Overview of Section 232 Tariffs on Steel and Aluminum: What Importers Need to Know
The implementation of new 25% Section 232 duties on steel, aluminum, and certain derivatives, effective March 12, 2025, which are in addition to any special rate of duty otherwise applicable, are affecting importers globally. Here is a breakdown of what these new tariffs entail:
1. Nature of Section 232 Tariffs and Interaction with Reciprocal Tariffs
On March 12, 2025, President Trump implemented 25% tariffs on steel and aluminum under Section 232 of the Trade Expansion Act of 1962. These duties, applied in addition to any existing special rates, aim to address national security concerns by bolstering domestic production. The additive nature of these tariffs has significantly raised the cost of imported steel and aluminum products, impacting budgets and pricing strategies for businesses reliant on these materials.
Subsequently, on April 5, 2025, the Trump Administration imposed a 10% baseline tariff on all imports to the United States, invoking the International Emergency Economic Powers Act (IEEPA) to address the national emergency posed by the persistent trade deficit. Building on this, the United States applied country-specific reciprocal tariffs as determined by the United States Trade Representative (USTR) which has been paused until July 9, 2025.
In its executive order, the Trump Administration explicitly excluded products already subject to Section 232 measures from the baseline and reciprocal tariff regime. Consequently, while Section 232 duties have increased the costs of imports like steel and aluminum, these products do not face additional tariffs under the reciprocal system as of this writing.
2. Immediate application and elimination of exemptions
These duties apply to imports made from March 12, 2025, onward. Notably, the new tariffs eliminate previous country exemptions and tariff-rate quota agreements, and they terminate the product exclusion process. Consequently, no new exclusion requests will be accepted, and existing exclusions will expire without renewal.
For those reasons, imports from countries previously subject to country exemptions are now subject to these tariffs (i.e., Australia, Canada, Mexico, the EU, the UK, Japan and South Korea).
However, we might see some country-specific bilateral trade agreements in due course that could exempt certain countries from these duties.
3. Exemptions from Derivative Articles – No Duty Drawback
Critically, the additional duties on derivative steel articles would exclude steel articles that are processed in a third country from steel that was melted and poured in the United States. The same exemption applies to derivative aluminum articles. This applies to all the listed derivative HTS codes to which the new Section 232 tariffs would otherwise apply, so businesses need to start mapping their suppliers’ supply chains for products in those codes to identify US content if they have not already done so.
Unfortunately, no duty drawback is available for these duties. Businesses that would reexport the listed products from the United States to third countries should consider rearranging their shipping so that listed products ultimately destined for third countries are shipped there directly and not imported first into the United States.
4. Expansion of Previous Proclamations
This trade action, via presidential proclamation, is an expansion of President Trump’s previous proclamations from 2018, now covering all products and derivatives from the original proclamations plus additional derivative products. The 2025 proclamations rely on definitions of steel and aluminum articles from the 2018 proclamations.
For ease of reference, we provide all such descriptions and HTS codes of steel products and derivatives listed or linked below:
Steel Products Subject to the 2018 (and thus 2025) 232 Tariffs
Proclamation 9705 (Mar. 8, 2018) defined steel articles at the Harmonized Tariff Schedule (HTS) 6-digit level as: 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.11 through 7306.90.
Proclamation 9980 (Jan. 24, 2020) defined derivative steel articles as an article in which:
steel accounted for, on average, at least two-thirds of the product’s total material cost; and where
import volumes of such derivative article increased year to year in comparison to import volumes the preceding two years; and
import volumes of such derivative article exceeded the 4 percent average increase in the total volume of goods imported.
Those proclamations also included the following HTS codes:
HTS Heading
Product Type
Description
Source
7208, 7209, 7210, 7211, 7212, 7225, 7226
Steel Product
Flat-rolled products
Proclamation 9705
7213, 7214, 7215, 7227, 7228
Steel Product
Bars and rods
Proclamation 9705
7216 (except subheadings 7216.61.00, 7216.69.00 or 7216.91.00)
Steel Product
Angles, shapes and sections of iron or nonalloy steel
Proclamation 9705
7217, 7229
Steel Product
Wire
Proclamation 9705
7301.10.00
Steel Product
Sheet piling
Proclamation 9705
7302.10
Steel Product
Rails
Proclamation 9705
7302.40.00
Steel Product
Fish-plates and Sole plates
Proclamation 9705
7302.90.00
Steel Product
Other products of iron or steel
Proclamation 9705
7304, 7306
Steel Product
Tubes, pipes and hollow profiles
Proclamation 9705
7305
Steel Product
Tubes and pipes
Proclamation 9705
7206, 7207, 7224
Steel Product
Ingots, other primary forms and semi-finished products
Proclamation 9705
7218, 7219, 7220, 7221, 7222, 7223
Steel Product
Products of stainless steel
Proclamation 9705
7317.00.30
Derivative Steel Product
Nails, tacks (other than thumb tacks), drawing pins, corrugated nails, staples (other than those of heading 8305) and similar articles of iron or steel, whether or not with heads of other materials (excluding such articles with heads of copper), suitable for use in powder-actuated handtools, threaded
Proclamation 9980
7317.00.5503, 7317.00.5505, 7317.00.5507, 7317.00.5560, 7317.00.5580, 7317.00.6560 only and not in other numbers of subheadings 7317.00.55 and 7317.00.65
Derivative Steel Product
Nails, tacks (other than thumb tacks), drawing pins, corrugated nails, staples (other than those of heading 8305) and similar articles of iron or steel, whether or not with heads of other materials (excluding such articles with heads of copper), of one piece construction, whether or not made of round wire
Proclamation 9980
8708.10.30
Derivative Steel Product
Bumper stampings of steel, the foregoing comprising parts and accessories of the motor vehicles of headings 8701 to 8705
Proclamation 9980
8708.29.21
Derivative Steel Product
Body stampings of steel, for tractors suitable for agricultural use
Proclamation 9980
Additional Derivative Steel Products Subject to the 2025 232 Tariffs
The exact HTS codes of additional derivative steel products subject to the new tariffs are provided in pages 12-14 of Proclamation 10896 (Feb. 10, 2025).
For any derivative steel article identified in Annex I of Proclamation 10896 that is not in Chapter 73 of the HTSUS, the additional ad valorem duty shall apply only to the steel content of the derivative steel article.
5. Calculating Section 232 Tariffs on Steel and Derivative Steel Products
The calculation of these tariffs involves determining the value of the steel or aluminum content, which is:
The total price paid or payable for the steel or aluminum content itself, excluding any costs related to transportation, insurance, and other services associated with the shipment from the country of exportation to the country of importation.
This value is typically reflected in the invoice that the buyer pays to the seller for the steel or aluminum content.
Here are some scenarios considering the HTS codes above:
SCENARIO 1–If an article is identified in Proclamation 9705 or 9980, the Section 232 tariff will apply to the entire merchandise value.
Example: A steel body stamping classified under HTS 8708.29.21 and thus classified under Proclamation 9980, has a value of $100. The Section 232 tariff will be $25.
