Tax Insights: US Court of International Trade strikes down section 122 tariffs

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Issue 2026-22

In brief

What happened?

On May 7, 2026, the US Court of International Trade (CIT) held, in a divided 2‑1 decision, that the temporary 10% import surcharge¹ (i.e. tariff) imposed under section 122 of the US Trade Act of 1974 exceeds the US President's statutory authority. The US Department of Justice (DoJ) has appealed this decision and on May 12, 2026, the US Court of Appeals for the Federal Circuit (CAFC) issued an administrative stay of the CIT's ruling while it considers the government's motion for a stay pending appeal. On May 20, 2026, the CIT denied the government's separate motion for a stay of enforcement of its judgment pending appeal. Nevertheless, the CAFC's administrative stay remains in place. 

Why is it relevant?

This ruling continues a pattern of judicial scrutiny of broad executive tariff authority. It follows the US Supreme Court's February 2026 decision, which invalidated tariffs under the US International Emergency Economic Powers Act (IEEPA).² Unlike that decision, the CIT's permanent injunction covers only the named plaintiffs and it has been stayed pending appeal. However, the CIT's subsequent denial of the government's stay motion, with even the dissenting judge concurring on the non‑merit factors, signals the CIT's view that the legal challenge has substantial merit.

As a result, the import surcharge remains in effect and continues to be collected from all importers by US Customs and Border Protection (CBP), including the plaintiffs that won the case, pending a final judgment after all appeals.

Actions to consider

Canadian businesses exporting to the United States should assess their section 122 surcharge exposure, particularly when the imports involve affiliates or third parties. They can preserve their potential rights to a refund by monitoring legislative deadlines to file corrections and/or protest the finalization of customs entries. There is currently no administrative refund mechanism, so proactive recordkeeping is essential. Businesses should also review contractual provisions around tariff pass‑throughs and refund entitlements to manage disputes, and monitor evolving US policy developments, including pending section 301 investigations³ that may replace the surcharge.

In detail

Background

A February 20, 2026 presidential Proclamation⁴ had invoked section 122 of the US Trade Act of 1974 to impose a temporary 10% ad valorem surcharge on virtually all imports into the United States, from February 24 to July 24, 2026. The Proclamation was issued the same day the US Supreme Court struck down tariffs imposed under IEEPA. Section 122 authorizes the President to impose a surcharge of up to 15% for no more than 150 days to address "fundamental international payments problems," including "large and serious United States balance-of-payments deficits."

Two consolidated court cases were filed at the CIT to challenge the Proclamation:

• Oregon v. United States, brought by 24 states
• Burlap and Barrel, Inc. v. United States, brought by a New York‑based spice importer and a Florida‑based toy company

The CIT's reasoning

In its May 7, 2026 decision that the temporary section 122 surcharge exceeds the President's statutory authority, the CIT found that the Proclamation that imposes the surcharge did not identify the type of "balance‑of‑payments deficits" that the US Congress had in mind when it enacted section 122 in 1974. The decision depended on how the term "balance‑of‑payments deficits" in section 122 should be interpreted. The CIT held that the term refers to the specific economic measures Congress understood when it enacted section 122 in 1974 – deficits in liquidity, official settlements or basic balance. These concepts were tied to the Bretton Woods fixed exchange rate system, which ended in 1973.

The Proclamation relied on different metrics: the US trade deficit, current account deficit, negative net international-investment position and deficits in primary and secondary income. The CIT found that "[n]owhere does Proclamation No. 11012 identify balance-of-payments deficits within the meaning of Section 122 as it was enacted in 1974."

The CIT also noted that if the executive branch could select among any sub‑accounts to identify a deficit, this would effectively create open‑ended tariff authority under section 122, raising constitutional nondelegation concerns. At the oral argument stage on April 10, 2026, the government acknowledged that balance‑of‑payments deficits are measured differently today than in 1974, and that basic balance and liquidity are no longer considered relevant measures.

Scope of relief and the stay

The CIT found that only the direct importer plaintiffs – Burlap and Barrel, Basic Fun and the State of Washington (through the University of Washington's direct import activity) – had standing. The remaining 23 state plaintiffs were dismissed because their alleged injuries, based on indirect passthrough costs, were deemed too speculative to support standing.

