Tariffs & Supply Chains: An English Law Perspective on Contractual Levers You May Have (or Want)
These are challenging times for supply chains. In recent months, the US government has announced, reversed, delayed, adjusted, and enacted a series of tariffs on imports to the United States from a long list of countries; some countries have retaliated, and others are negotiating and beginning to announce trade deals. The supply chain is trying to adapt fast and frequently.
Whether tariffs are imposed for additional tax revenue, to encourage domestic production and consumption, as a geopolitical tool to favour some countries over others, a combination of these or otherwise, they are having significant impact. From increasing material and production costs, to squeezing operating margins, increasing administrative and trade compliance burdens, inflating end-product pricing, and affecting supply and demand cycles with stockpiling in advance of anticipated tariffs or import delays in case tariffs are soon to be removed or reduced.
While supply chain restructuring or diversification may be a medium or longer-term priority, its participants may wish to be agile and respond swiftly in the short-term, but where does the tariff burden lie, how flexible are the contracts, and what contractual levers might be available to mitigate the impact?
We consider below (from an English law perspective – though the comments may have general application) some contractual levers that may help navigate these challenges. One comment of universal application is that: whether any tariff announcement is sufficient to trigger a contractual lever, and the consequences which may flow from it, will be contract clause and context specific.
Where Does the Tariff Burden Lie?
Does the contract contain provisions which allocate the parties’ risks and responsibilities in the event of tariffs? If not, each party may bear the increased costs of performing their respective obligations.
Does a Tariff Trigger Automatic Consequences?
Dynamic pricing provisions may vary the price payable by reference to an underlying index, which may shift in response to a tariff, or they may build-in formulae to adjust prices by reference to an increase in the cost of supply, which could include the imposition of a tariff. These provisions may provide that price adjustments are time limited, subject to a maximum cap, or kick-in only once a cost threshold is exceeded.
What Contractual Levers Are Available?
Does the contract provide opportunities for the parties to require or request variations, to suspend performance, or even to terminate, in the event of tariffs or significant cost increases?
Surcharge
Surcharge pricing may allow a party to apply an additional fee beyond the original contract price, to cover a particular cost. End users will often be expected to pay increased prices for consumer goods affected by tariffs, and a similar principle may apply to business-to-business contracts if a clause permits a party to levy surcharges. As with dynamic pricing provisions mentioned above, these may be subject to threshold and time limits, and they may provide a unilateral right to adjust pricing, or trigger a renegotiation.
Change in Law
The contract may specify the consequences of a change in law after its execution. The clause would need to be examined to assess whether: a tariff could qualify as a change in law; it requires contractual adjustments or triggers a renegotiation; it allocates the consequent burden of additional cost of compliance; it addresses the ramifications of any delays caused, or even perhaps provides a right to terminate. Such a clause may only apply if the change in law requires that the contract be amended (for example, in order for it to remain compliant with the law that has changed), so whether a tariff could be said to require a variation or merely affect the economics of the arrangement could give rise to debate/dispute.
Force Majeure / Frustration
Is often the first thing that comes to mind when a significant event impacts a contract, but circumstances in which such a clause may be successfully utilised can be limited. There is no standalone doctrine of force majeure under English law, so step one is to see if there is such a clause. A force majeure clause is usually composed of two parts: the first lists a series of events considered to trigger the force majeure provisions, and the second determines the consequences, which may for example include a right to suspend performance temporarily and/or to give notice to terminate, if certain circumstances apply. Whether a tariff constitutes a force majeure event will depend on the clause wording.
Even if tariffs are specifically referenced, force majeure clauses can require that the triggering event make it legally or physically impossible to perform, rather than merely more expensive, and English caselaw indicates that such clauses will not generally be construed to extend to changes in economic circumstances. So, force majeure may not be an especially useful lever in respect of tariffs. That said, if the imposition of a tariff has knock-on consequences, such as a key component or ingredient becomes temporarily unavailable rendering it impossible to manufacture a product, there may be better prospects of force majeure responding to assist.
Absent a force majeure clause, parties to English law contracts sometimes consider the doctrine of frustration (discharging a contract when an unforeseen event makes the contract incapable of being performed), though the English courts have consistently held that increased costs or reduced profitability will not be sufficient to frustrate a contract – so unless the impact of a tariff is so extreme as to create impossibility, it is unlikely to assist.
MAC / Hardship
Is there a “material adverse change” (MAC) or a hardship provision? MAC clauses may allow a party (e.g. a buyer in an acquisition) to renegotiate or withdraw from a transaction if a certain event occurs which has a material negative impact. The potential applicability and effect of the clause would need careful consideration in each case. It may list specific triggering events, refer more generally to any matter which has a materially adverse effect, or incorporate carve-outs that may prevent tariffs from being considered a relevant event. What consequences are specified, and does it trigger a renegotiation or provide a right to terminate or withdraw?
Alternatively, there may be an economic hardship clause, permitting a party to trigger a renegotiation if something occurs making performance significantly more difficult / financially onerous (though not impossible). Carefully defining what constitutes “hardship” will be important, as this may be an area ripe for dispute when something drastic occurs. Hardship clauses are not especially common in English law contracts, though sometimes appear in cross-border long-term supply relationships, or where markets may be volatile.
Change Control / Variation
some longer-term or complex contracts may have a prescribed process to propose, evaluate, negotiate in good faith, and implement changes to contract economics following a change to the scope of work or a cost increase for example.
The boilerplate provisions in many contracts incorporate a variation clause expressly permitting contract amendment by agreement between the parties, and parties are generally free to agree and implement variations to their contracts in any event (subject to any express restrictions in the contract).
Their utility can be limited where they do not specify what changes should be made on the occurrence of a triggering event, constitute only an “agreement to agree”, or provide no more than an option to negotiate, though incorporating an obligation to negotiate in good faith may be more helpful than nothing at all. In certain circumstances (such as where the parties have a particularly strong desire to continue working together, or where all parties find themselves similarly impacted by an event), a mutually agreeable change control or variation clause may assist to achieve a commercial resolution. That being said, where a collaborative relationship persists despite challenging circumstances, the parties may elect to vary the underlying agreement regardless of any express variation process. It would be extremely unusual for a commercial agreement to prohibit its parties from amending the agreement in writing executed by all parties.
Termination
If nothing sufficiently reduces the damage that will be done by continuing to perform, looking at contract termination possibilities may be the only option.
Some of the provisions mentioned above may allow notice of termination to be given if certain circumstances have arisen. If not, does the contract permit termination for convenience by giving a period of notice? Where such a right exists, it may however be accompanied by exit costs and these should be balanced against the costs associated with the tariff to ascertain which route makes most economic sense. Or has the imposition of the tariff brought about a breach of the contract sufficiently serious to warrant a termination – for example, if the tariff brings about a failure to supply or a refusal to order, accept delivery or pay – whether under a provision allowing notice of termination to be given in the event of a material breach or under the common law for repudiatory breach?
Comment
Scope for complex contractual disputes abound: contrasting interpretations of contractual provisions; whether they are enforceable; whether a clause encompasses a particular event; whether that event has occurred; can US tariffs be classified as “unforeseen” events when they featured so prominently in the election campaign?; has a force majeure event occurred?; if so, has the obligation become impossible (not just expensive) to perform?; what constitutes a material adverse change or a hardship?; is a party engaging in negotiations in good faith?; has a right to terminate arisen?; whether the tariff has brought about a breach of contract; does a breach give rise to a right to terminate under the contract or English common law? And these are just a number of examples arising from the concepts considered above.
The firm’s Commercial Disputes and International Arbitration lawyers regularly assist clients seeking to rely on, or challenge an opponent’s reliance on, the types of levers discussed above, and with resolving any complex contractual disputes arising. The team works closely with our international trade team, which is advising our global clients in real-time as the trade landscape continues to shift.
We noted above that the availability and utility of these rights and levers will be contract clause and context specific, and the wording of each provision will be very important. Do your supply chain contracts include some or all of the levers you need, and will they operate as you would like?
