By Manav Das –

We added some tariffs with pride,
Hoping that’ll keep rivals outside.
But inventors soon found
There was less cash around
And our own breakthroughs quietly died.

With all the talk about tariffs, and the recent Oral Hearing at the Supreme Court, I started wondering as to how this impacts intellectual property (IP). Tariffs are defined as taxes levied against imported goods, calculated as ad valorem tariffs, a percentage of the declared customs value. Since 2018, the United States government has significantly escalated the use of these tools, most notably through Section 301[1] of the Trade Act of 1974 and Section 232[2] tariffs. The current administration has used tariffs as a leverage in foreign policy. These tariffs are primarily intended to compel U.S. companies to diversify and move their manufacturing supply chains out of foreign countries and reinforce domestic industry. The long-term goal is to use this punitive tax as a negotiating tool, a revenue source, and a protective mechanism for favored domestic sectors.

Tariffs and IP:

So how do tariffs impact IP? The imposition of elevated tariffs creates immediate operational and financial stress, which flows directly into IP management decisions. The tariffs represent a substantial tax burden paid by US businesses[3]. This cost immediately drains capital resources that companies would otherwise allocate toward research and development, equipment investment, and job creation. Also, tariffs often go unnoticed in their interaction with intellectual property payments. Off-invoice payments, such as royalties and license fees associated with imported merchandise, carry the potential to significantly increase the dutiable customs value. 

The core adverse impact of tariffs on IP is the mandatory diversion of capital. By requiring companies to allocate billions of dollars in scarce resources toward tariff payments, the policy directly impedes investment in future innovation. Tariffs impact semiconductors[4], life sciences[5], quantum computing[6], and artificial intelligence[7], to name a few industries.

The negative financial impact of tariffs can be strategically offset to some extent by utilizing domestic policy incentives. The Credit for Increasing Research Activities[8] (R&D credit) is recognized by economists as a vital policy alternative or offset to protectionist trade measures. While tariffs increase the cost of doing business, the R&D credit functions as a subsidy to innovation by reducing tax liability.

Tariffs impact individuals as well, at least through inflation and disruptions to the supply chain. While companies may be able to offset some of their tariff-related costs, there are no corresponding “R&D credits” for individuals. Other than setting up companies and going through a demanding set of criteria, individual innovators have little to no tax benefits for innovative activities, including filing patents and related filing and attorney fees.

Tariffs and the Supreme Court:

The Supreme Court recently heard a consolidated case, Trump v. V.O.S. Selections[9] and Learning Resources v. Trump[10], that directly challenges the legality of wide-ranging tariffs imposed under the International Emergency Economic Powers Act[11] (IEEPA). This body of tariffs includes the “Reciprocal tariffs” and “Fentanyl tariffs”, which have raised the applied U.S. tariff rate and generated billions of dollars in revenue[12], paid by U.S. importers. The core legal question is whether Congress lawfully delegated sufficient authority to the President under the IEEPA to impose such sweeping taxes on imported goods. Notably IEEPA does not include the words “tariff” or “duty.” Challengers argue that the administration’s actions amount to an unconstitutional delegation, as Article I of the Constitution grants Congress the power to regulate commerce and set tariffs.

Lower courts, including the Court of International Trade and the Federal Circuit, have generally ruled against the broad IEEPA-based tariffs. Initial reporting of the Oral Hearings seems to indicate that the Supreme Court may be leaning toward agreeing with the lower courts. Should the Supreme Court decide that the IEEPA-based tariffs are unlawful and must end, then companies will experience a major reduction in import costs, freeing up capital for reinvestment in R&D, innovation, and equipment. On the other hand, should the Supreme Court uphold the IEEPA-based tariffs, businesses must treat high import taxes as a permanent, systemic risk. This reinforces the long-term strategic necessity of maximizing the R&D tax credit as an innovation offset and relocating supply chains to avoid persistent tariff exposure.

Tariffs and Taxes:

While the core purpose of the tariffs is ostensibly to bring manufacturing home and spur innovation, the adverse impact on R&D investment may certainly impede any such gains, and result in long-term loss of US competitiveness in global innovation leadership. I am not an economist, much less a political economist. Although to me, politics is the art of couching economic reality in the context of life, liberty, and the pursuit of happiness (consider themes from elections past: “read my lips, no new taxes,” “it’s the economy, stupid!” or the most recent buzzword: “affordability”). Whenever companies are faced with budget cuts, a knee-jerk reaction is to cut IP budgets, trim down IP portfolios and R&D teams, resort to trade secret protection, and so forth.  

