Sales and Use Tax and Tariffs: Explore Consequences, Strategies

In an era of heightened global trade changes, tariffs have become a pivotal driver in shaping economic policy. While tariffs directly increase the cost of imported products, their ripple effects extend to sales and use tax obligations, creating complex compliance challenges for companies.

Tariffs and their connection to sales and use tax

Tariffs are taxes imposed by the federal government on imported goods, typically calculated as a percentage of the customs value (the cost of the goods, including freight and insurance). Sales and use taxes, in contrast, are state and local taxes imposed on the sale or use of tangible personal property and certain services. Sales and use taxes vary across over 13,000 U.S. taxing jurisdictions, with rates ranging from 0% (in states like Delaware) to over 10% (e.g., in parts of California).

The interplay between tariffs and sales and use tax arises because tariffs increase the cost of imported goods, which in turn can affect the taxable sales and purchase prices for state and local sales and use taxes. This creates a domino effect on businesses’ tax obligations, particularly for those with high import and export volumes.

How tariffs impact sales and use tax

Increased taxable basis for sales tax

Tariffs are included in the customs value of imported goods, which forms the basis for calculating sales tax when these goods are sold domestically.

For example, if a company imports electronics costing $100,000, pays a 25% tariff ($25,000), and incurs $5,000 in freight, the total cost of the products becomes $130,000. If the electronics are sold for $140,000 in a state with an 8% sales tax, the sales tax liability to the purchaser is $11,200 (8% of $140,000), compared to $9,200 without passing on the tariff (8% x $115,000). In effect, in this example, passing the tariff on to the customer increases the customers sales tax payment by $2,000. For businesses selling in multiple states, accurately calculating the taxable basis across jurisdictions becomes critical, as errors can lead to under or over collection of sales and use taxes.

Use tax complications

When imported goods are purchased and used by a purchaser (instead of being purchased for resale), use tax may apply. The use tax is typically based on the total cost of the goods, including tariffs.

For instance, a professional services firm importing office furniture subject to a 145% tariff must pay use tax on the full cost (including the tariff) if the furniture is used in a taxable state. Failure to account for tariffs in use tax calculations can result in underpayment and penalties during audits.

High-volume importers may overlook use tax - especially with complex supply chains — in states where use tax exemptions are limited.

Don’t let your organization and customers feel the weight of tariffs — enact risk mitigation strategies to strengthen your business and manage rising costs. Explore strategies. 

Impact on pricing and customer tax burden

As illustrated above, tariffs raise product costs, forcing businesses to decide whether to absorb the cost or pass it on to customers. Passing on tariff costs increases the sales price, thereby increasing the sales tax that the consumer must pay. Without passing the tariff onto their customers, businesses will likely face reduced margins. Whether to pass on a tariff or absorb all or a part of it will be a business decision that every business importer will have to make.

Nexus and multi-state compliance

Tariffs can indirectly expand a company’s income tax and sale tax nexus (the obligation to collect and remit sales tax) by increasing inventory levels or sales volumes in certain states. For example, higher tariffs may prompt businesses to stockpile goods in warehouses in states where they didn’t previously have inventory, triggering physical nexus in those states.

The Wayfair court decision in 2018 created new economic nexus thresholds (e.g., $100,000 in annual sales) for sales tax collection purposes. Increased sales revenue in a state due to tariff-driven price hikes can potentially trigger the threshold and create new sales tax collection obligations.

Companies must track nexus across jurisdictions and comply with varying sales and use tax rules. This can be an overwhelming task for those with extensive import-export operations.

Exemptions and credits missteps

Some states offer sales and use tax exemptions for certain items. For instance, if imported raw materials and equipment are used in a manufacturing process, those materials and equipment may be exempt from sales and use tax, but only if the business can prove the goods qualify for the exemption (along with the issuance of state specific Exemption Certificates). Tariffs that are included in the cost basis of the imported goods must be documented.

Similarly, duty-drawback programs do not directly reduce sales or use tax liabilities, as these are state-level taxes. Duty drawback is a refund of customs duties paid on imported goods that are later exported or used in the production of exported goods. Businesses may mistakenly assume drawback refunds offset state tax obligations, leading to compliance errors.

Why sales and use tax compliance is critical

The intersection of tariffs and sales/use tax creates significant compliance risks, particularly under the current trade environment. Here’s why businesses must prioritize compliance:

Heightened audit scrutiny

State tax authorities are increasingly vigilant about sales and use tax compliance, especially post-Wayfair. Audits often focus on whether businesses correctly included tariffs in their taxable sales price base or paid use tax on the tariffs that are imposed on imported goods that are utilized by the businesses. Maintaining accurate records is critical to defend an audit.

Non-compliance can result in back taxes, penalties (often 10 – 25% of the tax owed), and interest, which can be substantial for high-volume importers.

Financial and reputational risks

Undercollecting sales tax can lead to customer disputes or class-action lawsuits, damaging brand reputation. Over collecting, conversely, may trigger customer complaints or state inquiries into unremitted tax. To mitigate these risks, it is important for a company to ensure that it is handling tariffs correctly.

Cash flow disruptions from unexpected tax assessments can strain finances, particularly for businesses already grappling with tariff-driven cost increases.

Help your business adjust to changing tariff policies. Explore impacts, alternatives, and strategies.

Complex multi-state obligations

With tariffs driving up costs and potentially expanding nexus, businesses must comply with diverse state tax laws. Navigating these variations requires robust tax systems and experience.

Trade policy uncertainty

President Donald Trump’s 2025 tariffs and retaliatory measures have escalated trade tensions. China’s tariffs on U.S. goods and restrictions on rare earth exports, for instance, highlight the risk of reciprocal trade barriers. These disruptions affect supply chains, import volumes, and sales tax calculations, making proactive compliance essential.

Potential U.S. countermeasures, such as increased withholding taxes on foreign firms, could further complicate tax planning for multinational companies.

Operational efficiency and cost savings

Compliant businesses can leverage exemptions, credits, and duty drawback programs to offset tariff costs. For example, accurately documenting imported goods for future export can increase drawback refunds (up to 99% of duties) and secure sales tax exemptions in some states. Non-compliance risks losing these benefits, increasing overall costs.

How CLA can help with sales and use taxes and tariffs

Changing tariffs have amplified the complexity of sales and use tax compliance for U.S. businesses. By increasing the cost of imported goods, tariffs may drive up sales tax liabilities, complicate use tax reporting, and potentially expand nexus obligations across states.

Non-compliance risks audits, penalties, and reputational damage, while proactive compliance can unlock cost-saving opportunities through exemptions and drawback programs.

Our experienced tariff and sales and use tax professionals can support you through these matters.

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