David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: artificial sweeteners.

In early August the Trump administration announced a landmark deal with Nvidia and Advanced Micro Devices: In exchange for the ability to sell artificial intelligence chips in China, the companies agreed to pay the U.S. government 15 percent of their revenue from those chip sales.

And while the government isn't calling the deal a tax, it kind of looks like one — specifically, it works like an export tax. And it's that similarity that raises questions about the deal's legality, since the Constitution expressly prohibits export taxes. Article I, section 9, clause 5, for those keeping score at home.

So does the agreement hold up under constitutional scrutiny? And assuming the deal goes forward, would it be an effective revenue raiser?

To help us make sense of these developments, I'm joined by Tax Notes contributing editors Robert Goulder and Joe Thorndike. Bob, Joe, welcome back to the podcast.

Robert Goulder: Thanks for having me, Dave.

Joseph J. Thorndike: Thanks for having me.

David D. Stewart: So Bob, why don't you start us off? Could you give us some background on Nvidia and why their chips are such a big deal?

Robert Goulder: Well, sure, and the short answer here is artificial intelligence. The collective wisdom of Wall Street and global investors the world over suggests that we are poised on the brink of the next great wave of technological advancement, courtesy of AI. Gosh, this is going to be bigger than the internet, or so they say. We'll realize unimaginable commercial efficiencies. And I'm a little bit skeptical about that, but the market believes in it, and that's the point. It follows that any nation that is going to dominate in geopolitics had better also dominate in the trenches of AI competition. And having the best tech means having the best chips, and that's where companies like Nvidia and AMD are key. They're world leaders in that field.

David D. Stewart: So before we turn to the tax issue at hand, why did the government restrict the export of these chips?

Robert Goulder: Well, one word: China. We're talking here about certain models of these microprocessors. For Nvidia, it's the H20 chip, and for AMD, it's the MI308 chip. There was a concern that very bad things would happen if China got ahold of these chips, because they're experts at reverse engineering things and they'd figure out the company's trade secrets, and that would eventually allow the [People's Republic of China] to leapfrog over the USA in terms of AI superiority.

Bear in mind that this is all happening against the backdrop of this Sputnik moment that occurred a while ago in the AI sector: The Chinese company DeepSeek released this platform — we all thought that the U.S.-developed AI platforms were best in class, and then we get this shock that a Chinese outfit has a low-budget, low-cost counterpart called DeepSeek that is just making people think, "You know what? China is really close to catching up with us on AI. We've got to do something. Let's ban the chips."

David D. Stewart: So did the administration support this ongoing ban?

Robert Goulder: Yes. The ban started in 2022 under the Biden administration, and the Trump administration continued it. After being elected and taking office, the White House said they supported it. The specific issue came up during congressional testimony: Commerce Secretary Howard Lutnick, when he was going through his confirmation hearings, he was asked point-blank, "Does he, and does the administration, concur with the Biden administration on the need to ban these exports?" And the answer was an unequivocal yes. So that's a pretty harsh about-face when you think about where we were in April during those hearings and where we are today with the Nvidia deal.

David D. Stewart: Well, how did we get where we are? Why did the White House suddenly switch positions and move toward this new arrangement?

Robert Goulder: Money, basically. There was a coordinated lobbying effort on the part of the Nvidia CEO, this fellow named Jason Wong. He came to Washington, started heavily lobbying the administration and Congress and basically anybody in the District of Columbia that would listen to him, making the case that the sales to China, they make wonderful sense in terms of commercial profits, sort of taking the national security concern and putting it to one side. But Wong described the Chinese market as a multibillion-dollar sales opportunity. And when you've got that kind of money at stake, people tend to listen.

David D. Stewart: So what did we get in this final deal? What does it look like?

Robert Goulder: Well, as you said in your intro, I think it's a 15 percent cut of the action. You can call it a tax, you can call it a skim, you can call it whatever you want. But when these companies sell these particular chips to buyers located in China, those sales will be taxed, really, because the U.S. government is going to get 15 percent of gross. How that's not a tax, I don't know. It doesn't have the form of a tax; it's not being administered by the Internal Revenue Service, as far as we know. It's not going to be administered by the Customs and Border Patrol.

There's a lot of uncertainty about who writes the check and who collects the check and where it's deposited and where it's going to go. Is it going to be used to pay down the debt? Is it going to be used to fund other spending? Is it going into somebody's presidential library campaign? Who knows where the money's going to go? So there's not a lot of transparency about that, but the deal is 15 percent of gross.

David D. Stewart: So Joe, the White House, they're not saying this is a tax, but what about it to you says, "No, this kind of looks like an export tax"?

Joseph J. Thorndike: Well, I think that just out of the gate, anytime the government demands money in a forcible extraction from someone or some company, that's going to start to look a lot like a tax, just right out of the gate. It might be other things; it might be a user fee, it might be a voluntary contribution, although these are kind of mushy terms. What's voluntary about this deal? In this situation, you can either pay this 15 percent of sales and make the sale, or you don't pay the 15 percent and you don't get to make the sale. It's not very voluntary.