SCENARIO 2– If the article is identified in new Proclamation 10896 and is in Chapter 73, the tariff again applies to the entire merchandise value.
Example: A stainless steel pan classified under HTS 7323.93.00 has a value of $100. Because the pan is identified by new Proclamation 10896 and is classified in Chapter 73, the value of the entire merchandise is subject to the 25% duty. Thus, the Section 232 tariff will be $25.
SCENARIO 3– If the article is identified in new Proclamation 10896 but is not in Chapter 73, the tariff applies only to the steel content value.
Example: A passenger elevator part classified under HTS 8431.31.00, with a steel content valued at $75 out of a total $100, will incur a tariff of $18.75, because only the value of the steel content is subject to the 25% duty.
The implementation of these new Section 232 duties introduces significant changes for importers of steel and aluminum products. Understanding the details of these tariffs and their implications is essential for businesses consider strategic adjustments within their supply chains to mitigate the impact of these new duties.
Financial Institutions May Have Civil and Criminal Exposure for Knowingly or Unknowingly Assisting Customers Who Support Terrorist Activities
While there have been numerous shifts in government enforcement priorities in the past three months, there does appear to be one area where the status quo has remained the same. This new administration has made it clear that preventing financial institutions from working with terrorist organizations remains a top concern. While the administration has added “new” entities to its lists in the form of drug cartels and other nefarious groups, none of this changes the fact that it is as important as ever for banks and similar financial institutions to maintain effective compliance to avoid the government’s crosshairs. Moreover, if one of these banned entities does become inadvertently involved with a financial institution, it is equally as important to know how to get in front of the issue to mitigate the relevant and serious risk.
For decades, terrorist organizations have tried to access the U.S. financial system to fund their terrorist operations around the world. Terrorist organizations and other criminals use various strategies to conceal the nature of their activities, including money laundering and structuring. The U.S. government has multiple tools for combatting terrorists’ abuse of the U.S. financial system. Congress enacted the Currency and Foreign Transaction Reporting Act of 1970, as amended (referred to as the Bank Secrecy Act or BSA) to monitor the source, volume, and flow of currency and other monetary instruments through the U.S. financial system to detect and prevent money laundering and other criminal activities. After the terrorist attacks on Sept. 11, 2001, Congress strengthened the BSA framework through the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Among other things, the USA PATRIOT Act targeted terrorist financing and enhanced enforcement mechanisms to combat it. Indeed, there are numerous other statutes and regulations that may come into play in cases involving terrorist financing. Those statutes and regulations rely heavily on U.S. financial institutions to identify and report bad actors.
The risks involved when banks fail to follow these statutes and regulations are severe, and this GT Advisory summarizes the current laws that the government uses to try to eliminate terrorist organizations’ ability to move funds for their nefarious activities. U.S. financial institutions and their employees have substantial exposure if they knowingly or unknowingly assist customers in supporting or financing terrorist activities. As mentioned above, while the new administration is changing the way the government addresses the threat of terrorist funding in some ways, the basic tools used in detecting and prosecuting remain largely the same. Some of the government’s tools that should be considered in creating effective compliance for financial institutions include the following.
1. Terrorist Support and Financing Violations
The most powerful tool in U.S. law enforcement’s quiver in curbing terrorist financing involves statutes proscribing the provision of material support to designated terrorist organizations. The government can prosecute individuals and entities that facilitate or finance terrorism under multiple statutes: (i) 18 U.S.C. § 2339A, which prohibits persons from providing material support or resources, including financial services, knowing that they will be used in preparation for or in carrying out certain predicate offenses associated with terrorism; (ii) 18 U.S.C. § 2339B, which prohibits knowingly providing material support to designated foreign terrorist organizations; and (iii) 18 U.S.C. § 2339C, which prohibits providing or collecting funds with the knowledge or intention that they will be used to carry out a terrorist attack. The statutes are complex, but it is important to note that conspiring to commit terrorism or aiding and abetting the commission of terrorism are punishable as if the person has committed the crime himself. Moreover, under 18 U.S.C.§ 2339C, an individual or entity can be prosecuted for concealing the nature, location, source ownership, or control over any material support or resources knowing that they will be or were provided to support terrorist activity. All of these statutes include severe criminal penalties for individuals and entities. These statutes apply to banks and other financial institutions similarly to how they would apply to anyone that helps known terrorists and, consequently, contain penalties to reflect the severity of the underlying conduct.
More specifically, under 18 U.S.C. § 2339B, if a financial institution becomes aware that it has possession of or control over funds of a foreign terrorist organization or its agent, the financial institution is required to retain possession or control over the funds and report the existence of the funds to the Secretary of Treasury in accordance with the regulations. The failure to do so may result in a civil penalty equal to the greater of $50,000 per violation or twice the value of the funds over which the financial institution was supposed to retain possession or control. The material support statute specifically states that it applies extraterritorially, meaning that the law reaches individuals, companies, and conduct that is normally beyond the reach of U.S. jurisdiction. Since the statute’s inception, U.S. courts have affirmed criminal convictions and civil penalties based on its broad extraterritorial reach.
2. IEEPA Violations
While not as chilling as the threat of being charged as supporting terrorism, the executive branch also can use its emergency powers to curb and punish financial institutions that conduct transactions with designated terrorists. This issue of emergency powers has been in the news recently because of the current administration’s discussion of using these powers to curb narcotics trafficking by targeting the various drug cartels.
Specifically, the International Emergency Economic Powers Act (IEEPA) delegates authority to the president of the United States to regulate financial transactions to address threats following the declaration of a national emergency. As mentioned above, President Trump has issued multiple executive orders (EOs) designating terrorists or terrorist groups. The EOs prohibit U.S. persons from engaging in transactions with the designated terrorists or terrorist groups. The Office of Foreign Assets Control (OFAC) enforces sanctions against U.S. persons or non-U.S. persons with a U.S. nexus who deal with designated terrorists or terrorist groups. Financial institutions must notify OFAC of any blocked transactions and file an annual report. A financial institution that willfully violates an executive order or IEEPA implementing regulation may be charged criminally. The fines for a financial institution found to have violated these orders may be high and also involve potentially damaging collateral effects, such as debarment.
3. Money Laundering
While money laundering has always been a relevant risk for financial institutions, in light of the new administration’s views on stopping both terrorism and narcotics trafficking, the industry should expect that the administration will pursue these laundering cases with greater zeal than the prior one. If a U.S. financial institution or its employees willfully assist a customer in laundering money, the government may charge the financial institution or its employees with conspiracy to commit money laundering. While laundering may occur throughout the United States in any location where a nefarious individual is trying to hide ill-gotten proceeds, the increased focus on international criminal and terrorist activities will result in greater detection of laundered amounts and, consequently, much higher fines.
