State and local tax implications of tariff escalations by the Trump Administration

The Trump Administration’s prior announcement of a 10-percent universal tariff and 125-percent tariff on Chinese goods created a widespread impact on both businesses and consumers. In addition to the economic impact of the tariffs, businesses have faced renewed scrutiny under state and local tax (SALT) regimes.

Three issues that businesses may need to consider as to how these federal tariffs may trigger cascading SALT consequences include:

1. Sales and use tax: Whether tariffs must be included in the tax base if separately stated on the invoice
2. The interpretation of merger and acquisition (M&A) agreements: How tariffs are included as part of the transaction costs under the agreement
3. Personal property tax: How tariff-related costs affect valuation

This alert summarizes the practical impact of these issues and the limited guidance issued by states in this evolving space.

Sales and use tax: Inclusion of tariffs in the taxable base

To avoid passing tariff costs directly to consumer, many businesses may try to maintain historical prices, and then separately stating the additional charge as a result of the tariff. The question is whether sales tax is due on the separately stated tariff, with the reasoning that the tariff is not part of the sales transaction involving tangible personal property and goods, but rather is being passed through to the buyer.

States generally define “sales price” or “gross receipts” to include charges “incidental to the sale,” and tax the business inputs as part of the total sales price. For example, when selling a computer, the cost of the chips and labor involved in assembling the computer is generally considered part of the selling price. With tariffs, the issue arises as to whether the seller or the buyer is subject to the tariff. If the seller is the party subject to the tariff, many states will take the position that the tariff is part of the cost and included as part of the taxable sales price, even if the tariff is separately stated.

For example, Illinois recently issued guidance in April 2025 (presumably in response to the tariff announcements), stating that tariffs are not deductible from gross receipts when the seller is the consignee, and are thus included as part of the taxable sales price even if separately stated. Ill. General Information Letter ST 25-0022-GIL (Apr. 7, 2025). California, New York, South Carolina, and Wisconsin all issued similar guidance over the years. See CA State Board of Equalization Annotation 325 (Apr. 8, 1987); 20 NYCRR 526.5(b)(1)(i) and N.Y. TSB-M-83(11)S (June 15, 1983); S.C. DOR Letter Ruling 20-4 (Oct. 10, 2020); Wis. Dept. of Rev. Tax Bulletin 205 (Apr. 1, 2019).

States may argue that separately stating the cost of the tariffs is akin to itemizing the cost of tangible goods, which is generally not deductible. The counterargument is that tariffs, standing alone, are not subject to sales tax. Therefore, passing through the cost of a tariff is, effectively, imposing a tax on a tariff itself, rather than the underlying price of the goods.

Transactional clarity: Are tariffs “taxes” in M&A agreements?

With tariffs reemerging as a central feature of trade policy under the 2025 proposals of the Trump Administration, buyers and sellers are encouraged to revisit how these costs are contractually allocated under an asset purchase agreement (APA). Buyers are encouraged to negotiate tariff-specific indemnities and customized representations and warranties, depending on whether representation and warranty insurance policies exclude tariff-related breaches. Under Delaware law, which governs many M&A agreements, courts typically interpret indemnification and tax allocation clauses narrowly and apply the principle that “ambiguities in a contract should be construed against the drafter,” (Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 1114 (Del. 2003)) highlighting the importance of making any contractual provisions clear since it is not always apparent which party is the “drafter” of the APA.

If an indemnity does not specifically address tariffs, the question arises as to whether a tariff can fall into the definition of a “sales tax or other similar taxes” (ie, is a tariff similar to a sales tax for purposes of an indemnification?). While each contract needs to be reviewed independently, it may be difficult to consider a tariff akin to a sales tax, as the tariff itself is not imposed on the buyer of the contract, but rather on the importer of the goods.

In light of the recent focus on tariffs, parties are encouraged to pay particular attention to the tax representations and warranties in an APA, especially where deferred tax assets (DTA) are a material component of the target’s balance sheet. Under the Financial Accounting Standards Board Accounting Standards Codification Topic (FASB ASC) 740, the imposition of new tariffs may require revisions to transfer pricing arrangements, which could undermine projected earnings and thus jeopardize DTA recoverability – potentially triggering a valuation allowance. Buyers are encouraged to evaluate whether tariff-related adjustments could impact the effective tax rate or create new uncertain tax positions, and whether existing financial forecasts still support the recognition of tax benefits post-closing.

Ultimately, risk mitigation has increasingly led parties to be proactive in their discussions concerning tariffs and to include clear provisions in an APA. These provisions typically include defined accounting treatment for tariffs, knowledge cut-off clauses, and clear, demarcated representations covering supplier impacts, tariff exposure, and country-of-origin data, to preempt post-closing disputes.

Property tax: Inventory valuation and tariff-inflated costs

States that impose ad valorem taxes on the value of the inventory of the business located in the state often rely on cost-based valuation methods, which may include tariffs if embedded in reported purchase prices. For example, Kentucky, Louisiana, and Texas have all issued guidance that indicates that the increased costs due to tariffs are likely to inflate the personal property tax exposure, with certain exceptions. See Ky. Rev. Stat. Ann. § 68.246; Tex. Tax Code §§ 23.011 and 23.0101 La Admin. Code tit. 61, Part V, § 1701(G)-(H).

Texas’ guidance made clear that tariff-inflated inventory costs increase property tax exposure, unless taxpayers apply cost method adjustments. Therefore, if importers fail to bifurcate tariff costs from inventory basis, assessors may overstate taxable value of the personal property depending on the jurisdiction.

Conclusion

The Trump Administration’s continuing focus and expansion of tariffs in April 2025 is creating a secondary wave of SALT considerations, highlighting the need for a deeper understanding of each state’s laws. The nuances between a state’s specific definitions and acceptable valuation methodologies could feasibly create differences among states. Additionally, greater attention is being given to the drafting of merger and acquisition agreements to clarify which party bears the economic burden of, and legal responsibility for, tariff-related costs.

For more information, please contact the authors.