Tariffs on imports into the U.S. are on the rise, focusing on many of the U.S.’s largest trading partners like Mexico, Canada and China, as well as major products such as aluminum and steel. Buyers and sellers who are importing goods into the U.S. should be aware of the potential increases in cost structure and understand who bears the burden of paying for those increases due to the heightened tariffs.
What is a Tariff?
Tariffs are a form of tax or customs duty levied by governments on the value of goods imported into a country.[1] Tariffs are typically a percentage of an imported product’s value, and the rates vary across categories of goods, components of goods and raw materials.
Who is Responsible for Paying Tariffs?
The short answer? It depends. Contracts for the sale of goods typically contain a provision allocating responsibility for the costs and performance of moving the goods to the ultimate destination. Part of that provision is a delivery term, often either an INCOTERM (standardized commercial terms published by the International Chamber of Commerce) or a Uniform Commercial Code term (terms defined by codified state law under the governing law of the contract). Examples are Delivered Duty Paid (DDP), Delivered at Place (DAP), Ex Works (EXW), or the ever-present Free on Board (FOB), each of which will be discussed in greater detail throughout this series. The delivery term also dictates responsibility for payment of tariffs upon import to the country of destination. Buyers and sellers should be acutely aware of the effects of the chosen delivery term.
Contracts for the sale of goods likely contain other provisions that impact amounts paid by the buyer for the goods relating to tariffs. To the extent the seller is allowed to increase pricing for the costs of raw materials or other inputs, that may give the seller the right to pass through the impacts of tariffs to the buyer via a price adjustment. Other questions arise related to whether the application of tariffs constitutes a force majeure event – typically, it does not.
On the other hand, what if there isn’t a single negotiated contract, but rather purchase orders and acknowledgements that have passed back and forth, creating a “battle of the forms” scenario? An analysis must be conducted to determine which document governs the purchase and whether tariff responsibility was allocated therein.
As buyers and sellers negotiate contracts, it is imperative that each party be aware of the potential impacts of tariffs to the transaction and how responsibility for tariffs is allocated via the contract terms.
Our Supply Chain, Transportation and Logistics Practice Group will be publishing a series of short insights on discrete contract topics related to tariffs in the weeks that come.Future installments are forthcoming, so be sure to check back here in the coming weeks.
[1] Import tariffs & fees overview and resources. International Trade Administration | Trade.gov. https://www.trade.gov/import-tariffs-fees-overview-and-resources.