There is a delicate balance to be struck between incorporating levers for sufficient flexibility and allowing the parties to navigate their business through unexpected and significant disruptive events (such as tariffs), whilst at the same time maintaining levels of contractual certainty that may be required to justify investment in a relationship, and so that everything is not forever up for renegotiation. Our commercial contracts and other lawyers assist clients to assess the context-specific strategic benefits of these levers, advising on the drafting, negotiation and incorporation of such provisions. Ultimately, it is about tailoring the balance between flexibility and certainty to the specific industry and business needs of our clients in order to future proof their commercial relationships.
Tariffs and Alcohol Production Contracts: The New Trade Landscape
Since early 2025, U.S. alcohol manufacturers have found themselves on the frontlines of a fresh wave of trade disruptions. With the “Liberation Day” tariffs, core inputs such as cans, bottles, grain, labels, barrels are seeing their prices rise. For producers using imported goods, relying on contract production, or alternating proprietorship relationships, these cost shifts are no longer theoretical.
Craft alcohol manufacturers operate on thin margins and often lack leverage in global supply chains. For years, flexible terms and handshake understandings filled the gaps. But in today’s trade environment, producers need to tighten up their contracts. This starts with how manufacturers manage tariff risk.
Force Majeure Provisions are Usually Inapplicable
It’s a common misconception that rising costs from tariffs are a “force majeure” event. They’re not. Force majeure covers “acts of God” such as hurricanes, pandemics, and labor strikes; the kinds of events that make performance impossible. Tariffs, by contrast, just make performance more expensive. Courts generally do not excuse a party from paying or performing because of an unfavorable cost shift. Unless your force majeure clause expressly covers tariffs or government duties (and most don’t), you’re on the hook. This is why producers need a different set of tools, and that comes through good contract drafting.
Tighten up Your Contracts
To keep your margins intact and your relationships healthy, you need proactive language that deals with tariffs head-on. Many producers are now reworking their contractual agreements like alternating proprietorships and contract production deals—to include specific language that allows for tariff surcharges. These provisions enable the host producer or manufacturer to pass on new tariffs as a separate line item. Other agreements use broader “change in law” provisions to trigger pricing adjustments if newly enacted duties or government actions materially alter production costs. These mechanisms function quite differently from general hardship or material adverse change (MAC) clauses. While hardship clauses typically permit renegotiation in response to unforeseen circumstances, they often lack enforceable standards. Without clear financial thresholds or defined triggers, a court may still enforce the original pricing. By contrast, tariff surcharges and change-in-law provisions directly allocate costs and give parties a reliable structure for managing increases without creating ambiguity.
Even simple contractual language can go a long way. For instance, a sentence reserving the right to apply a “tariff surcharge equal to any new or increased import duties imposed after the effective date” keeps pricing transparent and ensures both sides know where they stand. Likewise, a well-drafted change-in-law clause can provide a formal mechanism for renegotiating terms in response to legislative or administrative actions—such as executive orders or international trade measures—that impact the cost of inputs.
In the alternating proprietorship and contract brewing contexts, tariff risk deserves even more attention. These agreements often require the host to secure and purchase certain ingredients and materials used in production. That includes imported items like glass, barrels, malt, specialty grains, or fruit. If tariffs are imposed on these goods during the term of the agreement and the contract is silent, the host may be left to “eat” those additional costs. Sometimes these agreements allow only for annual cost increases. Given the volatility of the new tariff policies, that’s not a sustainable model. For this reason, these agreements should explicitly state that the host is permitted to pass along any new or increased import duties associated with ingredients or materials sourced on behalf of the tenant.
Tariffs may go up or down, but what shouldn’t fluctuate is your contract’s ability to handle them. Rather than reaching for force majeure clauses ill-suited to cost increases, producers should plan ahead by including express surcharge rights, price adjustment mechanisms, and change-in-law protections. This way, if tariff rates spike again, your production doesn’t grind to a halt — and neither does your profit margin.
Remember, well-drafted agreements don’t just assign risk; they preserve relationships. When the rules of trade change over a single tweet, the best defense is a well-drafted contract.
Judge Jay Lobrano Appointed Local Tax Judge at the Board of Tax Appeals
On May 23, 2025, Louisiana Governor Jeff Landry appointed Francis J. (Jay) Lobrano as the Local Tax Judge of the Louisiana Board of Tax Appeals to complete the term of outgoing Local Tax Judge, now Louisiana Supreme Court Justice Cade Cole.
Judge Lobrano has served as the Chairman of the Board since March of 2022, and has served as a member of the Board since April 2016. In his new role, Judge Lobrano will preside over all local tax matters pending at the Board, including sales and use tax disputes between Parish tax administrators and taxpayers, as well as legality challenges involving property tax assessments.
Judge Lobrano will still sit as the Chairman of the full Board, that hears tax matters involving state tax matters.
Open File0.17MB
Should Miller be Set Aside? Observations from a Recent U.S. Supreme Court Decision Regarding a Trustee’s Power to Set Aside Fraudulent Transfers
The U.S. Supreme Court recently decided United States v. Miller, which resolved a circuit split over whether a trustee could avoid federal tax payments under section 544(b) of the United States Bankruptcy Code.[1] In this case, a trustee utilized section 544(b) to claw back tax payments under Utah’s state fraudulent transfer statute. Ordinarily, an action under Utah law against the federal government would be barred by sovereign immunity; however, section 106(a) of Bankruptcy Code contains a waiver of sovereign immunity with respect to section 544(b). Despite this, the Supreme Court held that the sovereign immunity waiver under section 106(a) only applies to section 544 itself, and not to the state-law claims “nested” within the statute.
Background
The underlying facts of the case concerned a Utah-based transportation company, All Resort Group, which became insolvent in 2013 following financial struggles and the misappropriation of company funds by two of its shareholders. In 2014, these shareholders transferred $145,000 of company funds to the IRS to pay for their personal income tax obligations. In 2017, All Resort Group filed for bankruptcy. Shortly thereafter, the trustee sued the United States under section 544(b) seeking to avoid the 2014 tax payments as fraudulent transfers under Utah state law. The United States argued that sovereign immunity prevented the trustee’s cause of action under Utah law, while the trustee argued that section 106(a) waived the government’s sovereign immunity with respect to section 544(b). The parties cross-moved for summary judgment. The Bankruptcy Court for the District of Utah entered judgment for the trustee, holding that sovereign immunity did not preclude the trustee from suing because of the waiver under section 106(a). The District Court and the Tenth Circuit affirmed the Bankruptcy Court’s decision. This further entrenched a circuit split where the Fourth and Ninth Circuits had previously sided with a trustee, while the Seventh Circuit had sided with the government—and the Supreme Court granted certiorari.
Avoidance Powers
Under chapter 5 of the Bankruptcy Code, trustees have avoidance powers that permit a trustee to recover certain assets for the benefit of the bankruptcy estate. There is a strong policy justification for these avoidance powers, because they enable trustees to equalize distributions among creditors, and prevent debtors from offloading assets to preferred creditors on the eve of bankruptcy. Specifically, section 544(b) permits a trustee to “avoid any transfer of an interest of the debtor . . . that is voidable under applicable law by a creditor holding an unsecured claim.” 11 U.S.C. § 544(b)(1). State laws, like the Uniform Voidable Transfers Act and the Uniform Fraudulent Transfer Act, provide a common basis for a trustee to invoke section 544(b) and generally provide creditors with a cause of action to invalidate fraudulent transfers.
The Interplay between Sections 106 and 544
The crux of the dispute involved how broad section 106(a) of the Bankruptcy Code may be. The relevant portions of section 106(a) read: “sovereign immunity is abrogated as to a government unit to the extent set forth in this section with respect to . . . (1) section[] 544,” and “(5) [n]othing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.” The trustee argued that section 106 provided a broad waiver of sovereign immunity for both section 544(b) and the “applicable law” invoked by this section, whereas the government argued the waiver applied only to section 544(b) itself and did not extend to the “applicable law” nested within section 544(b). According to the majority, the government had the better reading.