The CIT issued a permanent injunction limited to those plaintiffs and declined to enter a universal injunction. The CIT's judgment declared the Proclamation "invalid as contrary to law" and ordered section 122 surcharges paid by the importer plaintiffs to be "refunded with interest as provided by law." On May 12, 2026, the CAFC issued an administrative stay suspending the CIT's judgment and injunction while it considers the government's motion for a longer-lasting stay pending appeal. In seeking the stay, the government argued that enforcing the injunction would disrupt collection operations and divert CBP resources from the ongoing IEEPA refund process.

On May 20, 2026, the CIT denied the government’s motion for a stay pending appeal, finding that the government failed to demonstrate irreparable harm, likelihood of success on the merits, or that the public interest favored a stay. In its analysis, the CIT characterized the government’s asserted harms (including disruption to CBP operations and a potential influx of cases) as speculative, noting that CBP retains the ability to extend liquidation periods for up to three years to preserve collection of the surcharge if the government ultimately prevails.

The CIT emphasized that requiring plaintiffs to continue paying deemed unlawful section 122 surcharges, only to wait for potential refunds over an extended period, constitutes a meaningful harm. On the public interest factor, the CIT rejected broad policy arguments advanced by the government, underscoring that determinations of that nature fall within the purview of Congress. Notably, the dissenting judge in the original case concurred in denying the stay, concluding that the non-merit factors weighed decisively against granting the motion.

The appeal will proceed to the CAFC. The DoJ expects "hundreds, if not thousands" of importers to file their own challenges at the CIT.

Potential replacement tariff authorities

The US Trade Representative is conducting two section 301 investigations involving 76 separate potential tariff determinations, which are expected to conclude before the section 122 tariffs expire on July 24, 2026. Section 232 investigations may also provide alternative tariff mechanisms. The CIT's decision does not affect sector‑specific tariffs⁵ already in place under section 232, section 201 or section 301. Therefore, even if the DoJ’s appeal of the CIT decision is unsuccessful, alternate tariffs may be imposed in place of the section 122 surcharges.

Actions for businesses

The section 122 import surcharge remains in effect and continues to be collected from all importers by CBP. The surcharge expires on July 24, 2026, unless the US Congress extends it, which is considered unlikely. However, an exemption from the section 122 surcharge may be available for imported goods that qualify for the Canada‑United States‑Mexico Agreement (CUSMA) origin treatment, subject to continued compliance with origin and documentation requirements.

Businesses importing into the United States or exporting goods that enter US commerce should:

• confirm CUSMA treatment – goods that qualify as originating under the CUSMA may be exempt from the section 122 surcharge; businesses should verify compliance with origin and documentation requirements
• understand Consolidated Administration and Processing of Entries (CAPE) limitations – the CAPE refund mechanism covers only IEEPA tariffs, and there is currently no administrative refund channel for the section 122 surcharge
• preserve refund rights – liquidation and protest deadlines remain in effect during the appeal process, so it is essential to conduct a proactive review of the importer’s entry history, liquidation status and procedural deadlines; note that the CIT's judgment ordered refunds "with interest as provided by law" for the successful plaintiffs, which may set the template for future refund claims
• review contracts – examining purchase orders, supply contracts and customer agreements governing tariff cost allocation and refund entitlements is critical; disputes over IEEPA refund allocations are already occurring, and similar issues will arise if section 122 refunds become available
• coordinate across functions – aligning customs, tax, transfer pricing, finance and legal teams are important to assess refund eligibility, financial reporting implications and potential cost-of-goods-sold adjustments
• plan for broker capacity constraints – US customs brokers are already managing the IEEPA refund process, and capacity is stretched; businesses relying on brokers should anticipate elevated demand

The takeaway

The CIT's decision, now reinforced by its May 20, 2026 denial of the DoJ's stay motion, is a significant legal development. However, while the ruling calls into question the legal basis for the section 122 surcharge, the surcharge remains in effect and CBP continues to collect it, because the CAFC's administrative stay suspends the CIT's injunction. Companies that prepare by organizing their data, preserving refund rights and assessing cross-functional implications will be better positioned to respond — regardless of whether the appellate process results in refunding the surcharge, or replacement tariff authorities are established before the surcharge’s July 24 expiration.

The tariff landscape continues to evolve. Section 301 and section 232 investigations are expected to produce new tariff actions in the coming weeks. We encourage you to stay informed and reassess your supply chain and compliance strategies.