What are tariffs? How do they work?

• Tariffs are taxes on imported goods. The importer of record is responsible for paying tariffs to customs agents at the point of entry, though they may pass the cost of the tariff on to consumers by raising prices or adding a tariff surcharge. 
• The U.S. Supreme Court invalidated tariffs collected under the International Emergency Economic Powers Act (IEEPA). The U.S. Court of International Trade has ordered the government to refund IEEPA tariffs. Whether states can or will refund sales tax on IEEPA duties remains to be seen.

• Managing tariffs is complex for businesses. Tariffs vary by country and product type (HS code), and they are subject to change.

A tariff is a tax on goods imported from other countries. The term “duty” is often used instead of or alongside the term tariff.

The receiving country controls the tariffs on imported goods. They don’t control tariffs levied on exports; those are controlled by the country of import.

President Donald J. Trump imposed new tariffs during his first term and has implemented numerous new tariffs since returning to the Oval Office. For more details, review Trump’s 2025 tariffs and stay up to date with tariffs in 2026. 

Tariffs are typically paid by the importer at the point of entry. U.S. tariffs are collected by U.S. Customs and Border Protection (CBP), and similar governmental agencies collect tariffs in other countries. For instance, Canada Border Services Agency (CBSA) is responsible for collecting tariffs on goods entering Canada.

In some cases, an importer may decide to have the buyer pay the duty upon delivery. This is known as Delivered at Place (DAP).

DAP can lead to disgruntled customers because they aren’t given the goods they purchased until they pay the applicable import taxes and duties. They may even be required to travel to the point of entry to collect their goods. For this reason, Delivered Duty Paid (DDP) is generally preferred. (Learn more about DDP versus DAP.)

Read how Avalara is helping GlobalPost International manage cross-border tax compliance, or contact us to learn more about Avalara Cross-Border solutions.

Almost all countries impose at least some tariffs. You can find a list of many countries’ customs duties on the World Trade Organization website (see Summary tables under World Tariff Profiles).

Duty rates are often shaped by factors such as a country’s reliance on imports, international trade agreements, and free trade agreements.

Some countries, like the Bahamas and Cameroon, have extremely high tariffs.

By contrast, Hong Kong and Macau are free ports with no tariffs on general imports — though both impose excise duties or consumption taxes on select imported goods (e.g., distilled spirits and tobacco). Approximately 72% of goods that entered the European Union in 2023 were tariff free.

The standard tariff rates that members of the World Trade Organization (WTO) can impose on other WTO members are known as Most Favored Nation Tariffs, or MFN. These are generally the best tariff rates available, although WTO members can be subject to even lower tariffs due to preferential or trade agreements.

A free trade agreement (FTA) is an agreement between countries that governs certain trade obligations, protections on investor and intellectual property rights, and more. Many countries have an FTA with one or more countries.

The U.S. had 14 comprehensive FTAs with 20 countries when Trump started his second term. The fate of these agreements is up in the air, as the president prefers reciprocal trade deals to free trade deals.

Tariffs are typically based on a percentage of the sale price in the selling country. They’re sometimes absorbed by the importer, which can reduce profits for that business. Yet often they’re passed on to consumers in the form of higher prices.

Depending on the nature of a tariff (the rate and what it’s applied to), a tariff hike can both reduce profits for a business and increase prices for consumers. Per the Brookings Institute, “which party bears the heaviest burden depends on the specific market.”

While sales tax laws vary from state to state, states take a uniform approach to the definition of sales price. 

Tariffs that are passed on to the consumer — whether separately stated or included in the retail sale price — are typically subject to sales tax if the transaction is taxable. Sales tax is calculated as a percentage of a product’s total purchase price, and tariffs can’t be deducted from the selling price. 

According to the Streamlined Sales Tax Governing Board, if the tariff costs are passed on to customers, Streamlined Sales Tax states consider tariff costs to be part of the sales price; tariff costs are therefore subject to the same sales and use tax as the imported product whether listed as a line item on the invoice/receipt or billed separately to the customer. If the importer doesn’t collect sales or use tax, the customer is responsible for reporting use tax on the sales price, which includes the tariff the importer billed.

However, if the consumer is the importer responsible for paying the tariff to the customs authority, the product sales price does not include the tariff, and the tariff is not subject to sales or use tax. “The importer doesn’t owe use tax on items purchased for their own use because the purchase of the goods is a different transaction from the payment of the tariff,” explains Scott Peterson, VP of Government Relations at Avalara. The purchaser pays the tariff to U.S. customs and doesn’t owe use tax on the amount of the tariff to the state.

As the Illinois Department of Revenue wrote in a general interest letter dated April 7, 2025, “the identity of the person legally responsible for paying the tariff under federal law is the critical factor in determining whether sales or use tax applies to the amount of the tariff.”

California and Washington have also published guidance related to sales tax on tariffs.

“Managing tariffs and sales tax complicates the life of every business,” Peterson observes. “But even the most sophisticated business struggles when tariffs change as often as they have recently.”  

On February 20, 2026, the Supreme Court struck down tariffs implemented under the IEEPA. A couple of weeks later, the U.S. Court of International Trade directed CBP to refund tariffs collected under IEEPA.

On March 6, 2026, CBP said it would implement new functionality in its Automated Commercial Environment (ACE) to handle IEEPA tariff refunds. It should be up and running by mid-April, though it will likely take CBP months or even years to refund all the IEEPA duties.

The Supreme Court ruling has left businesses and consumers wondering whether states will refund sales tax on IEEPA tariffs.

Peterson says IEEPA tariff refunds should work the same as any other refund. “There must be a clear chain of evidence. The tariff must be listed on the invoice and included in the amount upon which the sales tax was charged. The retailer must return the sales tax to the consumer before the retailer is allowed to request a refund from the state.”

None of this requires the retailer to return the tariff to the consumer, but Peterson suspects consumers will expect the tariffs they’ve paid to be returned. “There will likely be lots of lawsuits from those seeking refunds of separately stated tariffs and the tariffs that were built into the price. And all of this applies only to the tariffs impacted by the Supreme Court’s decision — the IEEPA tariffs.” Tariffs implemented under other authorities, like Section 232, remain in effect.

Because tariff rates are based on HTS codes, ensuring all imported goods have the correct HS code is the first step toward improving compliance. 

Automating the assignment of HTS codes with a tool like Avalara Tariff Code Classification can help. Once Avalara classifies the items you sell, Avalara AvaTax Cross-Border can automatically calculate customs duties and import taxes during checkout.

Learn more about Avalara Managed Tariff Code Classification.

This blog post has been updated. It was originally published in March 2025.