The government may also charge international money laundering in terrorist financing cases. International money laundering is sometimes referred to as “reverse money laundering” because it involves the transfer of legitimate funds abroad for an illegal purpose. 18 U.S.C. § 1956(a)(2)(A) prohibits the transport, transmission, or transfer of funds and monetary instruments of funds from the United States to a place outside of the United States with the intent to promote a specified unlawful activity. Specified unlawful activities include the terrorism material support offenses, IEEPA violations, and other criminal activities connected to terrorism.
Most importantly, money laundering is something that a financial institution is legally required to take steps to detect and prevent. These efforts will never be perfect but taking steps to enact effective compliance is critical to mitigating the risk of fines and penalties and, in some circumstances, may even change charging decisions. Effective compliance programs that are continuously reviewed and improved are key to mitigating the risk of fines and penalties if cases like the ones discussed above arise.
4. BSA Violations
Similar to the money laundering issues discussed above, the Bank Secrecy Act (BSA) creates challenges for financial institutions that may increase over the coming years. The BSA imposes substantial reporting and due diligence requirements on financial institutions to prevent abuse of the U.S. financial system. Among other requirements, each financial institution must: (i) develop and implement an effective anti-money laundering (AML) program; (ii) file and retain records of currency transaction reports (CTRs) to report cash transactions of $10,000 or more; (iii) file and retain records of suspicious activity reports (SARs) where the financial institution knows, suspects, or has reason to suspect, inter alia, that the money was from an illegal source or the transaction occurred in connection with a plan to violate federal law or evade reporting requirements; (iv) file and retain records of Reports of International Transportation of Currency or Monetary Instruments (CMIRs) to report the transportation of currency or monetary instruments exceeding $10,000 to or from the United States; and (v) adopt customer identification procedures and perform other due diligence measures. The BSA rules are administered by the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), and the federal banking agencies including the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, and the National Credit Union Administration.
The penalties for violating BSA requirements can be severe. Potentially applicable penalties include:
Criminal Liability for Financial Institutions or Employees Who Willfully Violate BSA Reporting Requirements – A person, including a bank employee, who willfully violates the BSA reporting requirements may be subject to five years in prison and a fine of up to $250,000. The criminal penalties are increased to 10 years in prison and a fine of up to $500,000 where the person commits the BSA reporting violation in connection with another crime or engages in a pattern of illegal conduct.
Structuring Violations – A person who structures, attempts to structure, or assists in structuring any transaction with one or more domestic financial institutions to evade a BSA reporting requirement may be guilty of a crime. Structuring involves willfully breaking a payment into smaller amounts so that they fall under the reporting threshold. Structuring is punishable by up to five years in prison and a fine of up to $250,000. Like the reporting penalties, the criminal penalties for structuring are increased to up to 10 years in prison and a fine of up to $500,000 where the person commits structuring in connection with another crime or engages in a pattern of illegal conduct exceeding more than $100,000 in a 12-month period.
Civil Penalties – The secretary of the Treasury may impose a civil penalty of $500 for a negligent violation of the recordkeeping requirements in the BSA. The penalty can be increased by up to $50,000 where there is a pattern of negligent violations. Where a financial institution engages in certain international money-laundering violations, the secretary of Treasury may impose a penalty equal to the greater of two times the value of the transaction or $1,000,000.
Where a financial institution’s failure to satisfy the recordkeeping requirement is willful, the civil penalty is equal to the greater of the value of the transaction or $25,000, up to a maximum of $100,000. The penalty is applied for each day the violation continues on each branch or place of business. Therefore, the civil penalties can increase significantly. The civil penalty can apply in addition to any criminal penalties.
Egregious Violator – Where an individual willfully commits a BSA violation and the violation either facilitated money laundering or terrorist financing (i.e. the individual is an “egregious violator”), the individual is prohibited from serving on the board of directors of a U.S. financial institution for a period of 10 years commencing on the date of the conviction or judgment.
5. Internal Revenue Code Currency Violations
The Internal Revenue Service frequently uses information gathered under the BSA reporting requirements to determine if taxpayers are compliant with their U.S. tax reporting obligations. Large transfers of cash are not per se illegal; however, they may be an indicator of fraud for tax purposes. Therefore, the IRS has a strong interest in financial institutions filing timely and accurate CTRs. To this end, the Internal Revenue Code includes a parallel statute that addresses the failure to file or the filing of inaccurate CTRs. The following penalties may apply under 26 U.S.C. § 6050I:
Criminal Liability for Willful Failure to File a CTR – Any person who willfully fails to file a CTR is guilty of a felony punishable with up to five years in prison and a fine of up to $25,000 (or $100,000 in the case of a corporation).
Criminal Liability for Willfully Filing a False CTR – Any person who willfully files a false CTR is guilty of a felony publishable with up to three years in prison or a fine of up to $100,000 (or $500,000 in the case of a corporation).
Criminal Liability for Structuring – The Internal Revenue Code includes its own criminal provision for structuring violations. A person who structures or assists in structuring may be publishable with the same penalties that apply to a person who fails to file or files an incorrect CTR.
Criminal Liability for Willfully Aiding or Assisting in Preparing a False CTR – Any person who aids, assists, counsels, or advises in the preparation of a false CTR is guilty of a felony punishable with up to three years in prison or a fine of up to $100,000 (or $500,000 in the case of a corporation).
Civil Penalty – The civil penalty for failure to file or filing an incorrect CTR is equal to the greater of $25,000 or the amount of cash received in the transaction, up to a maximum of $100,000.
6. Forfeiture Actions
In addition to civil and criminal penalties, the government can use civil and criminal forfeiture statutes to seize the property related to terrorism or money-laundering violations. This includes proceeds of the criminal activity, funds used to facilitate the criminal activity, and in some circumstances, legitimate funds that have been knowingly commingled with illegal funds. Where the illegal funds are being held abroad, the government may be able to seize assets held in correspondent accounts that foreign financial institutions maintain in the United States as a substitute.
7. Loss of Bank Charter or Removal from Banking Activities
In addition to the civil and criminal penalties that can apply, federal banking agencies have the authority to revoke bank charters and prohibit bank employees from engaging in further banking activities. Equally concerning are the various state banking regulators that can also revoke a financial institution’s charter for violations of federal laws. Because of the regulated nature of financial institutions, the ramifications of any of the violations mentioned above, even if not particularly egregious, have the potential to cause irreparable harm to the institution.
Conclusion
The government has numerous tools to penalize financial institutions or their employees for knowingly and unknowingly assisting customers with supporting or financing terrorism. As the strategies that terrorists use to access the U.S. financial systems continue to evolve, financial institutions may wish to consult with their advisors on the best way to prevent violations.
Florida Legislature Will Need Extra Time to Negotiate Budget & Tax Relief
Today, the President of the Florida Senate announced that tax relief has stalled the budget negotiations for the 2025 Regular Session. This means the Florida legislature will likely have to return in a Special Session to resolve tax and budget bills before the start of the state fiscal year on July 1, 2025.