I am not a tax specialist either. However, as a layman ruminating from the outside, it seems reasonable that there must be some instrument to protect R&D from the ravages of the political economy, or even the economy in general. The R&D tax credit appears to be one such instrument. There may be benefits in raising the tax credit for companies as a percentage of gross revenue. There may also be benefits in a graded scheme that allows for a higher percentage credit to companies with lower gross revenues.

However, this does not help individuals. A real benefit would be from giving a tax credit or a deduction to individuals for innovative activities. Such activities can be tailored to spur innovation. For example, experimental activities, software and equipment purchases, etc. where the credit or deduction is realized in the calendar year when there is a measurable end benefit, such as a designed product, a proof of concept, a launch of a startup, patenting activities, etc. I leave it to the experts to determine the precise points in the innovation lifecycle where such tax benefits may be most effective.

In the meantime…

Regardless of the Supreme Court’s outcome, IP and finance teams must implement strategies to manage tariff risks. Some options are:

Maximize the R&D Credit: The R&D credit remains an important tool, especially if tariffs are upheld, acting as a capital reclamation mechanism. The credit provides a 10% average return on investment (ROI) on qualified spending, offsetting the direct cost of tariffs on innovation capital.

Customs Compliance Audit: Cross-border licensing agreements must be rigorously audited to minimize the dutiable value risk. Royalty and IP-related fees can be structured carefully to prevent U.S. Customs and Border Protection (CBP) from deeming them dutiable, which would exacerbate the overall tariff liability.

Supply Chain Resilience: Investing in US-based R&D and domestic manufacturing serves as the ultimate long-term hedge against tariff uncertainty, reducing import cost exposure while strengthening IP protection under U.S. law.

In conclusion, the U.S. IP landscape is currently defined by profound economic uncertainty. Should the Supreme Court uphold the tariffs, this would codify the current elevated risk environment, transforming IP and R&D strategy from a compliance exercise into a necessity for corporate survival against sustained high import costs. If tariffs must serve as a protective mechanism for favored domestic sectors, there need to be offsetting credits for businesses and individuals to protect and increase R&D investment.

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[1] Section 301 of the Trade Act of 1974, available at: https://www.congress.gov/crs-product/IF11346 (last accessed November 9, 2025).

[2] Section 232 of the Trade Expansion Act of 1962, available at https://www.congress.gov/crs-product/IF13006 (last accessed, November 9, 2025).

[3] The Economic Impact of Tariffs, Knowledge at Wharton, Penn Wharton Budget Model (PWBM) analysis, available at: https://knowledge.wharton.upenn.edu/article/the-economic-impact-of-tariffs/, April 2025 (last accessed on November 6, 2025).

[4] Short‑Circuited: How Semiconductor Tariffs Would Harm the U.S. Economy and Digital Industry Leadership, Information Technology and Innovation Foundation Report, available at: https://itif.org/publications/2025/05/21/short-circuited-how-semiconductor-tariffs-would-harm-the-us-economy/, May 2025 (last accessed on November 6, 2025).

[5] Impact of Proposed Tariffs on the Life Sciences Industry, KPMG, available at: https://kpmg.com/us/en/articles/2025/impact-of-proposed-tariffs-on-the-life-sciences-industry.html, 2025 (last accessed on November 6, 2025).

[6] Trade Deals May be a Hopeful Sign, But Tariffs Still Threaten U.S. Quantum Leadership, Quantum Insider, available at: https://thequantuminsider.com/2025/07/28/trade-deals-may-be-a-hopeful-sign-but-tariffs-still-threaten-u-s-quantum-leadership/, July 2025 (last accessed on November 6, 2025).

[7] How Trump’s Tariffs Could Make AI Development More Expensive, Time Magazine, available at: https://time.com/7275771/trump-tariffs-ai-development-china/, April 2025 (last accessed on November 6, 2025).

[8] 26 U.S.C. § 41, available at: https://www.law.cornell.edu/uscode/text/26/41 (last accessed November 9, 2025).

[9] V.O.S. Selections, Inc. v. Trump, No. 24-1287 (U.S. Nov. 5, 2025).

[10] Learning Resources, Inc. v. Trump, No. 24-1287 (U.S. Nov. 5, 2025).

[11] International Emergency Economic Powers Act, available at: https://www.congress.gov/crs-product/R45618 (last accessed November 9, 2025).

[12] Erica York, Alex Durante, Trump Tariffs: Tracking the Economic Impact of the Trump Trade War, Tax Foundation, October 31, 2025, available at: https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/ (last accessed November 9, 2025).