The Supreme Court explained that section 544(b) requires a bankruptcy trustee to identify an actual creditor who could have set aside the transaction under applicable law. If there is no actual creditor who could have set aside the transaction, then the trustee is prohibited from avoiding the transaction. In this case, no actual creditor would be able to avoid the federal tax payment under Utah law (because of sovereign immunity), and therefore, section 106(a) cannot provide a backdoor into creating liability for the government. The Court explained that the legislative history bolsters this reading, quoting the relevant House and Senate Reports, which provide “the policy followed here is designed to achieve approximately the same result that would prevail outside of bankruptcy.” The Court cited other sovereign immunity precedents for the proposition that sovereign immunity waivers are typically jurisdictional in nature and concluded that construing section 106(a) as applying to and modifying the elements of section 544(b) would be a “highly unusual understanding of sovereign-immunity waivers.” The Court also explained that the text of section 106(a)—that it does not “create any substantive claim for relief or cause of action not otherwise existing”—plainly refutes the argument that section 106(a) extends to both section 544(b) and its elements (the underlying “applicable law”).
In sum, the Supreme Court held that while section 106(a) abrogates sovereign immunity for causes of action under section 544(b), it did not abrogate sovereign immunity under the state-law claim that supplied the “applicable law” under section 544(b).
The Dissent
In a short dissent, Justice Gorsuch reasoned that because the parties did not dispute that a fraudulent transfer claim existed under Utah law, the “applicable law” element of section 544(b) was satisfied, even though the defendant was the federal government. In Justice Gorsuch’s view, sovereign immunity would operate as an affirmative defense to such a suit, but that here, the waiver in section 106(a) prohibited the government from raising this defense. Justice Gorsuch reasoned that applying the section 106(a) waiver to the “applicable law” did not “modify the elements” of 544(b) and concluded that trustees should be permitted to avoid fraudulent transfers to the federal government.
Observations and Takeaways
The majority opinion drives the point home that the key analysis of section 544(b) is whether an actual creditor could prevail against a party outside of bankruptcy, despite the term “actual” not appearing in section 544(b)’s text. Here, since an actual creditor would not prevail against the federal government outside of bankruptcy because of sovereign immunity, the Trustee could not maintain a claim. This ruling will provide guidance to attorneys engaged in disputes even outside of the sovereign immunity context, as it reinforces that a trustee cannot succeed in bringing an avoidance action pursuant to state law if an existing creditor cannot prevail under that law.
Interestingly, the Supreme Court’s holding can be read to be in direct tension with the fundamental principle of bankruptcy that creditors in equal positions should be treated equally—meaning, in this context, that prepetition transfers to preferred creditors should be prohibited. Indeed, preventing these and making such transfers also available to other creditors is the entire purpose of a trustee’s avoidance powers.
[1] U.S. v. Miller, 604 U.S. ___ (2025).
California Proposes Further Modifications to Market-Based Sourcing Regulations
On May 20, 2025, the California Franchise Tax Board (FTB) issued its Second Notice of Modifications to Proposed Regulation Section 25136-2, which would affect how businesses source sales of services and intangible property for California income tax purposes.
On Jan. 6, 2025, the FTB released initial amendments to Proposed Regulation Section 25136-2. Following a public hearing on Jan. 30, 2025, where stakeholders provided feedback, the FTB issued a second round of amendments in response to the comments received.
Key Substantive Changes in the May 20 Amendments
Presumptions and Substantiation Rules – On May 20, 2025, the FTB amended Proposed Regulation Section 25136-2 to clarify four presumptions for sourcing service revenue to California: when the service relates to (1) real property located in California, (2) tangible personal property delivered in California, (3) intangible property used in California, or (4) individuals physically present in California at the time of service. The FTB clarified these presumptions may be rebutted by a preponderance of evidence, including contracts or business records maintained in the ordinary course.
Various examples were modified for clarity in response to taxpayers’ comments.
Administrative and Miscellaneous Changes in the May 20 Amendments
Updated Applicability Date – The effective date of these amendments has been shifted to apply to taxable years beginning on or after Jan. 1, 2026, providing businesses additional time to comply.
Terminology Standardization – Consistent use of “benefit of the service” language throughout.
The FTB did not issue a notice for an additional public hearing in response to the recent modifications. Due to the limited scope of these changes, a further hearing may not be scheduled. After the comment period concludes on June 5, 2025, the FTB can submit the regulation to the Office of Administrative Law (OAL) for review if no comments are received. The OAL may either approve or disapprove the proposal. If disapproved, the FTB must address the identified issues and resubmit the regulation for review.
How Will Federal Bills Eliminating Tax on Tips and Overtime Impact Employers?
Takeaways
The House and Senate bills differ in key ways, including that while the House bill would provide a deduction on tips and overtime earnings, the Senate bill provides a deduction for tips only.
It remains to be seen which measures will pass in Congress. President Trump is expected to sign a bill that provides some sort of tax relief on tips or overtime pay.
Employers could consider restructuring compensation policies.
Tax breaks on overtime pay and tipped earnings passed the House on May 22, 2025, as part of the “One Big Beautiful Bill Act” (H.R. 1). The tax deductions provided under the sprawling reconciliation bill would be temporary, however, making these earnings deductible only for tax years 2025 through 2028.
H.R. 1 is part of the broader reconciliation package being hammered out in Congress. The legislation still needs to be approved by the Senate, which recently passed its own standalone bill providing a permanent tax deduction on tipped earnings. The Senate bill does not include tax relief on overtime pay (although several other Senate bills to provide a tax break on overtime are pending).
Both the House and Senate bills restrict the tax deduction to workers earning less than $160,000 per year. That is the current IRS threshold for defining “highly compensated employees” under IRC section 414(q)(1)). This is a different standard than the Department of Labor’s criteria for defining the “highly compensated employee” exemption under the Fair Labor Standards Act (FLSA). Also, under both bills employees’ tips and overtime pay would still be reportable and remain subject to payroll taxes.
There are key differences between the House and Senate bills, however. It remains to be seen which (if either) will make its way to the president’s desk. The reconciliation bill must now go before the Senate, where several Senate Republicans have indicated their intention to push for significant changes before passing the bill. Lawmakers aim to bring the bill to a vote by August. President Donald Trump has expressed his support for eliminating taxes on tips and overtime. He is expected to sign such a measure if passed by Congress.
“One, Big, Beautiful Bill”
The reconciliation package creates a temporary deduction from gross income for premium pay for overtime hours worked. The deduction applies only to compensation paid in excess of an employee’s regular rate of pay, as required under Section 7 of the FLSA. There is no cap on the amount of overtime earnings that an employee may deduct.
H.R. 1 also creates a temporary deduction from gross income for tips earned by workers — both statutory employees and self-employed independent contractors — in “traditionally and customarily tipped industries,” typically the hospitality industry (restaurants and hotels) but there are other businesses where tips are common (such as barber shops and hair salons). The legislation extends an employer tax credit for Social Security taxes paid on tips, currently applicable only to food or beverage service employees, to include tips customarily earned by employees providing beauty services such as hair care, nail care, and spa treatments.
To deter improper reclassification of regular pay as tips to qualify for the deduction, the treasury secretary would be directed to provide, within 90 days of enactment, a list of industries where tips have customarily been earned on or prior to Dec. 31, 2024.
A “qualified tip” is one paid voluntarily by the customer or client, not subject to negotiation. Earnings from mandatory service charges assessed automatically to customers would not be deductible.
Businesses would need to separately report tips and overtime earnings on employees’ W-2 forms and, for non-employees, report the portion of payments that are designated as tips, a requirement that also extends to “third party settlement organizations” such as gig economy companies.
Senate No Tax on Tips Bill
The freestanding Senate bill would provide tipped employees with a permanent tax deduction of up to $25,000 per year for qualified tips. (H.R. 1 does not cap the amount of tipped income that workers can deduct.)