The Senate announced they had offered a tax relief package of nearly $3B in the first year and $1.3B in future years. That relief would include a temporary elimination of certain motor vehicle fees, a permanent sales tax exemption on clothing under $75, a 1% reduction of the business rent tax (to 1%), and the historic sales tax holidays. See Senate Bill 7034.
The House’s current legislation would result in a $5B tax reduction in the first year and a $5.48B recurring reduction thereafter. Cornerstones of House Bill 7033 are a permanent 0.75% reduction of all sales tax rates and a redirection of tourist development tax (bed taxes) to offset local property taxes. The House bill will be considered on the floor of the full House tomorrow morning.
Harvard’s Tax-Exempt Status Dispute with the Trump Administration: Implications for Nonprofits
On April 16, 2025, President Donald Trump signaled a desire for Harvard University (Harvard or the University) to lose its tax-exempt status after the University refused several demands in the Trump Administration’s letter to Harvard, dated April 11, 2025, including reforms to governance and leadership, hiring and admission processes, student programs with records of antisemitism or bias and student discipline, as well as a discontinuation of DEI programs. Harvard’s refusal resulted in the Department of Education freezing $2.2 billion in grants and $60 million in contracts to Harvard. The Trump administration plans to freeze another $1 billion in federal funding for Harvard’s health research.
Harvard University sued the Trump administration on Monday, April 21, 2025, for infringing on the University’s free speech rights under the First Amendment. Additionally, Harvard argues that the administration’s actions against the University were arbitrary and capricious and outside the scope of its authority. Harvard contends that the federal government cannot impose unrelated conditions for higher-education institutions to access federal funding. The fate of Harvard’s federal funding and tax-exempt status may now set a precedent that could impact other nonprofit organizations.
While most nonprofit organizations focus on their missions, even a mission-driven organization can lose its 501(c)(3) status if it violates the Illegality Doctrine.1 In Bob Jones University v. United States (1983), the Supreme Court affirmed that a tax-exempt organization must operate in a manner consistent with public policy and federal law.2 The Court upheld the IRS’s decision to revoke tax-exempt status based on racially discriminatory practices — even though the institution claimed a religious purpose.3 If a tax-exempt organization engages in illegal activity or operates against public policy, it risks revocation — even if the charitable purpose itself is lawful.
Can the President Direct the IRS To Revoke Harvard’s Tax-Exempt Status?
On April 15, 2025, President Trump posted on Truth Social: “Perhaps Harvard should lose its Tax Exempt Status and be Taxed as a Political Entity if it keeps pushing political, ideological, and terrorist inspired/supporting ‘Sickness? Remember, Tax Exempt Status is totally contingent on acting in the PUBLIC INTEREST!”
Generally, Section 7217 of the Internal Revenue Code of 1986 (the Code) prohibits the President, and other executive branch employees, from either directly or indirectly requesting that the IRS investigate or audit specific targets. The IRS has declined to comment to date on whether they are considering review or revocation of Harvard’s tax-exempt status. Additionally, a White House spokesman stated, “Any forthcoming actions by the I.R.S. are conducted independently of the President, and investigations into any institution’s violations of their tax status were initiated prior to the President’s TRUTH.” However, if the IRS revokes Harvard’s status, Harvard will almost certainly appeal.
What Rev. Rule 80-278 Says – and Why It Still Matters
With calls to revoke Harvard’s tax-exempt status making headlines again, nonprofit organizations must revisit Rev. Rul. 80-278, one of the IRS’s clearest positions on when 501(c)(3) status can be revoked. In Rev. Rul. 80-278, the IRS held that an organization systematically violating civil rights laws was not entitled to tax-exempt status even if its stated mission was charitable.4 Charitable purpose is not enough if the conduct is illegal or contrary to “clearly defined and established” public policy.5
Harvard’s legal position was made clear by a spokesperson for the University, who stated that “there is no legal basis for revoking the University’s exemption.” However, the burden of proof would be on Harvard to prove that its activities are not illegal or against public policy, and that it is otherwise entitled to tax exemption. Ultimately, if Harvard exhausts all administrative remedies with the IRS, then it could potentially file for a declaratory judgement remedy under Section 7428 of the Code. Historically, there is no IRS precedent that directly applies to protected speech by students or faculty.
What Should Your Nonprofit Do?
In light of the ongoing dispute with Harvard, and the potential for time and cost associated with defending tax-exempt status, nonprofit organizations should diligently review their internal governing documents, ongoing federal and state grants and contracts, and other materials to ensure compliance with federal and state laws related to tax-exempt status.
Suggested Actions
Audit Advocacy and Activities. Make sure your lobbying, programming and public-facing content align with your exempt purpose and IRS standards.
Review Governance & Oversight. Ensure your board understands its fiduciary role in legal compliance — not just mission direction.
Compile Basic Organizational Information for Potential Audits. Begin compiling materials that commonly would come up in an audit or investigation, such as tax returns, relevant agreements and grant or scholarship program materials.
Develop a Rapid-Response Framework. Have a plan for if (or when) your tax status, operations or speech get questioned by regulators, donors or the media.
[1] Rev. Rul. 80-278, 1980-2 C.B. 175 (1980).
[2] Bob Jones Univ. v. United States, 461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d 157 (1983).
[3] Id. at 602-604.
[4] Rev. Rul. 80-278, 1980-2 C.B. 175 (1980).
[5] Id.
What Every Multinational Company Should Know About … Customs Enforcement and False Claims Act Risks (Part II)
As detailed in Part I of our three-part series on Minimizing Customs Enforcement and False Claims Act Risks, the combination of the new high-tariff environment, the heightened ability of Customs (and the general public) to data mine, and the Department of Justice’s (DOJ) stated focus on using the False Claims Act (FCA) substantially increases import-related risks. In light of this heightened risk, Part II and the forthcoming Part III of this series focus on preparing for specific areas where we see heightened enforcement risk, both for Customs and FCA penalties, with this article addressing the most common FCA risks arising from submitting false Form 7501 entry summary information.
Risks Arising from Misclassifications
By far, the most common Customs errors we see relate to misclassifications on Form 7501 entry summaries. If made knowingly, these misclassifications can lead to FCA liability, as demonstrated by a high incidence of DOJ settlements based on alleged known classification errors. Relevant FCA examples include $22.2 million and $2.3 million settlements, each premised on importers knowingly misclassifying entries into lower-tariff classifications to avoid paying duties owed on the companies’ imports.
Additionally, aggressively classifying goods to avoid being subject to the China Section 301 tariffs can create the risk of FCA liability. Such opportunistic classification led to a $22.8 million settlement by an importer that used inaccurate classifications despite receiving repeated CBP notices informing the importer that the classifications it had been using for similar goods were erroneous. The importer continued using the incorrect classifications for over three years, even after an outside consultant confirmed the importer had been using incorrect classifications.
Customs Compliance Response
Maintain a Regularly Updated Classification Index. Well-supported and consistent classifications are the key to avoiding these types of errors. The most important tool for ensuring accuracy in classifications is a robust and regularly updated Customs Classification Index, which should list the HTS classification for regularly imported SKUs while incorporating support for classification decisions made, including an application of the Customs General Rules of Interpretation, advisory opinions, responses to protests against liquidation, and other relevant support.
