US Supreme Court Blocks Emergency Tariffs but the Trade Battle Continues

On February 20, 2026, the U.S. Supreme Court handed down a historic ruling that will significantly impact trade policy in America. In Learning Resources, Inc. v. Trump, the Supreme Court, in a 6-3 majority, held that the President lacks the constitutional power to levy “emergency” taxes on foreign imports. The ruling effectively stated that while the Administration claimed the International Emergency Economic Powers Act (IEEPA) to support high tariffs to counteract drug smuggling and trade imbalances, Congress alone possesses the authority to levy such taxes.

Shortly thereafter, President Donald Trump reacted to this by issuing a new global tariff of 15%, making it clear that the administration remains committed to its trade policy goals. On the other hand, the decision of the Supreme Court last Friday gave much-needed constitutional guidance, effectively voiding the previous tariff structure in place by making it clear that the power of trade regulation is separate from the power to tax.

Why the Supreme Court Ruled Against the President

The lawsuit began with small U.S. businesses, such as Learning Resources, claiming that the 2025 emergency tariffs caused a significant cost increase, putting the businesses at risk of being nonviable. The lawsuit first went to the United States Court of International Trade, which ruled that the use of emergency powers was not sufficient to justify the imposition of broad tariffs. The ruling was upheld by the United States Court of Appeals for the Federal Circuit, who deemed the action “unbounded in scope,” sending the case to a fast-tracked review by the Supreme Court of the United States.

Chief Justice John Roberts wrote the majority opinion, stating that tariffs are a type of taxation, and the U.S. Constitution reserves the sole authority to “lay and collect Taxes” to Congress, not the President. The Court ruled that Congress had not granted the President the authority to impose tariffs and that the President had overstepped the constitutional boundaries. The International Emergency Economic Powers Act only granted the President the authority to “regulate” importation, but not taxation.

The Immediate Aftermath: A New Legal Strategy

Only hours after the SC decision, the administration reversed its position and relied on Section 122 of the Trade Act of 1974. This provision is rarely invoked and permits the President to impose tariffs of up to 15% in order to remedy a serious balance-of-payments deficit. The administration changed its mind from 10% to the full 15% statutory maximum.

In contrast to the initial tariffs, Section 122 tariffs are temporary and can stay in effect for no more than 150 days unless Congress extends them. The constitutional struggle over the authority of the President to impose tariffs may be resolved, but the policy struggle is now firmly in the political arena.

What Does This Mean for Your Business?

Preserving Refund Rights: Companies need to immediately examine all shipments in 2025 to find those that are eligible for a refund. While the companies are entitled to a refund, they will probably need to file a claim with the Court of International Trade to get the money back. They need to examine their customs data, check the dates of liquidation, calculate the amount of duties paid on the tariffs that have been invalidated, and file a protest.

Indirect Tax Cascade: In many countries, the sales tax or VAT is computed after the application of the tariff. A contraction in the tariff base may require a re-computation of past sales tax liabilities to prevent overpayment or "unjust enrichment" penalties.

Transfer Price Review: Review transfer pricing policies that took into account tariff costs, especially where the tariffs were factored into cost-plus arrangements, resale price margins, or transfer pricing adjustments, to ensure that previous allocations are still supportable in light of the invalidation of the tariffs.

Inventory Revaluation: Those companies that capitalized IEEPA tariffs into inventory must now determine if a revaluation is required. If the original 25% tariff is deemed void and replaced by a 15% Section 122 surcharge, the cost bases of the inventory and, in turn, the COGS could be impacted.

Commercial Clawback Risk: In many supply chain contracts, tax pass-through provisions are common, enabling suppliers to recover tariff costs from buyers. If a supplier has passed on the 25% tariff imposed under IEEPA and subsequently receives a refund from the government, buyers may attempt to recover the refund, possibly through arbitration based on the principle of unjust enrichment, claiming that the supplier cannot retain both the refund and the previous payment.

Strategic Recalibration Required: By imposing a uniform 15% tariff under Section 122 of the Trade Act of 1974, the U.S. has effectively changed the dynamics of global trade by lessening the pain of higher tariffs for countries such as China and India, but at the same time diminishing the preferential treatment that was earlier gained by countries such as the UK, Australia, Japan, and South Korea.

Takeaways

• No More Executive Shortcut Decisions: The Court effectively struck down the “tariff by proclamation” method, making it clear that Congress holds the power of taxation hence, slower and more methodical trade policy decisions in the future.

• Process, Not Policy: The Court’s decision focused on constitutional process, not the policy of tariffs. Trade tensions remain high, but future trade policies must conform to proper legislative process.

• The 150-Day Uncertainty Factor: Section 122 tariffs are set to expire after 150 days, which creates rolling cycles of planning for supply chain and pricing considerations.

• Changing Global Leverage: The flat rate of 15% limits the U.S. government’s leverage, as previous preferential rates are now less effective and could lead to more trade tensions.

  
  

Here is how Water and Shark can help address and mitigate this ongoing volatility:

• Diversifying and stress-testing your supply chain, aligning your inventory planning with important legal windows to minimize tariff risk.

• Enhancing supplier contracts with tariff contingency and risk-sharing clauses, aligned with transfer pricing to protect margins.

• Tracking legislative and regulatory updates to offer early warnings and real-time impact analyses of trade policy changes.

• Evaluation of minimizing the tax impact and tariff expense by exploiting duty drawback schemes, Foreign Trade Zones (FTZs), and effective pricing to shield your margins.

FAQs - Frequently Asked Questions

1. Did the Supreme Court ban tariffs completely?

No. The Court did not say tariffs are illegal. It only ruled that President Trump cannot impose broad emergency tariffs without clear approval from Congress.

2. Why were the original tariffs struck down?

Because tariffs are taxes, and under the Constitution, only Congress has the power to impose taxes. The Court said the emergency law used by the President did not clearly give him that authority.

3. Are the new 15% tariffs legal?

For now, yes. They are based on a different law (Section 122 of the Trade Act of 1974). But they can only last 150 days unless Congress extends them.

4. Does this mean the trade war is over?

No. Tariffs are still being used. The legal path has changed, but trade tensions and negotiations are very much ongoing.

5. What should businesses be doing right now?

Businesses should prepare for uncertainty. That means reviewing supply chains, checking contracts for tariff clauses, and being ready for changes if the 15% rate expires or increases.