So I think when you have an involuntary extraction, the presumption is that that is a tax, unless it somehow qualifies under one of the sort of exceptions to the tax concept. That's my take on it. Now, reasonable people can disagree about this, and reasonable people do disagree about this, but not a lot. I mean, I think most tax people, most experts, looking at this deal think it pretty solidly qualifies as a tax. I don't think that there's much serious debate about that, but that isn't to say there won't be debate about that. And certainly that's the Trump administration's position on it: not a tax.

Robert Goulder: Yeah. And I would just add that the only way for Nvidia and AMD to not pay this 15 percent to the federal government is to refrain from selling to Chinese customers, right? Don't do the transaction. That's the only way you can avoid paying the tax. And point for point, that aligns with the retail sales tax or a VAT. And anytime that's your only option — the only way to avoid the tax is don't make that deal — there should be an alarm going off, a red light blinking that says, "Hey, this is a tax."

David D. Stewart: All right. So let's turn to Joe's wheelhouse here, and let's talk a little bit about history. The Constitution specifically prohibits export taxes. There's a bunch of things in there that we can say are undesirable things, bad things even, that the Constitution doesn't prohibit, but this was something that the framers seemed to feel was important. So Joe, why is that? Why is that in there?

Joseph J. Thorndike: So let's go back and give a call-out again to that same clause that you did in your introduction there: Article I, section 9, clause 5. It hardly gets any attention. It needs all the attention it can get right now, because this is the only moment when anyone has cared about the export clause in literally decades. In any case, that clause says, "No tax or duty shall be laid on articles exported from any state." So that's a pretty sweeping statement.

Now, it was not an accident. It was not an afterthought. It was very deliberate; it was very important. And many people think that it was actually sort of a crucial provision of the Constitution because it played into the sectional tensions that ran through the convention. So essentially, Southern states really hated the idea of an export tax because they were big exporters. I mean, most of the exporting done by the original states was done from Southern states. And in addition, they felt that this might be used as a backdoor attack on slavery if they were allowed to tax exports: Because the Southern economy was so heavily agrarian and organized around agrarian exports, they felt that an export tax on the South's principle crops would be a way of going after that "peculiar institution," as they referred to it.

So I think it's a pretty convincing argument that the export tax was crucial to getting Southern support for the Constitution more generally. It was considered a really important element of the debate at that period. Also, its sweeping language — this sort of blanket prohibition on any sort of excise tax — that, too, was very intentional. The drafters considered a variety of sort of half measures like, "Hey, maybe we should prohibit export taxes on some goods but not on others." And they actively decided not to do that because they needed to reassure the South, "We will not use this technique of raising revenue because it'll hurt your interest too much." So that sweeping quality of it is also a very deliberate thing.

The other thing to keep in mind here that I think is important is that the Supreme Court has generally interpreted the clause in that same sweeping way that the convention originally intended. The Court has essentially ruled off the table anything that even looks like an export tax or might operate like one, even if it's framed differently. So there's an important 1901 case, Fairbank v. United States, and the Court concluded then that "if all exports must be free from national tax or duty, such freedom requires not simply an omission of a tax upon the articles exported, but also a freedom from any tax which directly burdens the exportation." So even if it's not, "Hey, we're going to tax every item you export," if somehow you have a tax that interferes with that exporting, that, too, is banned by the export clause.

So I think what we have here is, in total, a pretty convincing story. The convention does this thing very deliberately because it wants to appease the South. It drafts the provision quite sweepingly to make that appeasement work. And then the Court interprets it that way over time, over the decades, and really as recently as sort of like the turn of the 20th century, the Court more or less reaffirmed that sort of sweeping view of the export tax ban.

David D. Stewart: So we have a fairly clear statement from the Constitution, but of course, there's that question of, "Is this a tax?" What do you say about this argument that, "Well, it's a user fee. It's not a tax, it's a user fee, so it doesn't fall into this"?

Joseph J. Thorndike: Well, as it happens, the Court has addressed that question of user fees around exports, and what the Court concluded was that if it's going to be a user fee, it has to meet some specific conditions. As I said, the Court allows fees on exports, but the rules say — and the Nvidia deal does not follow these rules — the rules say that the fees have to be proportional to the government services or benefits received. And they cannot be, expressly, they cannot be based solely on the value of the goods being sold. That's what the Nvidia deal does, so this seems very clearly at odds with this exception that the Court has carved out. I think it's a very hard case to make that this would be a user fee, given that it's an ad valorem tax on exports.

David D. Stewart: So moving beyond the constitutional questions, are there other legal restrictions on the government's ability to just say, "I'm taking a piece of the action on these exports?"

Robert Goulder: Actually, David, there is: There's a statute on point about when the government can charge a fee and when it can't. For instance, it's not supposed to collect a fee in exchange for the issuance of an export license, and that's a statutory directive from Congress. On the other hand, there are some rules and regulations about Treasury collecting fees for the granting of an export license, so it's a little bit of a mixed record there. Certainly, there would be enough to justify a court challenge, if you had the right type of litigant.