Conduct Classification Reviews. We often find that importers leave classification decisions up to customs brokers, assuming they are experts and responsible for identifying the correct codes. Customs, however, places full responsibility for the accurate submission of all Form 7501 information on the importer of record, not the broker. Periodically review your classifications, especially for frequently imported items, to ensure accuracy.
Evaluate Classification Accuracy in Post-Entry Reviews. Customs allows importers 310 days after entry to fix any classification errors. Conduct post-entry checks to confirm the accuracy of all submitted information, and use post-summary corrections to correct any errors, including misclassifications, before liquidation. This will help catch errors and, where corrected, undermine FCA scienter.
Review Tariff Engineering. With tariff rates rising, Customs is aggressively looking for importers who have engaged in opportunistic classification to try to lower import charges. This includes a special focus on importers who have changed their classifications after the imposition of new tariffs. This does not mean importers should view themselves as locked into adverse and incorrect classifications. They should, however, adequately document any classification changes and be prepared to respond promptly to Customs inquiries.
Risks Arising from Misrepresenting the Physical Characteristics of Imported Goods
Making known misrepresentations to incorrectly claim a lower tariff classification can lead to FCA liability. For instance, an importer of brake parts settled an FCA case alleging it knowingly misrepresented the physical characteristics of its entries (claiming they were duty-free unmounted brake pads rather than mounted brake pads subject to a 2.5% classification) for $8 million.
Customs Compliance Response
Confirm Accuracy of Factual Support for Classifications. In most cases, classification is determined by (1) the physical attributes of the product and, in certain cases, (2) the primary use of the product. Ensure you have accurate backup and consistent classification for each of these issues.
Document and Retain Classification Decisions. Ensure you maintain detailed records for all classification determinations, and keep them for at least five years from the time of entry.
Risks Arising from Improper Country of Origin Declarations
Because of the imposition of special Section 301 tariffs on China, the number of importers caught making errors relating to declaring the wrong country of origin (COO) has sharply risen. The imposition of reciprocal tariffs only magnifies the importance of the COO. Generally these cases involve imported goods that were assembled in third countries using parts and components from a high-tariff country. In these situations, careful analysis is required to ensure there is sufficient manufacture, value added, and change in the name, character, and use of the product so the result is a “substantially transformed” product that is a new and different article of commerce.
FCA cases illustrate the twin risks that can arise from incorrect COO declarations. In 2021, the DOJ settled an FCA matter for $160,933, alleging the importer knowingly failed to designate that certain imports were manufactured in China, thus evading Section 301 duties.
Customs Compliance Response
Confirm Accuracy of Substantial Transformation Analysis. One of the highest-priority areas of Customs scrutiny is to find instances of importers evading customs duties either by transshipping through lower-tariff third countries or by shipping parts and components to a third country and then engaging in only minor assembly operations (e.g., from China to another Southeast Asia country). If the goods are not substantially transformed into a new and different article of commerce, then they cannot claim the lower-tariff COO. Review all instances where parts and components from a high-tariff country, like China, are used in further manufacturing in a lower-tariff country. Ensure there is a reasonable basis for the COO declaration, and document the analysis in case of Customs inquiry.
Risks Arising from Undervaluation
Failing to declare the full value of entries is another common error. Most importers use transaction value, which requires the importer to start with the price actually paid or payable, add certain mandatory additions (e.g., the value of assists and royalties), and accurately reflect any allowed voluntary deductions. Recent examples include $217,000, $729,000, and $1.3 million settlements of allegations relating to known under-declared entry values resulting in underpaid tariffs, as well as a $3.6 million settlement of civil claims resulting from the DOJ joining an FCA whistleblower lawsuit. An additional sobering example is a settlement of claims against an importer that knowingly undervalued its goods through the remedy of losing all import privileges.
More specifically, the known failure to include assists (i.e., customer-provided production aids such as tools, dies, and molds) within the entered value can incur FCA liability. Where a U.S. company provides such assists, it needs either to declare the full value of the assist on the first entry or set up a system to attribute the full value of the assist over the useful lifetime of the product, thus declaring it piecemeal over time. These values do not show up on commercial invoices, making it easy to forget to include this mandatory addition to entered value. But the risks of knowingly failing to do so are demonstrated by two FCA settlements of $4.3 million and $7.6 million for the alleged failure to include assists in the entered value.
Customs Compliance Response
Understand How to Calculate Entered Value. Most companies use transaction value to determine the entered value. Valuation is complicated in situations involving post-entry price adjustments, cash or quantity discounts, indirect payments, exchange rate conversions, and other tricky areas. Ensure valuation is calculated correctly for all entries, including for the inclusion of off-invoice mandatory additions to value.
Establish a System for Identifying and Tracking Assists, and Consistently Follow It. Importers should have a system for systematically identifying and tracking assists, which can be as simple as a spreadsheet. If this historically has not been done, a review of a company’s trial balance ledger can potentially identify historically provided assists. All assists either should be recognized on the first entry of the applicable universe of goods or apportioned over the expected useful lifetime of the assist. If the latter method is used, establish a system for tracking all relevant entries benefiting from assists and consistently add them when calculating the entered value. Share such information with your customs broker to implement a secondary check.
Risks Arising from Improper Claims of Preferential Treatment Under Free Trade Agreements
Another common error we see is failing to meet free trade agreement (FTA) requirements, such as failing to work through the COO requirements. Along these lines, in one FCA action an importer paid $22.2 million to settle allegations that, among other things, it knowingly claimed improper preferential treatment under FTAs.
Customs Compliance Response
Always Have Certificates of Origin On Hand at Time of Entry. One of the most common errors we see in customs audits and disclosures is one of the simplest to fix: Ensure that you always have the USMCA certificate of origin available at the time of importation. Under the USMCA, it is not possible to create these after the time of entry.
Apply Correct Country of Origin Principles. FTAs include different COO principles. These generally are based on a tariff-shift analysis, which is viewed as providing more certain outcomes than the more subjective substantial transformation test commonly applied by Customs. Certain products, such as automotive products under the USMCA, also have special rules for determining preferential status. Note as well that it may be necessary to apply FTA principles to determine the COO for purposes of paying normal Chapter 1-97 duties while applying substantial transformation principles for determining the country of origin for special tariffs, such as section 232 or 301 tariffs imposed by President Trump.
Risks Arising from Failure to Pay Antidumping and Countervailing Duty Orders (AD/CVD Orders)
In addition to the normal Chapter 1-97 tariffs, the U.S. government imposes a parallel set of duties under more than 600 AD/CVD orders. Because AD/CVD tariffs often are very high, failure to properly declare and pay all AD/CV duties can quickly run up tariff underpayments.
