by Though this column is guaranteed to offend, the intent is to foster conversation
While I teach a law course, I am not a lawyer. I don’t even play one on TV. But, playing one on TV strikes me as a possible mediation method to settle the escalating dispute among furniture retailers and their suppliers over the question of just how to share in the tariff refunds.
Now, I know you know how we got here, but just in case you are a Jehovah’s Witness, here’s the short version: In a 6-3 decision on Feb. 20, the U.S. Supreme Court invalidated Trump’s tariffs on furniture and other imported goods under the International Emergency Economic Powers Act. This nonspecific ruling opened the door to refunds of duties already paid, but said nothing about how to apportion the refunds. This vagueness, in turn, opened the door to state-level legislation that presumably would be enacted on behalf of consumers, so they might get some of their money back, as Home News Now reported.
‘Knives Out’
Operating on thin margins and amidst intense margin pressures, seemingly everyone wants a slice of this refund pie. In many cases, they don’t want a slice; they want the whole enchilada, which is a lot like a pie only it has beans and cheese. And it’s a rather large pie, or enchilada: As much as $175 billion, a total that includes but is not restricted to home furnishings. The first wave of these refunds is expected this week, so interest is peaking.
Public companies are especially interested in this latest “Knives Out” drama because many of them have identified in their guidance that tariffs could negatively impact earnings.
But, here’s the rub: Cost increases tied to tariffs weren’t unilaterally passed on to retailers dollar-for-dollar, at least not in all or even most cases. Some of the product cost increase was eaten by the manufacturer, some by suppliers. New efficiencies were found in other cases to mitigate the increase to cost linked to tariffs, something that Wayfair, for example, cited in its own guidance to assuage investors that the platform would weather the tariff storm.
Yes, a few manufacturers were meticulous enough to levy tariff-caused price increases SKU by SKU, but now they are being punished for their transparency with demands for a dollar-for-dollar pass-through of any refunds recovered, ignoring the fact that there is also a cost to doing the accounting and another cost to using the refund portal, applying for the refund, collecting it and re-distributing it. Presumably, in many cases the cost of all this will exceed the SKU-specific price increase levied in the first place. In total, more than 330,000 importers are generating roughly 53 million entries in the portal seeking refunds, according to a report from CNBC citing court records.
Many retailers, too, took a tiered approach to passing on increases to consumers. So, the inflationary impact was felt by almost everyone.
CNBC checked in with a dozen CFOs for national retailers and found that none of them intend to lower their prices in response to the refunds. Too much remains unknown, they say. In February, a few days after the Supreme Court ruling, Lowe’s CEO Marvin Ellison told Yahoo Finance that Trump’s administration would likely continue to battle in court, potentially delaying or blocking refunds before they go out.
“What I will tell you is that when I talk to my legal team, there are quite a few maneuvers that the administration can take to prevent a refund from being a reality in the near-term,” Ellison told Yahoo, “so we’re not sitting back factoring in that we’re going to receive a refund.”
(Any resemblance to HNN Publisher Rick Harrison is purely accidental.)
Court in session
So, let’s do what any red-blooded American would do in this situation: Let’s litigate!
What follows is a (fictional) account of how a TV judge such as Judge Judy or Judge Wapner might decide the dispute. The goal here is to highlight the issue’s complexity, as well as to establish copyright should Hollywood come calling with interest in the TV production rights. (See, thinking like a lawyer already!)
For this teledrama, we’ll name the judge, the Right Honorable Solomon King, an inversion of one of the better sources of wisdom, the author of Ecclesiastes, King Solomon. Representing the plaintiffs (the retailers), we have Ms. Ashley Haverty, esquire. For the defense (manufacturers), we have Mr. Bassett Ashley, esquire, with the law firm of Ashley, Ashley & Ashley. That’s right, Ashley is everywhere.
“All rise! This fictional, hypothetical, satirical court is now in session.”
Judge King: Good morning. We are here on the retailers’ motion to compel apportionment of the Section 301 tariff refund proceeds for which furniture manufacturers are eligible to claim. I’ve read the briefs. I want to hear argument. Ms. Haverty, you may proceed.
