This article is a guest post by Glenn C. McCoy, Jr., head of Ryan's national tax practice. The views expressed are solely his own.

The ongoing$26 million tax disputebetween Apple Inc. and the Florida Department of Revenue highlights a common pitfall for importers nationwide: when states reinterpret how federal fees flow through their tax systems, even the most sophisticated businesses can face unexpected tax bills. Now, with President Trump's tariffs, businesses are facing a similar shock—states can tax the tariffs themselves, stacking import costs in multiple ways and potentially eroding profit margins.

The 'tax-on-tax' issue CFOs commonly overlook

What most CFOs fail to realize is that states like New York, California, and Illinois treat tariffs as part of the product cost, making them subject to sales tax. For example, on a $1 million shipment with a 25% tariff rate, a business not only pays $250,000 to Customs but may also face additional state taxes on the entire $1.25 million taxable base, making the actual cost increase far exceed the tariff rate itself.

When a business imports goods and bears a 25% tariff, this is only the beginning of the tax burden. Most states include tariffs in the product cost base and then levy sales tax on it. For instance, for $1 million in imported goods with a $250,000 tariff, at a 6% sales tax rate, the business could incur an additional $75,000 in sales tax—effectively a tax on a federal tax.

What catches CFOs off guard is that even when tariffs are listed separately on the invoice, most states still include them in the sales tax base. New York, California, Illinois, and Washington have all issued guidance confirming this treatment, creating a compounding effect that is particularly significant for the profit margins of businesses with high import volumes.

Importer status determines tax treatment

The key factor determining state tax treatment is not whether tariffs exist, but who is the importer of record. When a seller imports goods and passes tariff costs on to the buyer, states like New York, California, Illinois, and Washington treat the tariffs as part of the taxable sales price—even if listed separately.

However, if the buyer is the importer of record and pays tariffs directly to U.S. Customs and Border Protection, some states may allow these amounts to be excluded from the sales tax base. This seemingly minor difference in the purchase contract can determine whether a business pays sales tax on tariffs or avoids the tax entirely.

Flexibility in income tax planning

On the income tax side, businesses have more flexibility. Unlike the rigid treatment of sales tax, businesses can choose to:

  • Capitalize tariffs as part of inventory or asset costs, or
  • Deduct them as ordinary business expenses under Internal Revenue Code Section 162

This choice has significant implications for cash flow and financial reporting. For high-turnover inventory, immediate deduction may offer better tax efficiency; for capital assets or slow-moving inventory, capitalization may better align with matching principles and financial covenants.

Property tax impact often overlooked

The National Association of Home Buildersestimatesthat Canadian lumber tariffs alone could increase construction costs by nearly $11,000 per home. For businesses holding significant real estate or planning construction projects, these increased costs will be directly reflected in property tax assessments.

More concerning for manufacturers and distributors: states that tax commercial personal property or inventory will include tariff costs in the tax base. For example, a distribution center holding $10 million in imported inventory could see its property tax assessment increase by $2.5 million due to a 25% tariff, resulting in tens of thousands of dollars in additional property taxes each year.

Nexus risk expansion

One of the most overlooked impacts of tariffs is the potential to trigger new state tax filing obligations. As businesses adjust supply chains and pricing strategies in response to tariffs, they may inadvertently create tax nexus in new states.

For example, a business begins stockpiling imported goods in warehouses across multiple states to hedge against future tariff increases. This inventory presence creates physical nexus for income tax purposes. Meanwhile, tariff-driven price increases could push sales above economic nexus thresholds (such as $100,000 in annual sales), creating new sales tax collection obligations.

Key considerations for financial leaders

CFOs should take immediate action to assess and mitigate tariff-related state tax risks:

  1. Review purchase contracts: Clearly specify which party is the importer of record and who bears responsibility for tariff-related taxes.
  2. Model multi-state impact: Calculate the true total cost of tariffs, including state and local taxes across all jurisdictions of operation.
  3. Evaluate income tax options: Work with tax advisors to determine the optimal treatment of tariffs under federal and state income tax.
  4. Monitor nexus expansion: Track potential new state tax obligations arising from supply chain adjustments.
  5. Consider structural adjustments: Evaluate changing importer of record arrangements or restructuring procurement processes to minimize state tax burdens.

Looking ahead

As tariff policies continue to evolve, state and local tax implications will become increasingly complex. States facing budget pressures may adopt more aggressive interpretations of tariff taxability. Businesses that proactively address these issues will be better positioned to manage profit margins and avoid unexpected losses in state tax audits.

The conclusion is clear: when calculating the impact of tariffs on your business, don't stop at the federal level. The true costs are often hidden in the ensuing maze of state and local taxes.