As a result, one of the most common Customs FCA claims is for failing to pay AD/CV duties. An importer of home furnishings agreed to pay $500,000 to resolve allegations that it violated the FCA by knowingly making false statements on customs declarations to avoid paying AD duties on imports from China, with four other importers agreeing to pay $275,000, $5.2 million, $10.5 million, and $15 million based on alleged known classification failures based on the same order. Three other importers paid settlements of $2.300,000, $650,000, and $100,000 to settle allegations that they had knowingly evaded AD duties under the aluminum extrusions AD duty order, while another paid $45 million to resolve allegations that it knowingly misrepresented the COO to evade AD/CV duties.
Customs Compliance Response
Use HTS Screening. The scope of an AD/CV duty is determined by its written scope, not whether it falls within any given HTS subheading. Nevertheless, every order provides HTS subheadings for the convenience of importers. Screen all entries against these HTS subheadings as an initial check, and follow up on any potential matches.
Be Wary of Counter-Intuitive Coverage of AD Duty Orders. Be aware that certain AD/CVD orders, such as the aluminum extrusions order against China, are not susceptible to HTS screening and require individual examination. Also, consider that certain AD duty orders, such as the one on solar panels, have tricky rules for determining the product scope. Learn which orders are of particular relevance for your import profile and carefully screen all potential matches against them.
Risks Arising from Misapplying Customs Duty-Free Exemptions
A number of Customs programs can result in duty-free entries, such as U.S. goods returned and the Generalized System of Preferences. Illustrating the risks inherent in misapplying duty-free exemptions, importers paid $610,000 and $908,100 to settle allegations that involved “improperly evad[ing] customs duties … breaking up single shipments worth more than those amounts into multiple shipments of lesser value in order to avoid the applicable duties.”
Customs Compliance Response
Carefully Confirm Eligibility Under All Tariff-Saving Programs. Each tariff-saving program has its own rules, which can include special eligibility requirements. Carefully review these rules and document their applicability before claiming preferential treatment.
Risks Arising from Failure to Appropriately Value Goods from Related Parties
Another common problem is that importers either do not have a transfer pricing study in place to support the arms-length nature of their pricing when purchasing from affiliates, or they improperly rely on an IRS transfer pricing study (which is impermissible because CBP has specific standards for transfer pricing studies that differ from the IRS standards). Although we are not aware of any FCA case alleging improper pricing from related parties, this conduct is common and can potentially impact a large volume of entries, making a known misdeclaration a risk factor for potential FCA liability.
Customs Compliance Response
Confirm the Existence of a Customs-Specific Transfer Pricing Study. If you do not have a customs-specific transfer pricing study in place, consider conducting or hiring a customs accounting specialist to prepare a bridge memorandum to analyze the underlying data. If you do not have an IRS transfer pricing study, then obtain one (and also take care of your IRS transfer pricing requirements).
Confirm the Consistent and Accurate Application of the Results. It is important not only to have a customs transfer pricing study but also to consistently apply its results. Ensure the entered value from every import from a related party is confirmed against the conclusions of the study.
In sum, DOJ has a rich history of using a wide variety of issues to support FCA claims, especially relating to the known false submission of Form 7501 entry summary information. By considering the compliance responses outlined above, importers can ensure that their entry summary information is accurate in the first place, to best avoid known false submissions. Part III of this series will turn its focus to FCA risks arising from improper management of import operations.
The Employee Retention Credit: IRS’s “Risking” Model Faces Legal Challenge
Case: ERC Today LLC et al. v. John McInelly et al., No. 2:24-cv-03178 (D. Ariz.)
In an April 2025 order, the US District Court for the District of Arizona denied a motion for a preliminary injunction filed by two tax preparation firms. The firms sought to halt the Internal Revenue Service’s (IRS) use of an automated “risk assessment model” that the IRS used to evaluate and disallow claims for the Employee Retention Credit (ERC), seeking to restore individualized review of ERC claims.
BACKGROUND ON THE ERC
The ERC was enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by COVID-19 by incentivizing employers to retain employees and rehire displaced workers. The ERC allowed employers that experienced significant disruptions due to government orders or a substantial decline in gross receipts to claim a tax credit equal to a percentage of qualified wages paid to employees. Millions of employers have filed amended employment tax returns (Form 941-X) claiming the credit for periods in 2020 and 2021. Since the enactment of the CARES Act, the IRS has issued roughly $250 billion in ERC.
THE IRS’S MORATORIUM AND AUTOMATED RISK ASSESSMENT MODEL
In September 2023, the IRS instituted a moratorium on processing ERC claims to review its procedures, reduce the backlog of claims, and identify potential fraud. Before the moratorium, all ERC claims received individualized review. During the moratorium, the IRS developed an automated “risk assessment model” to facilitate the processing of claims. This model, which is alternatively known as “risking,” utilizes taxpayer-submitted data and publicly available information to predict the likelihood that a taxpayer’s claim is valid or invalid. Claims deemed to be “high risk” by the system are excluded from review by an IRS employee and instead are designated for immediate disallowance. In August 2024, the IRS lifted its ERC processing moratorium and began issuing thousands of disallowance notices to taxpayers. Notwithstanding these actions, the number of pending ERC claims remained above one million as of November 2024.
THE COURT CHALLENGE TO THE IRS’S “RISKING” MODEL
In their motion for a preliminary injunction, filed January 7, 2025, the plaintiffs (the tax preparation firms) sought a court order compelling the IRS to, among other things, stop the use of “risking” and restore individualized employee review of ERC claims. The plaintiffs claimed to be injured by the “risking” model because they were unable to collect contingency fees from clients when claims were disallowed.
In support of their motion, the plaintiffs pointed to having received on behalf of their clients many boilerplate rejections immediately following the end of the moratorium. The plaintiffs alleged that these summary disallowances were arbitrary and capricious, thus violating the Administrative Procedure Act (APA), because the “risking” model precluded the IRS from acquiring information necessary to properly evaluate the claims.[1] The plaintiffs also contended that the disallowances reflected a shift in IRS policy to disfavor ERC, with the result being that several legitimate claims were being unfairly disallowed. The plaintiffs argued that this apparent shift violated Congress’s intent in enacting legislation providing for ERC.
On April 7, 2025, the court denied the motion, finding that the plaintiffs failed to meet the high bar for injunctive relief at this stage of the litigation.[2] The court said that the record of the case at this juncture did not support the plaintiffs’ contention that the increase in claim disallowances after August 2024 was because of the IRS denying valid claims. However, the court pointed to a concession by the IRS that its use of the “risking” model may be resulting in the disallowance of legitimate claims. The court suggested at several points in its order that the plaintiffs (or the employers they support) could bring forth evidence demonstrating that the “risking” model was unduly denying benefits to deserving taxpayers.
Practice Point: This case highlights that the IRS has been adopting novel mechanisms to address its backlog of pending ERC claims, which given current resource constraints, it may seek to employ them in other contexts, including those involving income tax refunds. The “risking” model in particular, while purporting to expedite the review of certain supposedly “high-risk” claims, may be having the collateral consequence of denying benefits to eligible employers. Taxpayers with potentially meritorious claims can (and should) be prepared to administratively appeal or even litigate disallowed claims, which they can do by filing a complaint in the US district court with jurisdiction or in the US Court of Federal Claims.
