Sales Tax Refunds on Tariffs Will Be Messy, ‘If Not Impossible’

Almost every state imposed sales taxes on the tariff portion of goods sold to consumers after President Donald Trump launched his global trade war last April, but it’s unclear any of those taxes will be refunded after the US Supreme Court struck down his import duties Friday.

Sales tax analysts and state tax administrators noted the justices punted on the tariff refund question when they determined, in a 6-3 decision, the International Emergency Economic Powers Act doesn’t grant the president the authority to levy tariffs—a power assigned to Congress. In avoiding the refund issue, the court was silent on any downstream impacts on state sales taxes paid on tariffed goods.

“Since the court did not deal with the issue of refunds in its decision and has remanded the case to address that issue, it is too early in the process to speculate about refunds generally,” said Richard Cram, director of the Multistate Tax Commission’s national tax nexus program.

The Supreme Court didn’t outline a strategy to compensate importers that have already paid Trump’s tariffs. Enforcement of any refund process will likely fall on lower courts, such as the US Court of International Trade. In an added twist, Trump called the ruling a “disgrace” and announced a new round of tariffs, under a different trade law, following the ruling.

If and when the courts provide full clarity on refunds, state revenue departments would likely issue guidance to taxpayers under their refund claims processes, said Joe Starr, a spokesman for the Federation of Tax Administrators.

“States are able to administer this type of refund,” he said. “Traditionally, the taxpayer would be required to file a refund claim with supporting documentation. It is up to each sovereign state to determine how they communicate with their taxpayers. Until such communication is published, taxpayers should proceed as they would with any other sales tax refund claim.”

Still, any strategy for sending refund payments back to consumers would be administratively messy, “if not impossible,” said David Harris, director of the Illinois Department of Revenue.

“It is hard to un-ring a bell unless there is some clear method to take the sound back,” Harris said. “The way sales taxes are reported and remitted, I think it would be extremely difficult, if not impossible, for any revenue agency to administer refunds on this.”

A spokesperson for the California Department of Tax and Fee Administration said the agency is “considering the implications of the ruling and may need to provide guidance if we determine the decision impacts retailers.”

Taxes on Tariffs

Last year, several states—including California, Illinois, and Washington—released guidance clarifying that the tariff portion in the price of an imported product is subject to sales and use tax, whether the amount is separately stated or embedded in the final selling price. The only exception to this general rule, the states said, occurs when the importer is also the end user of the product.

That view was echoed by the Streamlined Sales Tax Governing Board, which promotes consistent sales tax policies across its 24 member states. The board issued a short statement on uniform sales tax treatment of tariffs that found member states “consider tariff costs passed from an importer to a customer as part of the importer’s sales price and subject to the same sales and use tax as the product being sold.”

While granting refunds to taxpayers is theoretically possible, it would also be practically difficult because most consumers won’t have itemized receipts proving they paid sales taxes on of the portion of their purchases reflecting tariffs, sales tax software executives said.

“There must be invoices that list the tariff and sales tax on the tariff,” said Scott Peterson, vice president of US tax policy and government relations for the sales tax software company Avalara Inc. “This is going to be very messy.”

Early in the tariff process, some large sellers, including Amazon, said they would separately state tariff payments on receipts. But most pulled back on the practice after criticism from Trump.

“Even if importers are able to petition the government for tariff refunds, it’s unlikely that consumers will be able to do the same, as they lack the documentation to pursue a precise refund amount,” said Charles Maniace, vice president of regulatory analysis and design at the sales tax compliance company Sovos. “Such an approach is further complicated by the fact that tariffs were a product of federal action while sales tax is within the sole province of state government.”

It’s possible the whole problem is moot if the courts decided to rule prospectively and reject refunds.

“If the tariffs are not refunded, then the question of returning taxes wouldn’t be an issue,” said Joe Livingston, a fiscal policy analyst at the National Conference of State Legislatures.