Qualified tips would include tips received by employees in connection with delivering or serving food or beverages for consumption (if tipping is customary), and tips earned from providing beauty services (if tipping is customary). Like H.R. 1, the Senate measure extends the employer tax credit to beauty service establishments.The Senate measure also requires the treasury secretary to provide a list of occupations entitled to the deduction, namely, industries that “traditionally and customarily received tips on or before December 31, 2023.”
The Senate bill provides a tax deduction for tipped employees only; it does not extend the deduction to independent contractors.
The Senate-approved No Tax on Tips Act (S. 129) passed by unanimous consent on May 20, 2025, and now heads to the House for consideration.
State Laws
The pending federal bills would allow deductions from federal income taxes only. Several state legislatures in both blue and red states have introduced bills to create a deduction from state and local taxes for tips or overtime pay. These provisions vary. Some measures, for example, would eliminate tax on cash tips but retain the tax on credit card tips. Some impose affirmative reporting requirements on employers.
Alabama currently exempts hourly workers’ overtime pay from state income tax and withholding. The Alabama legislation was a temporary inflation relief measure passed for the tax year beginning Jan. 1, 2024. It was extended last year to exempt overtime pay earned through June 30, 2025.
Impact on Employers
With a tax deduction on overtime pay, employees would likely be more willing to work overtime or take on extra shifts. Ironically, Congress enacted the FLSA’s overtime provisions in 1938 to prevent overwork and to spread employment to more workers and reduce unemployment. To accomplish this, the FLSA discouraged employers from requiring employees to work overtime by making it more costly. Times have changed, and the ability to earn overtime wages not subject to tax may assist with reducing chronic staffing shortages in healthcare and other industries. This could result in higher overtime costs, particularly for public employers whose workers may be less willing to take compensatory time in lieu of overtime, as the FLSA allows.
Employers might restructure compensation to provide employees more take-home pay without incurring higher payroll costs by reducing pay for non-overtime hours and permitting more overtime work that is tax-free — a win for employers and employees. No tax on overtime could also result in requests from employees to be reclassified as non-exempt because more of their earnings will be tax-free. An exempt employee earning $75,000, for example, where the full wages are subject to tax, might prefer to be a non-exempt employee and earn $50,000 in regular wages and $25,000 in overtime, not subject to income tax. Employers may be hesitant to undertake drastic changes to their pay practices, however, if the tax benefits are short-lived.
As for no-tax-on-tips, the hospitality industry will feel the biggest impact if the measure is passed. Tipped workers will benefit by having most of their earnings in tips. As such, the deduction would deflate the ongoing efforts of worker organizations that have been advocating at the state and local level to eliminate use of the tip credit and efforts by some employers to eliminate all tipping at restaurants and use service charges or higher prices instead.
The tax deduction also could be a boon for recruitment, raising the appeal of tipped work and easing the strain of ongoing labor shortages in the industry. In states that permit back-of-the-house workers (such as cooks) to participate in a tip pool (permitted under federal law if no tip credit is taken), the tax deduction may also benefit kitchen workers. But, in other states, it may widen the asserted unfairness between servers and kitchen staff regarding compensation. Hospitality employers may need to consider a review of their compensation practices as the favorable tax treatment for tips will increase the divide between the earnings of tipped and non-tipped workers.
One Big Beautiful Bill Passed by the House
On Thursday May 22, the House of Representatives passed the One Big Beautiful Bill Act (H.R. 1, hereafter the “Bill”). The Bill will now be considered by the U.S. Senate.
The following is a summary of some of the key provisions that have been changed from the version that passed the House Ways and Means Committee:
The SALT Deduction Cap Has Been Raised. The Bill raises the SALT cap from $10,000 to $40,000 starting in 2025. The previous version of the Bill would have raised the SALT cap to $30,000. The deduction would be phased out for taxpayers with modified adjusted gross income of over $250,000 for single taxpayers and $500,000 for married taxpayers. For tax years between 2026 and 2033, the limits would be increased by 1% per year, and the cap would remain at the 2033 amount for subsequent tax years after 2033.
BEAT Rate. The Bill increases the base-erosion and anti-abuse tax (“BEAT”) rate under Section 59A from 10% to 10.1%. The previous version of the Bill repealed the increase to 12.5%.
FDII and GILTI. The Bill lowers the global intangible low-taxed income (“GILTI”) inclusion deduction amount from 50% (an effective rate of 10.5%) to 49.2% (an effective rate of 10.668%) and the foreign-derived intangible income (“FDII”) deductions from 37.5% (an effective rate of 13.125%) to 36.5% (an effective rate of 13.335%). The Bill as originally written would have made permanent the reductions under the Tax Cut and Jobs Act of 2017.
Itemized Deductions. In addition to the proposed itemized reduction limits that were in the previous draft of the Bill, the Bill adds a second prong, which effectively imposes an additional 5% tax on income equal to a taxpayer’s SALT taxes. The original draft of the Bill repealed the Pease limitation and effectively imposed an additional 39% bracket equal to the taxpayer’s itemized deductions in excess of the SALT deduction.
Proposed 501(p) Expansion Removed. The original draft of the Bill would have expanded Section 501(p) of the Code, which permits suspension of the tax-exempt status of an organization, to any organization deemed a “terrorist supporting organizations” (from just “terrorist organizations” under current law). The provision was not included in the final version of the Bill passed by the House.
Royalties Received by Tax-Exempts for Licensing Names/Logos. The original draft of the Bill would have treated any royalties received by a tax-exempt organization from a sale or license of its name or logo as “unrelated business taxable income,” which would be taxable income for the tax-exempt organization. This provision was not included in the final version of the Bill passed by the House.
Key provisions in the final passed Bill include:
Business Provisions:
163(j) Deductions. The definition of “adjusted taxable income” under section 163(j) is based on EBITDA (which is more favorable for taxpayers than EBIT under current law) for taxable years 2025 to 2028.
Section 199A. The deduction for qualified business income under Section 199A is increased to 23% (from 20%) for an effective rate of 28.49% (from 29.6%) and made permanent. Section 199A is also expanded to apply to the portion of dividends representing net interest income paid by a “business development company” (“BDC”) taxable as a regulated investment company. This expansion will reduce the effective rate of interest income earned through a BDC from 37% to 28.49% and will increase the attractiveness of BDCs as vehicles for credit funds. Dividends from real estate investment trusts (“REITs”) have had the benefit of Section 199A deductions.
GILTI/FDII Inclusion Deductions Made Permanent. Global intangible low-taxed income (“GILTI”) inclusion deduction amount is lowered from 50% (an effective rate of 10.5%) to 49.2% (an effective rate of 10.668%), and the foreign-derived intangible income (“FDII”) deductions is lowered from 37.5% (an effective rate of 13.125%) to 36.5% (an effective rate of 13.335%).
BEAT Made Permanent at Lower Rate. The current tax rate on the base-erosion and anti-abuse tax (“BEAT”) under Section 59A is increased from the current rate of 10% to 10.1% (instead of increasing to 12.5% after 2025).
Qualified Production Property Deductions. Taxpayers can deduct 100% of “qualified production property” costs immediately for certain newly constructed or acquired nonresidential real property in the United States. These properties must be in connection with the manufacturing, agricultural and chemical production, or refining of a qualified product.
Limitation for Qualified Depreciable Property Deductions. The deduction limitation from qualified depreciable property as business assets is increased to $2.5 million (from $1 million). The phase-out threshold is raised from $2.5 million to $4 million.
Bonus Depreciation for Qualified Property. The bonus first-year depreciation deduction under Section 168(k) is extended through 2029 (2030 for longer production period property and certain aircrafts). Under the Bill, taxpayers can claim 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, and before January 1, 2030 (January 1, 2031, for certain qualified property with a longer production period, as well as certain aircrafts).
