For decades, Costco Wholesale has built its reputation on a simple promise: quality merchandise at the lowest possible prices. The warehouse club's business model depends on ruthless efficiency—minimal marketing, no-frills stores, and the buying power that comes from moving enormous volumes of goods.

Now, that model has brought Costco into direct conflict with the Trump administration's tariff policy. In early December 2025, the retailer filed a lawsuit against the federal government seeking to pause tariff collections and recover import duties paid under recent global import taxes. The action places Costco at the forefront of a growing wave of corporate legal challenges triggered by the sweeping tariff policies introduced over the past year.

The lawsuit's outcome could have implications far beyond Costco's balance sheet. At stake is the fundamental question of executive authority over trade policy—and whether the courts will impose limits on presidential tariff-making power.

The Tariff Landscape in 2026

When 2025 began, the average U.S. tariff rate stood near 2.5%. That same rate now exceeds 15% after less than a year of President Trump's second term—the most dramatic shift in American trade policy in nearly a century.

The United States collected $187 billion more in tariff revenue in 2025 than in 2024, a nearly 200% increase. While businesses initially absorbed roughly 80% of these costs, that percentage is expected to shrink to around 20% in 2026 as companies pass expenses to consumers.

For a retailer like Costco, which imports vast quantities of merchandise from around the world, the impact is substantial. The company's famous $1.50 hot dog combo may remain untouched—it's been held at that price since 1985—but countless other products have seen price increases that challenge Costco's value proposition.

"We've worked extraordinarily hard to minimize price increases for our members," a Costco spokesperson said last quarter. "But there are limits to what any retailer can absorb, and these tariffs are testing those limits."

The Legal Challenge

Costco's lawsuit challenges the legal foundation of the Trump administration's tariff authority. The company argues that the sweeping application of tariffs under emergency powers exceeds constitutional limits on executive trade action.

The lawsuit joins a broader legal challenge currently before the Supreme Court, which will hear arguments on January 21 about a case that could invalidate Trump's most expansive tariffs. The tariffs being challenged in that case have generated $130 billion in revenue as of mid-December.

Legal experts offer differing views on the likely outcome. Supporters of the administration's position argue that emergency trade powers have been broadly interpreted for decades, and that courts are generally reluctant to second-guess executive branch national security determinations.

Critics counter that the current tariffs go far beyond any reasonable interpretation of emergency authority, representing a de facto rewriting of trade law without congressional approval. They point to historical precedents limiting executive overreach and argue that the judiciary has both the authority and the obligation to impose constitutional limits.

"This is not a close case," argued one constitutional law professor who has filed an amicus brief supporting the challengers. "The executive branch has claimed essentially unlimited power to impose taxes on Americans without congressional approval. If that's permitted, the constitutional structure of our government becomes meaningless."

Costco's Strategic Position

The lawsuit comes as Costco continues aggressive expansion despite trade policy headwinds. The company has announced plans to open 28 new stores in the U.S. and major international markets in 2026, with targets of "more than 30 sites each year for the foreseeable future" as part of a $6.5 billion expansion strategy.

Those additional locations will bring Costco's total store count to 921 worldwide. The company's confidence in continued growth suggests belief that either tariff policy will moderate, legal challenges will succeed, or consumer demand will prove resilient enough to absorb higher prices.

First-quarter fiscal 2026 results, released in December, supported that confidence. Net sales increased 8.2% to $65.98 billion, with earnings per share of $4.50 exceeding Wall Street expectations of $4.27. Digital sales jumped 20.5% year-over-year, and Black Friday was a record-breaking day for U.S. e-commerce, generating over $250 million in non-food orders.

But the results also revealed pressure points. Membership growth has moderated, prompting Costco to introduce new perks for Executive members, including exclusive early shopping hours. The move suggests management recognizes that value perception—always Costco's core advantage—requires reinforcement in an environment of rising prices.

The Tariff Pass-Through Question

JPMorgan analysts have estimated that businesses will pass an increasing share of tariff costs to consumers as 2026 progresses. If accurate, the implications for retailers—and for the economy more broadly—could be significant.

Higher prices reduce consumer purchasing power, potentially slowing the economic growth that has characterized the post-pandemic recovery. For retailers already navigating a "K-shaped" economy—where higher-income consumers continue spending while lower-income households pull back—additional price pressure could accelerate bifurcation.

Costco's customer base skews toward higher-income households, which may provide some insulation. But the company's appeal has always extended beyond affluent shoppers to middle-class families seeking value. If that segment feels squeezed by tariff-driven price increases, Costco's traffic and membership trends could suffer.

The company has not publicly discussed specific contingency plans if tariffs remain in place or increase. But industry observers note that Costco has options: shifting sourcing to non-tariffed countries, negotiating with suppliers to share cost increases, or accepting lower margins on certain product categories to maintain price competitiveness.

Political and Legal Timing

Costco's lawsuit arrives at a moment of unusual uncertainty in trade policy. President Trump has shown willingness to delay or modify specific tariffs—he postponed increases on upholstered furniture and kitchen cabinets on New Year's Eve—while maintaining his commitment to tariffs as a policy tool.

The Supreme Court case scheduled for January 21 could provide more definitive guidance. If the Court limits executive tariff authority, the entire landscape changes. If it upholds current policy, companies like Costco will need to adapt to a higher-tariff environment for the foreseeable future.

Some observers believe the administration will seek to settle major corporate lawsuits before the Supreme Court rules, preferring negotiated outcomes to potentially adverse precedents. Others argue that the administration views tariffs as a signature policy achievement and will defend them vigorously regardless of legal costs.

For Costco, the lawsuit represents both a business necessity and a strategic gamble. Success could save the company hundreds of millions in tariff costs and establish it as a corporate leader on trade policy. Failure could mean ongoing legal expenses, potential retaliation from a hostile administration, and no relief from the underlying tariff burden.

Investment Implications

Costco stock has slightly underperformed the S&P 500 over the past year, declining nearly 4% while the broader index gained 17%. However, over five years, the stock has jumped 141%, reflecting the company's consistent execution and strong competitive position.

The tariff lawsuit introduces additional uncertainty into the investment thesis. Bulls argue that Costco's business model is resilient enough to weather tariff headwinds, and that successful legal action could provide upside not reflected in current valuations. Bears counter that tariff exposure creates margin risk, and that membership growth deceleration suggests the company may be approaching saturation in key markets.

As with many retail investments, the outcome likely depends on factors beyond any single company's control. Trade policy, consumer spending trends, and the broader economic environment will determine whether Costco's expansion bet pays off.

What's clear is that Costco has chosen to fight rather than simply absorb tariff costs. The company's legal challenge represents a significant escalation in corporate resistance to trade policy—and a test of whether the judicial system will impose limits on executive authority that Congress has declined to assert.

The answer, when it comes, will matter for far more than Costco's bottom line. It will shape the relationship between government and commerce for years to come.