fee, the fee is often subject to sales tax.
• If the product itself is not taxable, the treatment of the tariff fee may differ from state to state and would need to be determined.

Some manufacturers roll the tariff cost into the product price, which can change how tax applies. Others add it as a separate fee, which might make it subject to different tax rules.

We Can Help

Misapplying sales tax to tariff fees can result in overpayments or underpayments, especially if automated systems aren’t properly configured to handle these charges. Exemption and resale certificate rules vary by state and may not clearly apply to tariff fees. With limited guidance available in many jurisdictions, staying compliant can be a significant challenge for businesses.

At Elliott Davis, our State and Local Tax (SALT) team can help you understand your sales tax obligations and identify how tariffs and related fees may impact your tax responsibilities. Contact us today to confirm that your business is compliant with sales and use tax requirements in states where you operate.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.