[1] The plaintiffs also alleged that the IRS exceeded its statutory authority by disallowing their clients’ ERC claims without providing them a right to be heard or a direct right to appeal in an independent forum. The plaintiffs argued that the IRS violated the Due Process Clause of the US Constitution’s Fifth Amendment by depriving their clients of ERC without adequate review of these clients’ claims.
[2] More specifically, the court found that the plaintiffs did not establish that they had standing to seek the requested relief, or that the United States (through the actions of the IRS) had waived sovereign immunity as to the plaintiffs’ APA claims. The court also concluded that the plaintiffs did not show that their due process claim was likely to succeed on the merits such that a preliminary injunction was an appropriate remedy.
Recalibrating Regulation: EPA, Energy, and the Unfolding Consequences of Deregulatory Momentum
The U.S. Environmental Protection Agency (EPA) has long navigated the complex intersection of science, law, policy, and public trust. Under the Trump Administration, EPA faces renewed scrutiny. The Administration seeks regulatory rollbacks and is pursuing a broader deregulatory strategy that many believe risks sacrificing hard won environmental protections in the name of economic growth.
While early promises to reduce bureaucratic red tape struck a chord with a number in industry, implementation has appeared blunt thus far, rather than measured. Deregulatory actions have sometimes resembled sweeping cuts “with a machete instead of a scalpel,” affecting the intended target of outdated or burdensome rules, but taking with it collateral damage including critical administrative safeguards and scientific functions. Although EPA has avoided some of the steepest cuts levied on other federal agencies, many worry that this trajectory will fundamentally impair the Agency’s mission.
EPA Administrator Lee Zeldin has attempted to ease concerns, stating that he can “absolutely” assure the public that deregulation will not harm the environment. “We have to both protect the environment and grow the economy,” he stated when questioned by CBS News’s “Face the Nation” about whether he could ensure that deregulation would not have an adverse impact. Still, the juxtaposition of that reassurance against ongoing efforts to slash regulations leaves many stakeholders uneasy.
At the heart of the Administration’s argument is a broader political philosophy — an intent to upend what it views as “entrenched bureaucracy.” White House spokesman Harrison Fields emphasized in a Statement that the Administration is “prioritizing efficiency; eliminating waste, fraud, and abuse; and fulfilling every campaign promise.” Critics, however, view these efforts as retributive, undermining institutional expertise, and marginalizing science-driven decision-making. Some demand a clearer upside — what fraud, waste, and abuse has been uncovered and eliminated?
One of the most visible fronts in this deregulatory push is energy policy. A recent Executive Order directs the federal government to expedite coal leasing on public lands, and aims to designate coal as a “critical mineral.” This pivot is being positioned as part of a strategy to meet the rising energy demands of generative artificial intelligence (AI) and data centers that are expected to increase significantly electricity consumption in the coming decade.
Despite this coal-forward rhetoric, more coal-fired power capacity was retired during Trump’s first term than under either of President Obama’s terms. Analysts note that even with reduced climate regulations, coal’s economic competitiveness remains constrained by market forces and state-level clean energy mandates. “You can run all these coal plants without environmental regulations…I’m sure that will save industry money,” energy data analyst Seth Feaster of the Institute for Energy Economics and Financial Analysis recently told Wired. “Whether or not the communities around those places really want that is another issue.”
Meanwhile, the federal freeze on electric vehicle (EV) charging infrastructure funding has disrupted planned rollouts in several states. “It puts some players in a bad spot where they’ve already invested,” states Jeremy Michalek, an engineering and public policy professor at Carnegie Mellon University, in a recent article on the topic. Similar concerns are emerging in the aviation and alternative fuels sectors, where projects relying on incentives from the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) now face sudden funding uncertainty.
Last week, Judge Mary McElroy of the U.S. District Court for Rhode Island, ordered the Trump Administration to reinstate previously awarded funds under both the IRA and the IIJA, underscoring the legal and financial turbulence surrounding the current regulatory landscape. This new normal is unwelcome to most shareholders. In a March 2025 press release about another lawsuit specifically challenging the Administration’s freeze on funding from the IRA and IIJA, Skye Perryman, President and CEO of Democracy Forward, states that “The decision to freeze funds that Congress appropriated is yet another attempt to roll back progress and undermine communities. These actions are not only unlawful, but are already having an impact on local economies.”
Meanwhile, in a recent post on TruthSocial, President Trump invited companies to relocate operations to the United States, promising “ZERO TARIFFS, and almost immediate Electrical/Energy hook ups and approvals. No Environmental Delays.” But for regulated entities, states, and federal partners navigating a rapidly shifting policy environment overseen by a new Administration that has diminished and fractured its workforce and shown a propensity to backpedal from bold claims, the promise of speed may not be worth the cost of lost clarity, stability, and long-term sustainability.
GeTtin’ SALTy Episode 51 | Overview of Washington’s 2025 Legislative Session: Tax Policy Challenges and Business Impacts [Podcast]
In this episode of GeTtin’ SALTy, host Nikki Dobay is joined by Max Martin, Director of Tax and Fiscal Policy at the Association of Washington Business, to discuss Washington’s legislative session and its implications for state tax policy.
With COVID relief funds dwindling and a projected budget shortfall of up to $20 billion, policymakers are exploring a range of revenue-raising measures, from B&O tax increases and a new surcharge on large business to the creation of a statewide payroll tax and even a potential wealth tax.
Max provides insights into these proposals, Governor Ferguson’s stance, and the challenges businesses face in navigating Washington’s evolving tax landscape.
As the session nears its end, Nikki and Max explore the balance between maintaining competitiveness and funding critical state programs.
Lastly, they share their favorite things about spring in the Pacific Northwest.
Advancing the IRS Whistleblower Program
The director of the IRS Whistleblower Office (the Office) released the Office’s first multi-year operating plan outlining its guiding principles, strategic priorities, achievements, and efforts to advance the program. As part of its plan, the Office’s mission and vision statements were enhanced. The mission states it is to effectively administer the Whistleblower Program by ensuring:
the IRS compliance functions receive and consider specific, timely and credible claims that identify non-compliance with the tax and other laws administered by the IRS;
whistleblowers receive required notifications timely; and
awards are fairly determined and paid
The IRS Whistleblower Office states its vision is “to effectively promote voluntary compliance and reduce the tax gap by providing excellent service to whistleblowers, taxpayers and other stakeholders.”
With the intention of making the Whistleblower Program a success, the plan is framed around six strategic priorities:
1.
Enhance the claim submission process to promote greater efficiency.
2.
Use high-value whistleblower information effectively.
3.
Award whistleblowers fairly and as soon as possible.
4.
Keep whistleblowers informed of the status of their claims and the basis for IRS decisions on claims.
5.
Safeguard whistleblower and taxpayer information.
6.
Ensure the workforce is supported with effective tools, technology, training, and other resources.