Haverty: Thank you, Your Honor. Let me begin with what I believe is the simplest way to understand this dispute. Imagine you and a neighbor share a water bill. The city charges too much for the water because, it turns out, the meter was wrong. A refund check arrives. The check goes to your neighbor. Does the law require that she share it with you? We argue that it does.
Judge King: In your hypothetical, both parties paid equal shares from the start?
Haverty: Your Honor, that is precisely our claim. Retailers who purchased sofas, bedrooms, dining room furniture paid prices that the manufacturers themselves, in their own invoices and price sheets, attributed to the Section 301 surcharges. Now the manufacturers’ position is, “That’s ours to keep.”
The difference, of course, is the capital intensity of retail purchasing. We are not talking about wrenches bought in small quantities on net-30 terms. A regional furniture chain might commit to a half-million dollars in purchase orders for a single manufacturer’s line six to nine months before a single SKU hits the retail showroom floor. During the tariff period, our clients made purchasing decisions, set retail prices, absorbed margin compression, and in many cases were simply unable to pass the full surcharge downstream to consumers in what is a highly competitive environment. The manufacturer put the tariff on the invoice as a surcharge. Our clients paid it. A court has now said that surcharge was unlawful. The money should follow the burden.
Judge King: Your reasoning might hold for manufacturers who issued explicit surcharge letters and who were transparent in their invoicing, but what of those who did not? Those that simply raised prices?
Haverty: For those manufacturers, we are not claiming the same dollar-for-dollar pass-through. We are asking this Court to consider apportionment based on the ratio of tariff costs to total cost-of-goods increase during the tariff period applied to the volume of purchases our clients made. It is an approximation, but the alternative is to reward obfuscation. A manufacturer that hid the surcharge in a general price increase would be better positioned than one who disclosed it, and that lack of transparency should not be rewarded.
Judge King: What do you say to the manufacturers’ argument that they incurred substantial costs in the administrative refund process, including filing entries, retaining customs attorneys, preparing supporting documentation, etc., and that these costs should be deducted before any apportionment?
Haverty: Those costs are real. We are not asking for a dollar-for-dollar gross recovery. We are asking for net recovery after reasonable, documented administrative costs are deducted. Second, those costs were incurred to recover money that, in substantial part, belongs to my clients. The costs of recovery do not transform the underlying ownership of the proceeds.
Judge King: Mr. Ashley, your response?
Mr. Ashley: Thank you, Your Honor. Ms. Haverty belies the profound operational and financial complexity of what happened in the furniture industry during the tariff period. I would like to submit a different analogy, one torn from the headlines of real life. Imagine that Waffle House gets hit with a sudden, unexpected increase in the cost of eggs, an increase caused by a government policy. Waffle House raises menu prices, adding a sticker on its menus alerting patrons of the egg surcharge. Some customers pay the higher egg price; some stop coming; some switch to oatmeal, which is a lower-cost item. Waffle House also changes suppliers, negotiates harder, reduces omelet sizes and re-engineers its menu to use less eggs. Kitchen staff are trained to reduce waste, and more is spent on advertising to get a few more new diners through the doors.
When the government reverses its egg policy and issues refunds, how much of that money should go to diners? Which part of the price increase was purely from eggs? What about the extra labor? Suppliers’ delivery fees? The costs to re-train line workers? The part saved reducing waste? What about the money spent on advertising to make up some ground? And, perhaps most urgently, Waffle House took less profit for two years, so what is the remedy?
Judge King: The analogy is apt in its complexity, but the diners might say, “You told me exactly what the egg surcharge was. You put it on the sticker. Why can’t I get that back?
Mr. Ashley: Because, Your Honor, the amount on the sticker was merely an approximation, a reasonable, good-faith estimate of surcharge impact at a point in time. It was not meant to be a precise accounting of actual costs passed through on each individual sale.
And here is where the Waffle House analogy fails: The furniture industry operates on long product cycles. A manufacturer might design a collection, source it from a Vietnamese factory to avoid the China tariffs, but then find that the Vietnamese factory’s capacity is maxed out. So, a portion of the run is made in China and gets slapped with the tariff, after all.