Opportunity Zones Reestablished. A second round of Opportunity Zones (“OZs”) are established for taxable years 2027 through 2033, with similar but modified benefits in temporary deferral of capital gains taxes, basis step-up, and exclusion of taxable income on new gains. The first round of OZs is set to expire in 2026. There is a greater focus on rural areas, such as the offer of higher basis step-up of 30% for investments in qualified rural opportunity funds (as opposed to 10% from the first round of OZs).
Deduction for Excessive Employee Compensation. An aggregation rule is added to the Section 162(m) limitation for executive compensation so that compensation paid by all entities within a covered corporation’s “controlled group” is counted for purposes of the $1 million limit.
Limitation of Amortization Deductions for Sports. The 15-year amortization of a professional sports franchise and related intangible assets that are acquired in an acquisition of interest (or assets) of a team is limited to 50% of the adjusted tax basis of those assets. This change is effective for assets acquired after the date of the enactment of the tax legislation.
Excess Business Losses Extended. The limitation on excess business losses for noncorporate taxpayers is made permanent. The maximum amount of business loss taken in a year is based on an inflation adjusted threshold, with $313,000 for single filers and $626,000 for joint filers in 2025. The Bill also changes the manner in which the excess business loss is calculated by including prior year’s excess business losses in calculating the current year’s excess business loss limitations. Under the current rules, excess business losses are treated as net operating losses for future years and are not included in determining the future years’ excess business loss limitations. This change further limits a noncorporate taxpayer’s ability to use business losses against other income of the taxpayer.
Charitable Donation Limitation. A C corporation’s charitable contributions are subject to a 1% floor.
Increased Taxes on Residents of Countries Imposing a UTPR. The individuals, entities, and governments of countries that impose an undertaxed profits rule (“UTPR”), digital services tax, diverted profits tax, and, (subject to regulations) an extraterritorial tax, discriminatory tax, or any other “unfair” foreign tax enacted with a public or stated purpose that the tax will be economically borne, directly or indirectly, disproportionately by U.S. persons are subject to an increased rate of U.S. taxes, generally increased by 5% for each year of the unfair foreign tax up to 20% maximum, and the governments of such countries are denied benefits under Section 892 (which generally exempts eligible government entities from U.S. withholding taxes on certain types of investment income).
Clean Energy Credits Rolled Back. The Bill proposes accelerated termination of clean energy tax incentives put in place under the Inflation Reduction Act. For example, it would terminate clean electricity tax credits for wind, solar and battery storage projects by 2028 and require projects to begin construction within 60 days of the Bill’s passage.
Taxable REIT Subsidiary Asset Test. Taxable REIT subsidiaries may represent 25% of the value of the REIT’s total assets (rather than 20% under current law).
COVID-related Employee Retention Tax Credits (“ERTC”). The Bill increased the penalty for aiding and assisting the tax liability-related understatements by a COVID ERTC promoter. The penalty is the greater of $200,000 ($10,000 in the case of a natural person) or 75% of the gross income derived by such promoter with respect to the aid and assistance of such understatement. A penalty of $1,000 is applied to COVID ERTC promoters that do not comply with due diligence requirements with respect to a taxpayer’s COVID ERTC eligibility.
No Carried Interest Provision. There is no provision affecting carried interest.
Tax-Exempt Provisions:
Increased Excise Tax on Private University Endowments and Private Foundations. The current 1.4% excise tax on net investment income of private colleges and universities is replaced with a tiered system based on an institution’s “student-adjusted endowment”. For such schools with a student-adjusted endowment of more than $2 million, the excise tax is increased to 21%. The scope of “net investment income” would also be expanded. Additionally, the current 1.39% excise tax on private foundations is replaced with a tiered system based on the foundation’s total size of assets. For purposes of calculating a private foundation’s assets for purposes of this test, the assets of certain related organizations are treated as assets of the private foundation. The excise tax rate would be 5% for private foundations with gross assets of at least $250 million but less than $5 billion, and 10% for private foundations with gross assets equal to or more than $5 billion.
UBTI for qualified transportation fringe benefits. UBTI is increase by any amount incurred for any qualified transportation fringe benefit or any parking facility that is not directly connected to any unrelated trade or business that is regularly carried on by the organization.
Tax on Excessive Employee Compensation. The $1 million limit applies to any employee or former employee of a tax-exempt organization, and for purposes of determining the $1 million limit, all compensation paid to a related person (including a related taxable entity) is included. The change applies to taxable years beginning after December 31, 2025.
Individual Provisions:
Ordinary Income Tax Rates. The maximum rate of 37% for individuals is made permanent.
Standard Deductions. For tax years of 2025 to 2028, the standard deduction is increased to $26,000 for joint filers (from $24,000), to $19,500 for head of household filers (from $18,000), and to $13,000 for all other filers (from $12,000).
Personal Exemption Elimination. The personal exemption is repealed permanently.
Section 199A. As mentioned above, the deduction for qualified business income is increased to 23% for an effective rate of 28.49% and made permanent. Individuals may also benefit from these lowered effective rates for dividends representing net interest income from BDCs.
Itemized Deduction Limits. Itemized deductions (which were disallowed under the TCJA) are allowed and made permanent. The Bill repeals the Pease limitation and creates a two-pronged reduction. The allowable itemized deduction is reduced by 5/37 of the lesser of (i) the amount of the taxpayer’s SALT taxes or (ii) so much of the taxable income of the taxpayer for the year (without regard to the proposal and increased by the amount of otherwise allowed itemized deductions) as exceeds that dollar amount at which the 37% tax rate bracket starts for such taxpayer. The effect of this change is to impose an additional 5% tax on income equal to a taxpayer’s SALT taxes. The itemized deduction is secondly reduced by 2/37 of the lesser of the (i) amount of itemized deductions otherwise allowed for the year that exceeds the allowed SALT deduction or (ii) so much of the taxable income of the taxpayer for the year (without regard to the proposal and increased by the amount of otherwise allowed itemized deductions) as exceeds that dollar amount at which the 37% tax rate bracket starts for such taxpayer. The effect of this second prong is to impose an additional 39% bracket equal to the taxpayer’s itemized deductions in excess of the SALT deduction.
SALT Deduction Cap Increased; SALT Denied for Various Service Professionals. The SALT deduction cap is made permanent and raised to $40,000, going down to $10,000 at a rate of 20% beginning at income of $250,000 for single filers and $500,000 for joint filers. For tax years between 2026 and 2033, the limits would be increased by 1% per year, and the cap would remain at the 2033 amount for subsequent tax years after 2033. Pass-through entity tax (“PTET”) deductions are denied for individuals who perform services in the fields of health, law, accounting actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing services, investment management services, and trading or dealing in securities, partnership interests, or commodities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Therefore, under the Bill, asset managers who are partners in partnerships will not be permitted to deduct their share of state and local taxes. In addition, the Bill disallows deductions for taxes imposed on partnerships and S corporations (such as the New York City unincorporated business tax).
Deductions for Tips. Taxpayers earning $160,000 or less in 2025 (adjusted in the future for inflation) are permitted a deduction for cash tips from an occupation that “traditionally and customarily received tips” to the extent the gross receipts of the taxpayer from the trade or business of receiving the tips exceeds the sum of the cost of goods sold allocable to the receipts and other expenses, losses, or deductions properly allocable to those receipts. This deduction is allowed for tax years 2025 through 2028.
Overtime Compensation Deductions. Deductions are allowed for overtime compensation for itemizers and non-itemizers for tax years 2025 through 2028.
Deductions for Car Loan Interest. Deductions (up to $10,000) of interest payments on car loans from 2025 through 2028. These deductions are allowed for itemizers and non-itemizers. The deduction phases out for single taxpayers earning $100,000 ($200,000 for joint returns).
Expansion of Childcare Credits. Employer-provided childcare credits are further expanded from 25% to 40% (and up to 50% for eligible small businesses). The maximum annual credit is also increased from $150,000 to $500,000 for employers (up to $600,000 for eligible small businesses).