Each of these strategic proprieties sets forth its priority efforts for 2025 and, separately, for 2026-2027.
Apart from increasing processing efficiencies, expanding the use of data analytics, adjusting staffing and other procedural efforts to enhance the program, the plan proposes significant improvements for whistleblower claimants. It updated and improved Form 211 (Application for Award for Original Information), including an updated list of alleged violations to select from, and includes a new option for multiple whistleblowers to file jointly. It is developing a digital portal to make claim submission easier. It also is developing a new approach for the initial analysis of claims to ensure high-value submissions are identified and prioritized to improve and speed up the evaluation of claims for awards.
The Plan and its implementation will make it easier and faster to obtain a reward while still preserving confidentiality and protection of whistleblower records and taxpayer information. It also provides for improved communication with whistleblowers during the pendency of their claims.
The Lobby Shop: Reconciliation Reckoning [Podcast]
The Lobby Shop team turns their focus on the ongoing budget reconciliation process in Congress that will shape the Trump administration’s economic agenda. Hosts Josh Zive, Paul Nathanson and Liam Donovan provide a quick update on the latest tariff developments before diving into the reconciliation process and the shifting legislative dynamics between the House and the Senate. Then, Liam does a deep dive on how economic pressures are reshaping political strategy, and what it all means for government funding timelines and the looming debt ceiling. Tune in for a Liam-style breakdown of the often confusing reconciliation process in the next couple of weeks.
What Every Multinational Company Should Know About … Tips and Tricks for Sell-Side Contracts
Assessing Tariff Impacts in Commercial Contracts
With the size and scope of President Trump’s tariffs continuing to shift, this is a critical time for businesses to assess their contracts and determine how increased tariff costs might adversely affect profitability, and whether there are any strategies to mitigate the losses.
Contract Review for Tariff Provisions
Tariffs typically affect profitability in two primary ways:
Increased costs of material or component inputs due to the tariffs, and
Tariffs applied to the final sale price of imported or exported goods.
As indicated below, force majeure and commercial impracticability provisions are blunt instruments, meaning the allocation of tariff-related costs is best addressed in the pricing provisions of commercial contracts. When drafting these provisions, consider the following:
Price Adjustments: Inclusion of a mechanism allowing for equitable price increases in response to rising costs associated with taxes, duties, tariffs, or other expenses resulting from changes in law, regulations, or other agreed-upon reasons can be beneficial to the seller. These types of pricing provisions can mitigate financial strain from tariff hikes.
Tariff Allocation: Tariffs are always paid directly to U.S. Customs by the importer of record, which must be a single party. But Customs does not care if parties reallocate tariff responsibility behind the scenes. Pricing provisions thus can specify how tariff costs are allocated between parties for foreign goods imported into the United States and for goods exported to foreign countries. This allocation can be drafted via express provisions on the topic or through careful use of Incoterms to set forth delivery responsibility. Clarity regarding (a) which party is responsible for paying any tariffs to the applicable government agency; (b) whether the seller, the buyer, or both share responsibility for tariff payments; and (c) what the reimbursement mechanism will be, if any, is essential for cost planning and risk mitigation.
In cases where pricing provisions do not provide adequate protection against tariff-related costs, other contractual clauses should be reviewed. For example:
Termination Rights: Termination provisions may offer an exit strategy if continued performance becomes economically unsustainable. Particular attention should be given to whether termination for convenience is permitted and, if so, what notice requirements apply.
Purchase Order Acceptance/Rejection: Contracts may provide flexibility regarding the acceptance or rejection of purchase orders. In the absence of a fixed quantity commitment or a requirements/output agreement, a seller may be able to reject orders and thereby decline to supply products.
Common Misconceptions Regarding Tariff Relief
Force Majeure/Commercial Impracticability: A frequent misconception is that a force majeure clause or the doctrine of commercial impracticability may apply to excuse performance due to increased tariff costs. While these doctrines are sometimes used strategically to initiate discussions around contract renegotiation, courts often view cost increases as foreseeable business risks that cannot support invoking force majeure or commercial impracticability defenses (unless the cost increase, such as a heightened tariff, is expressly identified as a force majeure event that excuses performance).
Tax Allocation Provision: Another common misconception is that a tax provision, providing the buyer pays all taxes, will permit a U.S. seller to pass along the tariffs on its inputs to a U.S. buyer. Typically, tax provisions are drafted to allocate responsibility for taxes levied on the transaction between the buyer and seller and do not contemplate taxes/tariffs levied on the upstream inputs.
Recommended Next Steps
This is an area of law where sophisticated counsel can help identify your working options under current contracts and maximize your company’s ability to take proactive steps to manage future tariff-related risks. Managing the effects of tariffs, or other unexpected governmental actions, requires a tailored approach based on each company’s contractual leverage and commercial relationships. A thorough contract review, coupled with proactive communication with business partners, can provide a solid foundation for addressing tariff challenges.
Congress Overturns IRS Reporting Rules for DeFi Platforms
President Trump has signed into law a bill that repeals Internal Revenue Service (IRS) regulations that required decentralized finance (DeFi) platforms to be treated as brokers for purposes of reporting customer transactions. The former regulations, finalized in December 2024 under the Biden administration, expanded the definition of “digital asset brokers,” to include certain participants that operate within the DeFi industry. Digital asset brokers are subject to tax reporting obligations similar to traditional financial intermediaries. Specifically, these brokers are required to issue IRS Form 1099-DA to both the IRS and their customers, detailing gross proceeds from digital asset transactions, as well as the name and address of each customer. Had the regulations remained in effect, DeFi brokers would have been subject to information reporting requirements for digital asset sales on or after Jan. 1, 2027.
The bill invoked the Congressional Review Act (CRA), a legislative tool allowing Congress to overturn recently enacted federal regulations, particularly those implemented late in an administration’s tenure.
Advocates of the repeal argued that the former regulations were overly burdensome and misaligned with the decentralized nature of DeFi platforms. They contended that forcing DeFi protocols, which often lack a centralized entity, to comply with broker reporting standards is technically infeasible. Critics of the regulations believed it would stifle innovation and push crypto enterprises offshore, undermining U.S. competitiveness in the digital asset sector. The repeal effort was led by Sen. Ted Cruz (R-TX) and Rep. Mike Carey (R-OH).
Opponents of the repeal warned that removing these reporting requirements may create loopholes for tax evasion and illicit financial activities, including money laundering. The Congressional Budget Office, relying on estimates provided by the Joint Committee on Taxation, projected a $4.5 billion increase in the federal deficit through 2035 from passage of the resolution. Critics argued that repealing the rule may allow more cryptocurrency transactions to evade scrutiny, potentially exacerbating financial crimes.
The repeal highlights the growing political influence of the cryptocurrency industry and a broader shift in Washington’s regulatory stance toward digital assets. As the larger debate unfolds, lawmakers and industry leaders will need to navigate the challenges of fostering innovation while maintaining financial security and compliance in the evolving digital economy.