Tariff Refunds as a New Deal Point: What M&A Dealmakers Need to Consider
The imposition of widespread tariffs under the International Emergency Economic Powers Act (“IEEPA”) fundamentally altered the M&A landscape over the past year—affecting deal valuations, due diligence protocols, and risk allocation across industries with significant import exposure. (For a detailed discussion of these issues, see Navigating M&A Transactions Amidst Trump’s Tariffs: Five Key Legal Issues to Consider in Today’s Market.) Following the Supreme Court’s decision in Learning Resources, Inc. v. Trump, which invalidated the use of IEEPA to impose tariffs, importers are now pursuing substantial refunds of duties paid during the tariff period. In anticipation of these refunds, companies across the supply chain are beginning to face reimbursement demands from customers seeking reimbursement of IEEPA tariff costs (see Preparing for IEEPA Tariff Reimbursement Demands: A Proactive Approach). Additionally, shortly after the Supreme Court decision to strike down the IEEPA tariffs, President Donald Trump imposed a 10% tariff on almost all imports under Section 122 of the Tariff Act of 1974 (19 U.S.C. § 2132). The President’s action was promptly challenged at the US Court of International Trade, which, on May 7, struck down the use of Section 122 in a 2-1 decision that is widely expected to be appealed to the Federal Circuit, and ultimately the Supreme Court.
In light of this constantly evolving and uncertain tariff landscape, there are several novel issues relating to pending and potential future tariff refunds that buyers and sellers now need to consider when executing M&A transactions.
Who is Entitled to the Benefit of Tariff Refunds?
Where a target business has paid tariffs imposed under recent executive authority—whether under IEEPA, Section 122, or otherwise—and those tariffs are subject to legal challenge or potential reversal, parties should address whether the buyer or the seller is entitled to any resulting refund for tariffs paid by the target business prior to closing. An initial instinct may be to look to existing analogous situations, as purchase agreements have long addressed entitlement to tax refunds for pre-closing periods, but the analogy has limits. Some businesses absorbed the tariffs entirely, while others passed costs through to customers, and each path creates distinct downstream complications that the typical tax refund provision was not designed to address. Which party should be entitled to the benefit of any refunds will vary by transaction, depending both on how the deal is structured and on how the target business handled the increased costs resulting from the tariffs.
The parties should consider whether the target business raised prices, effectively passing along all or a portion of the costs of tariffs to its customers, or whether it effectively bore those costs itself. A seller may argue that its claim to the refund is strongest where the target absorbed the tariffs rather than passing them through to its customers. In that scenario, the seller would contend that it bore the full economic burden of the overturned tariffs without shifting it downstream, and that there is little risk of customer claims for the buyer to worry about post-closing. But even this framing is not dispositive as the buyer may have its own reasons for resisting, and the outcome will depend on the specific facts and circumstances of the target business and the parties’ negotiated agreement.
Additionally, where all or a portion of the cost of tariffs were passed through to customers—either by increased prices or as a surcharge—the parties should consider whether the target business has received or is likely to receive requests from customers to be reimbursed. As discussed in our prior Legal Update, many companies across the supply chain are already facing reimbursement requests from customers seeking recovery of IEEPA tariff costs that were effectively passed through.
Even if its customers are not legally or contractually entitled to reimbursement, the target business may feel that it needs to compensate its customers in some fashion to preserve its business relationships. If the parties agree that the seller is entitled to receive the refund, the buyer may be left in an untenable position where the economic benefit of receiving the refund flows to the seller while the economic burden of compensating the target’s customers remains with the buyer. In practice, the degree of pass-through will vary—sellers may have absorbed all, some, or none of the costs—and in partial pass-through scenarios, the parties should consider an allocation methodology that reflects the actual economic incidence.
Sellers may also argue that the tariffs depressed the purchase price itself as a result of the target business’s historical earnings being reduced by tariff costs during the relevant period. If the buyer did not ascribe any value to a potential tariff recovery or make adjustments to historical earnings to disregard the costs of invalidated tariffs when setting the purchase price, sellers may posit that allowing the buyer to also capture the refund would amount to a windfall.
Who is Entitled to Claims for Reimbursement Against the Target Business’s Suppliers?
The same framework of economic allocation and deal structure applies where the target did not pay tariffs directly but instead absorbed costs passed through by its suppliers. In such circumstances, the question of who is entitled to pursue claims for reimbursement from the target’s suppliers—and retain the proceeds—requires careful analysis. The seller may argue that it paid inflated costs during the pre-closing period and should be entitled to pursue recovery from suppliers. The buyer, however, may be concerned about the seller aggressively pursuing claims against suppliers with whom the buyer must maintain an ongoing commercial relationship post-closing.
Mitigation Between Sign and Close
Sellers should consider whether interim period covenants are appropriate to preserve refund rights between signing and closing—ensuring, for example, that the seller does not waive or compromise refund claims during that period, or that the buyer has the ability to cause the target to begin the filing process pre-closing to protect timing. Without such protections, the entitled party may find that the value of its negotiated right to the recovery has been diminished or lost entirely before the deal even closes.
Cooperation and Cost Allocation
On structure, particularly in the IEEPA context, where the refund mechanics are most developed, whether a transaction is an asset purchase or a stock purchase will affect both the legal analysis and the practical mechanics of obtaining a refund. In a stock deal, the target entity remains intact, and in most cases continues to be the importer of record with CBP. Following closing, the buyer owns the entity that holds the refund claim. As a practical matter, the buyer controls the entity’s ACE Portal access and customs broker relationships, and it is the buyer (through the target entity) that will file CAPE Declarations and receive refund proceeds. This means that if the seller is the entitled party, it must rely on the buyer to pursue the refund, collect the proceeds, and remit them to the seller; the seller cannot file independently. In an asset deal, the analysis may be different. The seller may seek to exclude tariff refund claims from the purchased assets entirely, retaining the right to pursue and collect refunds independently. Where the seller retains the importer of record status for pre-closing entries, the seller can pursue the refund without relying on the buyer’s cooperation.
Once the parties have determined entitlement, they will need to craft covenants tailored to the nuances of the deal structure to implement their agreement. These covenants should address how claims are pursued, by whom, and subject to what constraints, including the standard of effort or cooperation expected from the other party, the duration of the obligation given that the refund process may take considerably longer than initially anticipated, and the specific actions contemplated. Cooperation may run in both directions.
On the recovery side, the entitled party may depend on the other to file declarations, provide access to historical entry data, respond to CBP inquiries, facilitate the transfer of funds, or pursue claims against suppliers. But where tariff costs were passed through to customers, cooperation may also be needed to manage reimbursement demands, including providing historical pricing data, coordinating response strategies, and aligning on how customer settlements may affect the net value of the recovery. In each case, the parties should consider whether the other party has approval rights over the manner and timing of pursuit or resolution, and how to manage the risk that an aggressive posture—whether toward a government claim, a supplier, or a customer—could disrupt important commercial relationships.
The parties must also consider who bears the costs of pursuing the recovery. There will be net costs associated with the process—customs broker fees, potential legal fees if protests or litigation become necessary, and internal administrative costs.
Conclusion
The question of tariff refund entitlement in M&A transactions is a new negotiation point that parties and their counsel would be wise to affirmatively address in many transactions. The issue does not lend itself to a one-size-fits-all solution. The right answer will vary by transaction—depending on the type of business, whether costs were passed through to customers, the deal structure, and the commercial dynamics between the parties. Failing to address these novel issues may have unanticipated outcomes and could result in disputes down the road.