Or, a manufacturer might have hedged its tariff exposure by pre-paying customs duties in advance, at a different rate. The per-unit surcharge on the invoice does not track the actual tariff paid on that specific unit. It is a blended number and estimate.
Judge King: So, you’re saying the surcharge was a price signal, not a cost-accounting entry.
Mr. Ashley: Precisely, Your Honor. Here’s another analogy that might help the plaintiffs better appreciate my clients’ position, this one also torn from the headlines. You bought an airfare to Paris. A few weeks later, Delta tells you you owe $35 more for a fuel surcharge on your ticket because of Iran and the cost of jet fuel. That $35 is not wired directly from your credit card to a tanker truck; it goes into Delta’s general revenue. If jet fuel prices drop and the airline gets a refund from a hedging contract, does every passenger get their $35 back? Of course not, because the $35 was a contribution to operational costs that included fuel, not a segregated escrow of exclusively fuel costs.
Now, Your Honor, if retailers can demonstrate in particular cases with documentation that a surcharge was tracked one-for-one to a specific customs entry and that the refund for that entry has now been received, we are not opposed to an appropriately scoped recovery. What we vigorously oppose is a class-wide, uniform apportionment that treats every tariff surcharge invoice as a pass-through. I know of no manufacturer that simply handed tariff costs through to retailers unchanged. Every one of them absorbed some portion of the tariff impact in their margins, in their operational changes, or in their investment decisions.
Not only that, Your Honor, but if it please the court, consider, say, Flexsteel, to pick a name out of a hat. The company is cautious and transparent. It charged retailers exactly the per-unit tariff on every invoice SKU by SKU. It did not try to game the market. Now that a refund is imminent, retailers point to Flexsteel’s invoices and say, “Hey, we can prove exactly how much you charged us. It’s on the invoice. Give it back.” Meanwhile, one of Flexsteel’s competitors proved less scrupulous, raising prices in a lump sum, with no surcharge line, and prices included a comfortable buffer. This competitor collected more than Flexsteel on the tariff, but the retailers have no line item to point to. No rule from the courts should penalize transparency and reward obfuscation.
Judge King: Ms. Haverty?
Ms. Haverty: Your Honor, the Flexsteel competitor in Mr. Ashley’s hypothetical is not off the hook under our motion, but merely harder to pursue. For manufacturers without explicit line items, the burden of proof shifts to the manufacturer, who must demonstrate that its price increases were attributable to costs other than tariffs.
Mr. Ashley: Counsel’s description is much more than a shift. We contend that the refund applications are being filed by manufacturers, at manufacturers’ risk, with no guarantee of recovery, using manufacturers’ legal resources and institutional knowledge of their own import records. No retailer contributed a penny to this effort.
Ms. Haverty: Your Honor, a defendant that has wrongfully collected money from a plaintiff does not get to keep it simply because he later successfully sues the government that made him collect it. The refund is not a windfall the manufacturers earned through entrepreneurial skill, but rather the return of money extracted from the supply chain by what we now learn was an unlawful tariff regime. Claiming the manufacturers took the “risk” of applying for their own refunds is like saying a tow truck company should keep your towed car because the company risked its own equipment to tow the vehicle to the garage.
One additional point, if I may, Your Honor. The home furnishings sector has margins that would make most other sectors weep. A typical furniture retailer operates on gross margins of 40%-50%, but net operating margins of just 2%-4%. When a tariff surcharge of 15%-25% of wholesale cost hits, retailers have virtually no cushion. Like Waffle House, they raised retail prices and lost customers. Some did not raise retail prices and lost margin. Either way, the burden hit downstream. The furniture sitting in American living rooms today was paid for with tariff surcharges that should not have existed. Someone is owed a reckoning. We ask this Court to say who.
Judge King: Much to consider. Thank you both. This case sits at the intersection of customs law, commercial equity and economics, and I do not think any of those bodies of law has a clean answer for this dispute. This court is obligated to make a ruling, but I would also strongly encourage the parties to explore whether a structured mediation process might resolve some or all of these claims before I am required to impose one.
This Court is adjourned.
