The following is a guest post from Mark Luscombe, Principal Analyst at Wolters Kluwer Tax & Accounting. Opinions are the author’s own.
On Feb. 20, the U.S. Supreme Court ruled that the International Emergency Economic Powers Act does not authorize the president to impose tariffs and invalidated all tariffs imposed under IEEPA. However, the Supreme Court did not establish a refund mechanism; it left that to the Court of International Trade and executive agencies. The CIT ordered Customs and Border Protection to begin refunding unlawfully collected IEEPA tariffs.
CBP has already started accepting certain refund claims within what is called Phase 1, limited to unliquidated entries and entries liquidated within the last 80 days. CBP has stated that 330,000 importers had paid IEEPA tariffs, representing $166 billion. By April 9, 56,497 importers had completed ACH registrations in the portal for refunds, representing $127 billion in potential refunds, including interest.
After Phase 1, there may be issues raised with respect to fully liquidated entries or importers not named as plaintiffs entitled to refunds. The Department of Justice has indicated that it may appeal CIT’s refund order with respect to some of these categories of importers.
Taxation of tariff refunds
If the tariff reduced a company’s reported income, the refund of that tariff is generally taxable under the tax benefit rule. If the tariff was passed on to a retailer without affecting the importer’s tax liability, the refund would be non-taxable to the importer. For companies still holding tariffed goods in inventory, the refund adjusts the tax basis of those goods rather than triggering an immediate tax event.
As a general rule, only the importer of record who paid the tariff or their customs broker may claim a refund. In instances where the tariff cost was passed on to a retailer, the retailer may have to look to contract provisions, purchase orders or pricing terms for the ability to recover from the importer. Also, as a general rule, any refunds recovered by consumers would not be taxable since no tax benefit was received by paying additional sums for the purchase due to the tariff.
Planning for tariff refunds
Importers
Importers should undertake a review of tariffs paid since Jan. 1, 2025, to determine what tariffs may have been paid that were authorized by the president claiming IEEPA authority. Importers who have paid tariffs under the CBP Phase 1 should register for refunds as soon as possible. Importers who have paid tariffs on goods or services imported under IEEPA that are not covered by Phase I should consider also filing with CBP, filing refund claims with CIT or filing an administrative protest with the CBP. There may be additional litigation to resolve some of these claims. Like the CBP, the CIT is likely to be overwhelmed by the volume of refund claims, and the proceedings could take a considerable period to resolve.
Retailers
Railers and others who purchase from importers should review their purchase documents to determine whether and to what extent tariffs may have been passed on to them by importers. Retailers and others who have had IEEPA tariffs passed on to them by importers in the form of either higher prices or specific reference to tariff surcharges should review their agreements with the importer for legal authority to recover the additional payments from the importer, whether or not the importer has yet succeeded in its refund action. Claims will generally be strengthened where there is a specific reference to a tariff surcharge in the purchase agreements.
Retailers and others who purchase from importers should also review their purchase agreements for potential language changes to strengthen their case in future situations to recover tariffs passed on to them by importers where the tariff has been declared illegal or unenforceable. Tariffs imposed under other provisions of the law could also be subject to future challenges if the statutory procedures required by those laws have not been followed. Retailers may also face pressure from their customers for refunds, even if not required by the CIT.
Consumers
Consumers will usually have no specific reference to a tariff surcharge in the higher prices that they may have paid for goods or services, even though they may have ultimately borne the economic burden of the tariffs. Some class action lawsuits have been filed against entities such as Costco, FedEx and UPS based on unjust enrichment. However, the outcome of that litigation is uncertain. Some businesses may feel some pressure to pass on some relief to their customers in order to maintain good relations.
Remaining tariff authority
The Supreme Court majority opinion stated that there is no inherent or inferred presidential authority to impose tariffs. Presidential authority to impose tariffs must be pursuant to specific authority granted by Congress. In place of the International Emergency Economic Powers Act, a few other existing federal statutes might be available to support the imposition of tariffs by the President.
The net result is that there is currently no authority in the president to declare global, unlimited revenue-raising tariffs. Tariffs now will require following more detailed statutory procedures that will take time to implement.
The Trump administration is seeking to have tariffs put in place under other statutory authority. It had already used such other statutes for steel, auto and aluminum tariffs, and these tariffs are not within the Supreme Court’s decision. The administration has already implemented a new worldwide 15% tariff under a separate statutory authority that requires Congressional approval within 150 days.