Family and Medical Leave Credits Expanded. Employer-provided paid family and medical leave credits are expanded by giving employers the option to choose between credit paid for wages paid during the employee’s leave or credit for insurance premiums paid on policies that provide paid leave. The family and medical leave cannot be already mandatory from state and local laws.
Adoption Tax Credits. Up to $5,000 of adoption tax credits are refundable, which makes the credit available to lower-income families who do not earn sufficient income to pay tax.
Scholarship-Granting Tax Credits. Tax credits are allowed for contributions by individuals to scholarship-granting organizations. The credits may not exceed the greater of 10% of the taxpayer’s adjusted gross income for the taxable year, or $5,000.
Expansion of Qualified Tuition Programs. Qualified tuition programs that are exempt from federal tax (i.e., “529 accounts”) are expanded to include tuition and material expenses for elementary, secondary, and home school expenses. Qualified higher education expenses are also expanded to include tuition and expenses in connection with a recognized postsecondary credential program.
Extension of Increased Alternative Minimum Tax Exemption from TCJA. The increased exemptions and increased exemption phase-outs from the individual alternative minimum tax are made permanent.
The $750,000 Limitation on Qualified Residence Interest Deduction Is Made Permanent. The $750,000 limitation on deductions for qualified residence interest is made permanent.
Personal Casualty Loss Relief Further Extended. The requirement that personal casualty loss deductions exceed 10% of adjusted gross income for taxpayers to benefit from deductions is waived for qualified disasters that occurred between December 2019 until 2025 (extended from 2020) and allows taxpayers to claim both a standard deduction and qualified disaster-related personal casualty losses.
Qualified Bicycle Commuting Reimbursements Are Taxable. Reimbursements of bicycle commuting expenses are subject to income tax. Before the TCJA, the reimbursements were not taxable.
Reimbursements for Personal Work-Related Moving Expenses Are Taxable. Before the TCJA, deductions were given to certain personal moving expenses for employment purposes and gross income did not include qualified moving expense reimbursements from employers. The deductions are permanently repealed, and the reimbursements are permanently taxable.
Student Loan Discharged on Death or Disability Made Tax-Free Permanently. Discharged student loans on the account of death or disability is not being taxable is made permanent.
Child Tax Credits Made Permanent. The child tax credit is made permanent, and the maximum child tax credit is temporarily increased to $2,500 (from $2,000) from 2025 to 2028 (subsequent years will be $2,000). Social security numbers for the child will be required to qualify for child tax credit benefits.
Creation of “Trump” Accounts. Trump accounts are tax-exempt trust accounts that can be created for U.S. citizens under age 18. The funds from the Trump accounts can be used for qualified expenses of the beneficiary such as higher education and first-time home purchases. The Bill provides a one-time $1,000 federal credit per eligible child born between 2025 and 2028, which will be deposited directly into the child’s Trump account.
Additional Authors: Robert A. Friedman, Martin T. Hamilton and Christine Harlow
New York’s Highest Court Defers to Tax Tribunal, Finds Sales Tax Exception for Information Service Providers Does Not Apply
A recent decision by the State of New York Court of Appeals (New York’s highest court), issued over a fiery and well-reasoned dissent, calls into question the continued viability of what has historically been an important exception to New York’s imposition of sales tax on otherwise broadly defined so-called “information services.” In the Matter of Dynamic Logic Inc., v. Tax Appeals Tribunal of the State of New York et al., 2025 NY Slip Op 02262 (N.Y. Apr. 17, 2025). New York’s current sales tax scheme, as enacted by the New York Legislature, is a tax on tangible property and a limited number of enumerated services mostly connected to the sale of tangible property. It may be time for the Legislature to step in to defend the sales tax scheme it has enacted, otherwise the state taxing authorities, with an assist from the courts, will continue to reinterpret New York’s sales tax scheme into a broad-based tax on services.
While an “information service” is broadly defined in New York as the service of “furnishing information” and includes “the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons,” New York law also provides for an exception to taxability when the information service involves “the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons….” NY Tax Law § 1105(c)(1).
Dynamic Logic Inc. (“Dynamic”) offers solutions to help its clients measure the effectiveness of their advertising campaigns and, specifically, at issue in the case was a solution offered by Dynamic known as AdIndex. Dynamic identified individuals who had been exposed to the client’s advertisements and then would survey those individuals along with a control group. The final deliverable was a report that Dynamic created for its client that included “survey data collected, an analysis of the ‘story’ the data tells, as well as client-specific ‘insights,’ ‘implications,’ ‘next steps,’ and ‘recommendations’ gleaned from the data.” One component of the report was a comparison of the client’s data “to broader market data” contained in a database maintained by Dynamic. Data collected for clients as part of the AdIndex solution would later be incorporated into the database where it would be “aggregated and anonymized” and become a part of the “broader market data” for use in future AdIndex reports.
On appeal, the parties agreed that the information at issue in the AdIndex reports was “personal or individual in nature,” but the Department of Taxation and Finance (“Department”) took the position, and the Tax Tribunal agreed, that the exception nonetheless did not apply because the information “was substantially incorporated into reports furnished to other people.”
The Court of Appeals first adopted a highly deferential standard of review stating that its job was only to determine whether the Tribunal’s decision was “rational” and “supported by substantial evidence.” The Court next found that the Tribunal’s decision had been “rational” because “every AdIndex report contains benchmark data, which, in turn, contains a meaningful amount of data generated from prior AdIndex reports.” While the Court acknowledged that the benchmark data was “a relatively small portion of each subsequent report[,] that reincorporation is qualitatively important to the analytical value of the report rendering it ‘substantial.’”
A powerful dissenting opinion found that the plain meaning of the exception, supported by the Department’s own regulation and its examples, “looks to whether the end product is substantially incorporated into reports furnished to others.” Here, there was never an instance where an AdIndex report for one client was substantially incorporated into the AdIndex report for another client. The dissent observed that by finding aggregated and anonymized background data is “substantially incorporated” into subsequent AdIndex reports because that background data adds “qualitative value” to the subsequent AdIndex reports, the Court’s interpretation “judicially nullifies the exclusion created by the [L]egislature.”
The Legislature should take note!
Beltway Buzz, May 23, 2025
The Beltway Buzz™ is a weekly update summarizing labor and employment news from inside the Beltway and clarifying how what’s happening in Washington, D.C., could impact your business.
SCOTUS: Wilcox to Remain Off NLRB. On May 22, 2025, the Supreme Court of the United States issued a decision blocking NLRB Board Member Gwynne Wilcox’s reinstatement to the NLRB while her challenge makes its way through the courts. The stay will remain effective through the appeals stage and until the Supreme Court declines to review the case or issues a decision on the merits.
House Passes Massive Tax Passage. Lawmakers in the U.S. House of Representatives this week passed a far-reaching tax and spending package by a narrow 215–214 vote. The bill would extend provisions of the 2017 Tax Cuts and Jobs Act, provide additional funding for national security and immigration enforcement, roll back green energy tax incentives, and add Medicaid work requirements. On the labor and employment policy front, the bill includes provisions to allow deductions for income earned as tips or overtime pay. Now it is the U.S. Senate’s turn, where some Republicans have expressed some skepticism about the bill, so any final legislation that the U.S. Congress may pass will likely be different than what the House passed this week.
Senate Says “Yes” to “No Tax on Tips.” In a surprise move, the U.S. Senate this week passed the No Tax on Tips Act (S.129). Democratic Senator Jacky Rosen (NV), a cosponsor of the bill, asked that the bill be passed via the Senate’s unanimous consent mechanism, and no one objected. Passage of a bill this significant in this manner is unusual. Here are the details:
The bill would allow individuals a 100 percent tax deduction on income from qualified tips, up to $25,000.
Individuals claiming the tip deduction must be employed “in an occupation which traditionally and customarily received tips,” as set forth in a pending list to be published by the secretary of the treasury.
The deduction is available to individuals earning $160,000 or less in 2025, with this amount being adjusted for inflation going forward.
