Tariffs, Refunds and the Consumer Supply Chain

Introduction

For consumer companies that import most of what they sell, tariff policy has been the largest swing factor in cost of goods. Within about a year and a half, the duties on many imports were imposed under emergency powers, struck down by the Supreme Court, replaced by a temporary surcharge and then replaced again by duties under a different statute. Each change altered landed costs, pricing decisions and, for those that paid the struck-down tariffs, the prospect of getting money back.

Carter's, the children's apparel company, shows the effect on reported results. It received about $132 million of refunds of previously paid emergency tariffs, including interest, in its second quarter of 2026, and recorded about $128 million as a reduction to cost of goods sold; its gross margin rose 1,890 basis points to 67.0%, primarily because of those recoveries, according to Carter's quarterly report. This article explains how the tariff regime changed, how refunds affect earnings, how apparel, toy and durables companies are responding and what it means for deals, which sit within the wider backdrop described in where the consumer and retail deal market stands.

IEEPA Tariffs

Tariffs imposed under the International Emergency Economic Powers Act, a statute giving the president powers to respond to declared national emergencies. The Supreme Court held in February 2026 that the act does not authorize tariffs, invalidating the duties imposed under it.

The sequence matters because each step applied to different goods, rates and time periods, and importers had to track which legal basis applied to each shipment.

The Supreme Court did not expressly address refunds for duties already paid, and the replacement surcharge under Section 122 could last for up to 150 days unless extended by Congress, according to Troutman Pepper Locke's analysis of the ruling. The ruling left other tariffs in place, including duties under Section 232 on goods such as steel, aluminum, copper, lumber and automobiles, and existing Section 301 tariffs.

The Court of International Trade's later ruling against the Section 122 surcharge was narrow: relief was limited to the plaintiffs, the government appealed and the Federal Circuit granted a temporary stay, so most importers continued paying the surcharge until it expired, according to Skadden's analysis. Each change reset the cost assumptions behind pricing, the problem set out in input cost inflation, hedging and price pass-through.

Section 301 Tariffs

Duties imposed under Section 301 of the Trade Act of 1974 after the US Trade Representative finds that a trading partner's practices are unfair or burden US commerce. Unlike the Section 122 surcharge, which is limited to 150 days and a 15% rate, Section 301 sets no fixed rate cap or 150-day limit.

Importers that paid the struck-down tariffs can claim refunds from US Customs and Border Protection, and many have begun to receive them. Carter's submitted refund claims for about $130 million through the Customs refund process known as CAPE and had about $2 million of claims still unadjudicated, which it treated as gain contingencies rather than income until they are approved.

For investors and buyers, these refunds create a normalization problem. A refund booked against cost of goods sold lifts gross margin in the quarter it is received, but it relates to duties paid in earlier periods and will not recur.

Carter's illustrates the second half of that adjustment: excluding the recoveries, its average unit cost rose a low-double-digit percentage because of incremental tariff costs, and those costs reduced its cost of goods sold margin by about $28 million in the quarter. How tariff costs flow into gross margin is explained in retail margins: gross margin, occupancy and SG&A leverage.

Why tariffs hit margins with a lag

Duties paid on imports are capitalized into inventory as part of the cost of the goods, and only reach the income statement when those goods are sold. A retailer whose inventory turns four times a year carries roughly three months of purchases on its balance sheet, so a tariff increase in one quarter shows up in gross margin mostly in the next. The same timing lag works in reverse: Carter's still held about $18 million of Section 122 tariffs in inventory at the end of its second quarter, costs that would flow through cost of goods as that stock sold, even though the surcharge itself had expired.

For bankers, this means a quarter's reported margin reflects the tariff rates of earlier purchases, not current ones. Inventory days, and how quickly a business can turn its stock, therefore matter when projecting how a rate change will land, a link explored in inventory turns, GMROI and retail working capital.

Tariffs hit hardest where products are made almost entirely abroad and sold at price points where shoppers notice increases. The responses differ by category because the ease of moving production differs.

Apparel and footwear

Apparel companies source mainly from Asia. Carter's, for example, sources substantially all of its products from third-party suppliers primarily located in Asia, and paid about $26 million of Section 122 tariffs on imports from Vietnam, India, Bangladesh, Cambodia and other countries in the first half of 2026. The main levers are pricing, as Carter's higher average unit retail showed, sourcing shifts between countries, negotiating cost sharing with suppliers and changing product specifications. Because the new Section 301 duties cover many of the same Asian sourcing countries, moving production between them offers less relief than it once did. How apparel economics work is covered in how apparel and footwear brands make money.

Toys and durables

Toys and many consumer durables have historically relied on concentrated sourcing from a few manufacturing countries, which makes moving production slow and expensive. Durables also face Section 232 duties on inputs such as steel, aluminum and lumber, which remained in place after the IEEPA ruling. For these categories, companies combine price increases with redesign, alternative suppliers and careful timing of inventory purchases ahead of rate changes. The economics of durables are covered in how consumer durables and hardlines companies work.

Tariffs now feature in nearly every consumer diligence process. Buyers map a target's purchases by country of origin and tariff classification, model margins under different tariff scenarios and test how much of past cost increases the target passed on to customers. A business that has already raised prices without losing volume earns more credit than one whose plan assumes it can.

Refunds in the purchase agreement

Refunds also need a home in the purchase agreement. A target with pending claims for duties paid before closing holds an asset whose value and timing are uncertain, so buyers and sellers negotiate refund rights: who keeps refunds received after closing that relate to pre-closing imports, and who bears the cost if a claim is rejected. Normalizing earnings for refunds already received is part of the quality of earnings work covered in consumer due diligence: brands, channels and stores.

The tariff picture is still moving. The Federal Circuit decision on the Section 122 appeal will determine whether importers can recover those duties too, which would create a second wave of refunds. A separate Section 301 excess-capacity investigation was ongoing, and Carter's noted that no tariffs had yet been imposed from it.

For coverage bankers, the practical point is that consumer companies' reported margins in 2026 combine one-time refunds, temporary surcharges and new duties. The work is to separate them so clients and buyers can see the business's real cost base.