Week in Insights: Tariff Refunds Need Protection From Litigation

Retailers that paid unconstitutional tariffs may now have a perverse incentive to avoid seeking refunds, because pursuing them could invite consumer class actions. Congress or the Treasury Department should consider providing a safe harbor to protect companies that recover tariffs from being punished through consumer litigation.

Importers and retailers already had good reason to tread carefully with the Trump administration when applying for tariff refunds. The president has said he will “remember” companies that forego seeking a return of tariffs paid.

Costco Wholesale Corp.’s recent motion to dismiss a proposed consumer class action shows there may be a threat coming from below as well. The plaintiff’s theory is that if Costco raised prices to account for tariffs, and those tariffs are later refunded, customers should receive their share. Similar suits have targeted other companies—turning tariff recovery into a recipe for litigation.

The result may be a strange legal and economic bottleneck. Even if the government levied the tariffs unlawfully, the parties best positioned to recover them may decide not to bother if they must pay out settlements and judgments to consumers afterward.

A tariff-refund safe harbor is a viable route forward. Congress or Treasury could require companies seeking refunds to choose a compliant path: pass refunds through to identifiable customers using a reasonable formula, provide a broad consumer benefit such as credits or demonstrable discounts, or retain the refund after certifying the tariff wasn’t separately charged or passed through to consumers.

Companies that follow the rule would be shielded from unjust-enrichment and consumer-protection class actions. Those that don’t would take their chances. Without such a safe harbor, we risk an outcome that doesn’t benefit consumers, retailers, or the rule of law.

—Andrew Leahey

Even if the government levied the tariffs unlawfully, the parties best positioned to recover them may decide not to bother if they must pay out settlements and judgments to consumers afterward.

Photographer: Scott Olson/Getty Images

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts analyzed a new tax code section on foreign-owned firms, the IRS’s latest conservation easement settlement offer, and more.

Insights

New US Tax Provision for Foreign-Owned Firms Creates Uncertainty

Companies need to start assessing their exposure to a new tax code section that has created the category of foreign-controlled foreign corporations and introduced new complexity for compliance, EisnerAmper’s Dean Peterson says.

Ballot Initiatives on Wealth Taxes Should Get Court Scrutiny

Courts should ensure that ballot initiatives to impose wealth taxes don’t allow the many to trample on the rights of the few, says Robert F. Mancuso of Capri Capital Partners.

IRS Syndicated Easement Offer Is Worth Investors’ Consideration

Investors should carefully assess their partnership’s litigation prospects in deciding whether to accept the IRS’s newest settlement offer for syndicated conservation easement transactions, Wiggam Law’s John Kirbo says.

India Reassures Investors After Tiger Ruling Prompts Concerns

India’s new rules on the taxation of exits from investments provide some reassurance and certainty to foreign investors and private equity funds, but don’t address every concern.

Refunds of Trump Tariffs Set Stage for Transfer Pricing Headache

A Supreme Court-ordered tariff refund means multinationals should monitor the profitability of certain US distributors and make necessary adjustments to their transfer prices, Covington’s Lauren Ann Ross and Ryan’s Brian Vincent say.

Five Questions With Baker Tilly Tax Principal Michelle Abel

Bloomberg Tax Insights & Commentary is featuring a recurring questionnaire of prominent tax professionals who are willing to share their thoughts about their work and the practice of tax these days. Today we feature Michelle Abel, a principal and firm leader of credits and incentives in Baker Tilly’s specialty tax practice.

Technically Speaking

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

State tax law’s familiar categories of license, service, hosting, and infrastructure are too rigid for modern software products, so states should give courts a better way to determine when cloud access is taxable, Andrew Leahey says in his latest Technically Speaking column.

Clarifying the true-object test through a safe harbor would be the best solution, Andrew argues, adding that “states should presume that a software transaction remains a software license when remote functionality is used only for a set list of functions.” Read More

News Roundup

Democratic-Led States Float 100% Tax on Payouts From Trump Fund

Lawmakers in a handful of states—including California, New York and Illinois—are scrambling to cancel out payments from a $1.8 billion fund the Trump administration has earmarked for people alleging government mistreatment by imposing a 100% tax.

OECD Teases New Global Tax Safe Harbors in Updated Guidance

The OECD incorporated details from its landmark January agreement on a global minimum tax into its consolidated commentary Thursday and indicated further amendments are coming to various parts of the framework.

Treasury Looks Anew at Book-Tax Guidance Move Affecting Insurers

The Treasury Department is taking another look at a portion of its preliminary guidance on the corporate book-income tax that could affect insurance companies, a Treasury official said Thursday.

Australian Tax Office Shutters Diverted Profits Review Team

The Australian Taxation Office has closed a specialist team dedicated to handling diverted profits tax cases.

Tax Management Memorandum

Can ESOPs Take Outside Debt to Fund the Repurchase Obligation?

Buchalter’s Zachary Wertheimer examines why third-party loans directly to employee stock ownership plans to finance repurchase liability can trigger significant ERISA risk, and presents practical considerations and important precautions for ESOP fiduciaries.

Will First Circuit Case Denham Further Muddy the NESE Tax Waters?

Deloitte’s Joseph Vetting analyzes the net earnings from self-employment tax for limited partners.

Career Moves

Holding Redlich Adds Two Australian Officials to Tax Practice

Michael Patane joined Holding Redlich as a partner to strengthen the firm’s tax practice, and Eli Bursky joined as special counsel to the firm’s Sydney office, the firm announced Monday.

Jones Day Adds Laurie Humphreys to Tax Practice in Chicago

Laurie Humphreys joined Jones Day as of counsel in its tax practice in Chicago, the firm announced Tuesday.

Cozen O’Connor Recruits Tax Attorney Drew Barsalou in Florida

Drew Barsalou joined Cozen O’Connor as a member in its private client, trusts, and estates practice in Boca Raton, Fla., the firm announced Tuesday.

Cole Schotz Adds Tax Lawyer Joseph Landolfi in Florida

Joseph Landolfi joined Cole Schotz as a member in its tax, trusts and estates, and corporate transactions departments in Boca Raton, Fla., the firm announced Tuesday.

Vorys Hires Kelvin Lawrence as Tax Partner in Columbus Office

Kelvin Lawrence joined Vorys as a partner in its tax practice in Columbus, the firm announced Tuesday.

Alston & Bird Hires Satvi Vepa as Tax Partner in London Office

Satvi Vepa joined Alston & Bird as a partner in its federal and international tax group in London, the firm announced Thursday.