Language in the Senate-passed No Tax on Tips Act is similar in concept to the provisions included in the tax package described above. However, there are some significant differences in the details. It is unclear at this time how this will be resolved, but some form of “no tax on tips” has a very good chance of being enacted in this Congress.
2024 EEO-1 Data Collection Opens, With Warning From Acting Chair. The U.S. Equal Employment Opportunity Commission’s (EEOC) 2024 EEO-1 Component 1 data collection opened this week (May 20, 2025) with covered employers having until June 24, 2025, to file. In a statement accompanying the announcement of the opening of the data collection, EEOC Acting Chair Andrea Lucas wrote, “Your company or organization may not use information about your employees’ race/ethnicity or sex—including demographic data you collect and report in EEO-1 Component 1 reports—to facilitate unlawful employment discrimination based on race, sex, or other protected characteristics in violation of Title VII.
House Committee Examines “Modern Workers.” On May 20, 2025, the House Committee on Education and the Workforce’s Subcommittee on Workforce Protections held a hearing entitled “Empowering the Modern Worker.” The hearing focused on the benefits of worker flexibility, practical problems associated with the “ABC” worker classification test (as embodied in California’s A.B. 5), and the value of portable benefits, as set forth in the Modern Worker Empowerment Act (H.R. 1319). The hearing follows on the heels of a March 25, 2025, hearing about the application of the Fair Labor Standards Act to the modern workplace.
DOL, MSHRC Nominees on the Move. On May 22, 2025, the Senate Health, Education, Labor, and Pensions (HELP) Committee advanced the following nominations en bloc by a party-line vote of 12–11:
Julie Hocker to serve as assistant secretary of labor and head the U.S. Department of Labor’s (DOL) Office of Disability Employment Policy
Marco Rajkovich to serve as a commissioner of the Mine Safety and Health Review Commission (MSHRC)
Wayne Palmer to serve as assistant secretary of labor for mine safety and health, leading the DOL’s Mine Safety and Health Administration
Henry Mack III to serve as assistant secretary of labor, leading the DOL’s Employment and Training Administration
The nominations now move to the Senate floor.
NLRB Acting GC Issues New Guidance on Settlement Agreements. On May 16, 2025, National Labor Relations Board (NLRB) Acting General Counsel William B. Cowen issued a memorandum entitled, “Seeking Remedial Relief in Settlement Agreements.” The memorandum follows on Cowen’s rescission of various memoranda issued by his predecessor that instructed NLRB regional offices to expand the scope of remedies in settlement agreements (e.g., reimbursement of car loan payments, letters of apology, etc.). Cowen’s latest memo provides regional directors with more discretion in approving settlement agreements, and it reminds them that they should seek make-whole relief in settlement agreements, but “should be mindful of not allowing our remedial enthusiasm to distract us from achieving a prompt and fair resolution of disputed matters.”
SCOTUS Permits Cancelation of Venezuela TPS. In an 8–1 order issued this week, the Supreme Court stayed a March 31, 2025, decision by a federal court to preliminarily block the U.S. Department of Homeland Security’s (DHS) January 28, 2025, notice of termination of the 2021 and 2023 Temporary Protected Status (TPS) designations for Venezuela. While both the Supreme Court’s order and U.S. Citizenship and Immigration Services’ (USCIS) TPS website are unclear as to the ruling’s impact on stakeholders, it appears that applicable dates for termination of the 2023 TPS designation reverts to April 7, 2025, while the 2021 TPS designation will remain in effect until September 10, 2025. Because the Supreme Court’s decision only concerns the lower court’s grant of a preliminary injunction, the underlying legal challenge to the TPS termination decision will continue.
Administration Pauses Enforcement of Mental Health Parity Regs. Last week, at the request of the U.S. Departments of Health and Human Services, Labor, and the Treasury, the U.S. District Court for the District of Columbia stayed a lawsuit challenging 2024 changes to regulations implementing provisions of the Mental Health Parity and Addiction Equity Act (MHPAEA). As a result, the departments issued a statement noting that they will not enforce the 2024 regulatory changes and will “reconsider the 2024 Final Rule, including whether to issue a notice of proposed rulemaking rescinding or modifying the regulation through notice and comment rulemaking.”
Memorial Day. This weekend, the Buzz will take time to remember the brave men and women who died in service to our country. We wrote about the cultural and legislative origins of Memorial Day several years ago.
Cardiac Monitors Found Subject to Sales Tax in California
The First District of the California Court of Appeal upheld the denial of Medtronic USA, Inc.’s (“Medtronic”) refund claim for California sales tax that it collected on sales of cardiac monitors. Medtronic USA, Inc. v. California Dep’t of Tax & Fee Admin., A169290 (Cal. Ct. App. Apr. 16, 2025).
The Facts: Medtronic manufactures two types of cardiac monitors, known as “RICMS,” which are implanted into a patient’s chest to monitor and collect information about the patient’s heart rhythm. Doctors then use the information to make decisions about and diagnose heart diseases of the patient.
For the periods at issue, Medtronic collected California sales tax on sales of its RICMS monitors. Subsequently, Medtronic requested a refund, maintaining that the RICMS devices met the definition of “medicines” that were statutorily exempt from sales tax.
The Law: California’s Revenue and Taxation Code Section 6369 exempts “medicines” from sales tax. The statute, in part, defines “medicines” as those furnished or prescribed for treatment of a human body by a licensed physician and “any substance or preparation intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment, or prevention of disease[.]”
The statute states that “medicines” specifically include “articles . . . permanently implanted in the human body to assist the functioning of any natural organ, artery, vein, or limb and which remain or dissolve in the body,” including bone screws, bone pins, and pacemakers. However, the statute specifically excludes from the definition of “medicines” “articles that are in the nature of splints, bandages, pads . . . instruments, apparatus, contrivances, appliances, devices, or other mechanical, electronic, optical, or physical equipment….”
The Decision: Medtronic offered multiple arguments to support that the RICMS devices are exempt from sales tax—all of which the Court rejected. First, Medtronic argued that the RICMS devices are specifically exempt because they are “articles [that are] permanently implanted in the human body to assist the functioning of” the heart. The Court agreed that the RICMS devices are permanently implanted but did not agree that they “assist the functioning” of the heart. The Court determined that unlike bone screws, bone pins, and pacemakers—which by themselves assist an organ to function—the RICMS devices “serve a purely informational function that requires subsequent human intervention to ‘assist the functioning’ of the heart.” Because the RICMS devices are diagnostic in nature, the Court held that they do not fall squarely within the relevant statutory provision that exempts permanently implanted articles that assist any natural organ in functioning.
The Court also rejected Medtronic’s argument that the RICMS devices are not specifically excluded from the definition of “medicines.” Medtronic argued that because the relevant statutory provision only excludes those articles—such as “splints, bandages, and pads”—that are applied externally to the patient, the RICMS devices (which are implanted in the patient’s body) are not in the same nature of those external applications and are not excluded from “medicines.” The Court rejected Medtronic’s external versus internal distinction, noting that the statute’s generic definition of “medicines” includes devices that are “intended for use by external or internal application to the human body[.]” The Court reasoned that if the generic definition of “medicines” includes devices that are applied both externally and internally, it could not read a different provision of the same statute to make such distinction and to apply only to external devices.
In rendering its decision, the Court strictly construed the plain language of the statute to ultimately affirm the trial court’s decision that the RICMS devices do not meet the definition of “medicines” exempting them from California sales tax. The Court recognized that while the function of the RICMS devices touches several concerns of the statute exempting “medicines” from tax, “those touches are too tenuous to establish the firm basis needed for an exemption.”
A takeaway here is just because the spirit of a statute seems to apply to a taxpayer, it does not necessarily mean the statute actually applies. And we can ask whether the spirit of a statute creates an ambiguity, as to its words, that requires further consideration. However, the plain language of a statute generally will prevail. Whether the Court came to the correct conclusion in analyzing the plain language here seems questionable.
