4 Things You Need to Know About the Border Adjustment Tax

Products made in the U.S. and overseas could soon be subject to new tax laws. Here’s what we know so far.

By Rich Harper March 8, 2017

The proposed border adjustment tax—a sweeping change to the U.S. tax code— continues to be a hot topic in Washington, D.C., as Congress begins the heart of its legislative session. As I discussed in a previous article, the border adjustment tax as proposed by House Republicans could have dramatic impacts on your tax bill, depending on where you manufacture your product.

Not surprisingly, outdoor companies have a lot of questions about how the border adjustment tax would work and the likelihood that it will actually become law. A record number of OIA members tuned in for a webinar we put on recently on this issue and I wanted to share some of the questions from that session and others I have received from members.

Watch the recorded webinar now

Clearly, we got your attention, and the industry will be heavily engaged as the border adjustment tax makes its way through Congress.

 

Question 1: When will the border adjustment tax go into effect?

It is almost certain that the House will vote on a tax reform plan this year—possibly before the 4th of July recess—and the border adjustment tax will be a key component. As we discussed previously, the Senate is working on its own plan but has yet to embrace the BAT. And President Trump likewise hasn’t made clear where he stands. So, the fate of the BAT is still up in the air.

If it does pass, however, it is unlikely that it will take effect immediately. We expect a transition period—possibly five to seven years—before it takes full effect. It is also possible that it would be phased in over that time with the amount of covered products increasing every year.

Interested in learning more about domestic manufacturing? Think now might be a good time to invest in reshoring efforts? Reach out to OIA Policy Advisor Andrew Pappas to learn about or join our Made In America Working Group.


Question 2: How would the border adjustment tax affect products manufactured abroad and sold abroad? Would it affect, for example, a ski jacket made in China and sold in Europe?

No. The border adjustment tax would not impact products manufactured abroad and sold abroad. It would only cover products sold in the U.S. Products made in and exported from the U.S. would be exempt altogether.

Question 3: If we use foreign inputs in a product that we manufacture in the U.S. and that we subsequently export, will we be able to deduct the cost of the foreign inputs from our tax bill?

Unclear. Foreign inputs for a product manufactured in the U.S. and sold in the U.S. would still be subject to the border adjustment tax. If that product is subsequently exported for sale, it is possible that you could deduct the cost of the imported inputs from your tax bill. We will not know for certain, however, until we see the final details of the plan. This is one of the key questions we have shared with members of Congress and their staff who are preparing the tax reform legislation.

Question 4: What about import tariffs? Will we at least be able to deduct the import tariffs paid from our tax bill?

Again, unclear until we see the final text. And this is a key point for outdoor companies. Most outdoor products—apparel, footwear, travel goods—are import-dependent, and outdoor companies already pay stiff import tariffs, which are essentially taxes that lead to higher consumer costs, fewer jobs and less innovation. While the average tariff on most imports is less than 3 percent, the average tariff on outdoor products is 14 percent and can go as high as 40 percent.