The Cost of Tariffs? More Complex Illinois Sales Taxes

Keith Staats, JD Special Counsel, Duane Morris LLP
Deciphering Today's State & Federal Tax Law

To say that tariffs have been a popular topic of conversation in recent months would be an understatement. However, putting politics aside, this is an appropriate time to address the federal government’s tariffs and their impact on Illinois sales taxes.

Notably, the Illinois Department of Revenue (IDOR) was recently asked to rule on this topic and address some concerns via a general information letter (ST 25-0022-GIL). Although general information letters aren’t legally binding and don’t create rights under Illinois’ Taxpayer Bill of Rights, they’re helpful guides related to how the department thinks on specific topics of interest.

In the ruling request, the question posed to IDOR was whether the amount of a tariff separately stated on a customer’s invoice in a taxable retail sale is a portion of the price of the item subject to Illinois Retailers’ Occupation Tax (ROT). IDOR responded, “Yes.”

Let’s decode IDOR’s reasoning. These are the underlying assumptions made in IDOR’s general information letter:

• Tariffs are taxes imposed by the United States on goods imported from another country.
• Tariffs are a component of the cost of an item purchased from a foreign seller by a retailer that’s the importer of record of the items for resale.
• Tariffs are also a component of the cost of an item purchased by a purchaser who’s an importer of record from a foreign seller for their own use or consumption.

With this in mind, let’s examine a couple of the scenarios addressed in IDOR’s general information letter ruling.

TARIFF SCENARIO NO. 1

Company A purchases tangible personal property (TPP) sold by Company B, and the items are imported into the U.S. The items are purchased for resale by Company A, so no sales tax—Illinois ROT or Illinois Use Tax (UT)—is due on the sale from Company B to Company A. Company A, as the importer of record, pays the tariffs to U.S. Customs and Border Protection when the goods enter the U.S.

Company A subsequently sells the TPP to Company C in a retail sale subject to Illinois ROT, and Company A invoices Company C. The invoice lists the selling price for the items, with a separately stated amount for the tariffs. Company A asked IDOR to rule on whether the separately stated tariff amount on the invoice to Company C is a portion of the selling price subject to Illinois ROT.

Citing an existing rule (Section 130.445(b)), IDOR ruled that separately stated tariffs are part of the selling price of an item of TPP subject to tax. As Section 130.445(b)(1) states, “federal importation taxes are not deductible in computing Retailers’ Occupation Tax liability from the gross receipts of persons who sell such tangible personal property at retail.”

TARIFF SCENARIO NO. 2

IDOR’s general information letter also addressed a scenario involving the impact of tariffs on a purchaser’s Illinois UT liability. (Remember, Illinois UT is imposed on TPP purchased from a seller who’s not required to charge Illinois ROT on a sale because of a lack of nexus with Illinois.) In this scenario, Company A buys items of TPP from Company B, a seller located outside the U.S. Company A is the importer of record, and the items aren’t going to be resold by Company A.

Let’s say U.S. Company A buys laptops from Chinese Company B for use by Company A’s accounting department. Company B ships the laptops from China directly to Company A as the importer of record. Again, in this scenario, tariffs on the laptops are paid to U.S. Customs and Border Protection when the items reach the U.S. Because Company B doesn’t have nexus with Illinois and isn’t required to charge Illinois ROT on the transaction, Company A is required to self-assess Illinois UT on the purchase of the laptops.

In this situation, IDOR doesn’t consider the tariffs to be a portion of the cost of the laptops subject to the Illinois UT, citing Section 130.445 as the authority for their position. I think IDOR’s ruling on this is generally on point, but the department didn’t provide an explanation for how it decided that tariffs aren’t included in the Illinois UT base but are included in the Illinois ROT base—perhaps, IDOR will have more to come on that.

Overall, it appears that Illinois is the first state to issue a ruling on this topic. With time, I suspect that other states with similar sales tax law definitions of the tax base will generally reach the same conclusion: Tariffs are costs of doing business to retailers who are purchasing items for resale to end users, and tariffs may not be excluded from the tax base.

Related Content:

• Traversing the Murky Waters of Illinois’ New Sales Tax on Leases: Changes to Illinois’ sales tax on leases of tangible personal property have created a sea of anticipated and unanticipated complications.
• Another Attempt at ‘Leveling’ Illinois’ Sales Tax: Despite the Illinois General Assembly’s latest legislative move to further level the playing field for out-of-state retailers, problems persist.