New York State Court Chops Retroactivity of Recent P.L. 86-272 Regulation
The New York State Supreme Court, which is a trial court, ruled that New York’s regulation that attempts to limit Public Law (“P.L.”) 86-272 in New York cannot operate retroactively. The court held that the regulation is not pre-empted by P.L. 86-272. American Catalog Mailers Association v. Department of Taxation & Finance, Index No. 903320-24 (NY Sup. Ct. Apr. 28, 2025).
P.L. 86-272 is a U.S. federal law that shields a seller of tangible personal property from imposition of a state’s net-income based tax when the company solicits orders in the state, conducts activities in the state that are ancillary to solicitation, or conducts de minimis (very small) amounts of activities in the state. Wisconsin Dep’t of Revenue v. Wm. Wrigley Jr. Co., 505 U.S. 214 (1992) (analyzing 15 U.S.C. 381 to 384 also known as P.L. 86-272). The law dates back to 1959 and, since its enactment by the U.S. Congress, it has been attacked by states—initially (and unsuccessfully) challenging Congress’ authority to enact the shield law and later (with mixed success) challenging the operation of the shield. The shield protects a minimum level of company activity (having in-state company representatives who solicit orders) and third-party selling activity (third parties are allowed to conduct selling activities on a company’s behalf). 15 U.S.C. 381(a) and (c). Congress enacted P.L. 86-272 because solicitation activity had been found by the Louisiana Supreme Court in 1958 to create a taxable state-nexus and, in 1959, the U.S. Supreme Court declined to hear appeals from the decisions, which together upset settled expectations in the business community.
In the latest round of state attacks on P.L. 86-272, New York State promulgated regulations in December 2023 that attempt to reduce the federal shield for New York State purposes back to January 1, 2015 (the date of New York’s statutory corporation tax reform) when companies use modern technology to interact with customers such as by: assisting customers via “chat” features on a corporation’s website; accepting a customer’s application for a credit card via its website; allowing New York residents to apply for non-sales jobs via its website; using Internet “cookies” to gather customer information via its website; remotely fixing or upgrading via the Internet previously purchased products; selling extended warranty plans via its website; contracting with a marketplace provider that facilitates sales via the provider’s online marketplace; or selling tangible personal property via the Internet and contracting with customers to stream videos or music to electronic devices for a fee. 20 NYCRR 1-2.10[i].
The American Catalog Mailers Association (“ACMA”) challenged the regulations by seeking a flat-out declaration that the 2023 regulations are preempted by federal law and improperly retroactive to 2015. The New York court found that P.L. 86-272 does not prohibit the State from identifying and regulating which Internet activities are construed by New York to constitute more than protected activity and ruled that there is no conflict between the regulations and P.L. 86-272. However, the court struck down the retroactive period. It noted that “‘for centuries our law has harbored a singular distrust of retroactive statutes’” and found that the ACMA’s members were “not forewarned of this retroactive application,” “had no opportunity to ‘alter their behavior in anticipation of the impact of [retroactive application of the challenged regulations]’[,]” and the nearly nine-year period of retroactivity “is excessive[.]” The ACMA New York case and the issues presented by the regulations are in their early stages. [1]
Possibly riding to somewhat of a rescue, federal legislators introduced bills in the House and Senate to amend P.L. 86-272 with respect to activities that are ancillary to solicitation. Such proposed changes may become part of the federal tax package that is currently in the reconciliation process. Stay tuned for more developments regarding P.L. 86-272!
[1] On May 13, 2025, the ACMA appealed the Decision and Order of the court to the Appellate Division, Third Department.
Remote Employee Solidifies Manufacturer’s Right to Apportion Income
A plethora of case law, state guidance, and practitioner musings are devoted to discussions of what income of a multistate taxpayer is subject to apportionment and the fairness of various apportionment methods. Much less discussion centers on whether a taxpayer with only one brick-and-mortar location has a right to apportion its income. A recent decision of the Michigan Tax Tribunal addresses this fundamental question. Vidon Plastics Inc v. City of Lapeer, MTT Docket No. 23-002017 (Apr. 17, 2025).
The Facts: Vidon Plastics Inc. (“Vidon”), a Michigan manufacturing corporation, operates its sole manufacturing plant in Lapeer, Michigan. On its Lapeer Corporation Income Tax returns, Vidon reported 100% of its property and payroll as being in Lapeer. However, Vidon reported 0% of its sales to Lapeer because all of its sales of tangible personal property were shipped to customers located outside of the City.
The City rejected Vidon’s apportionment of its sales because Vidon’s only physical location is within the City. Vidon appealed the City’s rejection to the Lapeer Income Tax Board of Review, which agreed with the City’s position. Vidon appealed to the Michigan Tax Tribunal.
The Law: Cities in Michigan are authorized to levy an income tax “on such part of the taxable net profits as is earned by [a] corporation as a result of work done, services rendered and other business activities conducted in the city[.]” A corporation is entitled to apportion net profit outside of a Michigan city where it is located when its entire net profit is “not derived from business activities exclusively within the city.” Though not defined in the law, the Tribunal determined that the term “business activity” warrants a “broad and liberal interpretation” and, thus, includes “the enterprise, profession, or undertaking of any nature conducted or ordinarily conducted for profit or gain by any person.”
In 2018, the Lapeer City Commission approved Regulation 18.1, which provides that a corporation is not entitled to apportion its net profit if it “has no regularly maintained and established out-of-city location and engages in no out-of-city business activity,” even if it fills orders by shipment to out-of-city destinations.
The Decision: Vidon asserted its right to apportion was established by several aspects of its business. Finding the burden rested with Vidon to establish its right to apportion by a preponderance of the evidence, the Tribunal examined each of Vidon’s purported out-of-City activities.
First, the Tribunal concluded that Vidon failed to establish that it conducted business outside of Lapeer via ownership of inventory in Texas. For inventory shipped free-on-board by carrier to the Texas warehouse, the Tribunal found that title transferred from Vidon to its customer when the inventory was given to the carrier because Vidon presented no evidence that title transferred at any other point. For consignment stock, the Tribunal applied provisions of the Uniform Commercial Code to determine that although the parties contracted that title did not pass until the purchaser withdrew inventory from the warehouse, this retention of title by the seller to goods shipped to a buyer merely created a security interest in the property—not the reservation of title in the property by Vidon.
Second, the Tribunal concluded that Vidon’s sale of goods destined outside of the City did not constitute business activity outside of the City. Though the Tribunal noted that such sales would not be counted in the numerator of the Lapeer sales factor for apportionment purposes, the Tribunal concluded that this does not mean that Vidon “conducted business activity outside the [C]ity[.]”
Next, finding that Vidon’s Lapeer-based employees and Vidon’s Illinois-based independent contractor do nothing outside of the City other than solicit orders of tangible personal property, the Tribunal found no evidence that their conduct constitutes business activity outside of the City.[1]
Finally, the Tribunal analyzed the conduct of a Vidon employee who primarily worked from his home in Ann Arbor. Reviewing the nature of the Ann Arbor employee’s activities, the Tribunal found that the employee’s activities included not just sales activities, but “things in addition to sales” including helping with strategic planning. Based on the location and type of work done by the Ann Arbor employee, the Tribunal found that Vidon established its “right to apportion its income.”
The Takeaway: Setting aside any discussions of constitutional law, this case serves as an important reminder that even a business with only one physical location may have a statutory right to apportion its income when the business engages in activities outside of its home jurisdiction. To substantiate its right to apportion, a business should think holistically about its activities—especially those of remote and/or travelling employees. Apportionment is a right—use it, don’t lose it!
[1] The Tribunal relied on MCL 141.605(a) for the proposition that a person is not doing business based on the solicitation of orders outside the City for sales of tangible personal property, which orders are sent inside the City for approval or rejection and, if approved, are filled by shipment or delivery from a point inside the City. This Michigan law seems to parallel Public Law 86-272, a federal law that generally prohibits a jurisdiction from imposing a net income tax where the taxpayer’s activities within the jurisdiction are limited to the solicitation of orders of tangible personal property, activities ancillary to solicitation, or de minimis activity.