David D. Stewart: So to that question, who is the right type of litigant? Who might have standing? So I assume that Nvidia or AMD themselves wouldn't challenge this, because they're trying to get access to a market they don't have access to at the moment. But is there somebody else who could step in and say, "No, this clearly violates the Constitution. I want this to stop"?

Robert Goulder: Well, that's a great question, and hopefully we'll find out, although I'm not confident that we will. The two parties who clearly have standing are the two parties that would be paying the export tax. And for the reasons you just mentioned, they're not going to be running off to court screaming about a constitutional grievance.

Who else could possibly have standing? Maybe a disgruntled shareholder of either of these companies. They could make the argument that their pro rata share of the corporate profits is smaller than it otherwise would be, because this 15 percent of the China sales is being soaked off and given to the federal government. That would be very interesting, because it would pit the rationality of the shareholders against that of the corporation. The corporation would say, "No, no, no, we're much better off because of this deal because the pot of corporate profits is going to be that much bigger because we can sell into China." So query whether shareholders would have standing.

What I think is fascinating is whether the states could. At least one of these companies is based in the state of California — Nvidia, I think, is based in Santa Clara, outside of San Francisco. They could argue that the stash of corporate profits that they want to tax at the state level is smaller than it otherwise would be because this 15 percent has been siphoned off to the feds. Now, that assumes the governor of that state would be interested in bringing such a suit. And as we've seen in a nontax context, governor Gavin Newsom does not seem terribly reluctant to file lawsuits against the Trump administration when he thinks some infraction has occurred. So we'll see. Maybe California has standing.

David D. Stewart: Now, there's another U.S. chipmaker that is making news lately — or at least in the news lately. What is going on with Intel?

Robert Goulder: Well, that's fascinating. Intel at one point in time, maybe a quarter-century ago, was the darling of Wall Street because they make the chips that we use every day in our laptops and our desktops. A very popular chipmaker. However, Intel is not terribly active with respect to this next generation of chips that's used in the AI sector, so they've sort of fallen behind there. And what's happened is Trump announced this deal where the federal government — yes, Uncle Sam — is going to become a 10 percent shareholder in Intel. Actually, it's 9.99 percent, so I'm just rounding off. But that's what's going on.

And it's a very quirky look, because it looks a little bit like Intel is becoming at least partly a state-operated enterprise, which is a little bit hard to square with a traditional notion of free-market capitalism. But there you have it. The other thing that stands out about the Intel deal is how the government is paying for this 10 percent equity stake. It's a transaction: They're acquiring common shares in a conventional manner. $8.9 billion transaction, and the bulk of that consideration is taking the form of issuing to Intel government grants that were previously approved under the CHIPS Act, during the Biden administration. So these were funds, appropriations that Congress already approved; they just haven't yet been released. So arguably, that's money that Intel is already entitled to. And all the Trump administration is doing is saying, "Well, we're not going to block it." And that counts as a hefty payment towards that $8.9 billion consideration. So very interesting when you think about the Intel deal in conjunction with what's happening with Nvidia and AMD.

David D. Stewart: Are we seeing something that might set the precedent for future arrangements between the U.S. government and companies?

Robert Goulder: Oh, for sure. And in fact, they're openly talking about it. The Treasury secretary has said that the Nvidia deal is going to be the role model for other types of arrangements like this. So that's a little bit interesting. Some might even say alarming, for the reasons I mentioned before about this being a type of industrial policy that we haven't seen in a long, long time. If you really squint and look hard at it, this type of industrial policy, it looks a little bit like what the Soviet Politburo might do in the 1940s and '50s; it doesn't really look like 21st century free-market capitalism. But that's where we're going. Defenders would say, "This is what you need to do to win."

Joseph J. Thorndike: I was just going to add to that. There were interesting comments made recently by Ray Dalio, who's a big hedge fund guy, and his theory is that this is sort of creeping authoritarianism and it's right out of the authoritarian playbook, to start having the government start taking on roles typically assigned to the private sector. And people say that's alarmist, but he says it fits the pattern of, say, authoritarian governments in the 1930s and '40s.

I think that might be a bit of an overstatement, but I think he's also on to something there — that this sort of government intervention in the private sector is new in a lot of ways, and certainly new to the Republican Party. So it does seem as though we might be entering a new era here.

Robert Goulder: Yeah, I think both of these deals — the Nvidia deal and the Intel deal — are the type of arrangement that if you had presented them to President Reagan in the 1980s, he would've gone ballistic and said, "What the heck are you doing? This is just crazy talk!" And now, it's becoming normal. All of this is becoming normalized. The precedent has been established. I think we will see more deals like this.

David D. Stewart: Well, if we do see additional movement in this direction, we're definitely going to have both of you back to discuss the larger implications of it. This has been a great discussion. Bob, Joe, thank you for being here.

Robert Goulder: Thanks much.

Joseph J. Thorndike: Thank you.

David D. Stewart: That's it for this week. You can find me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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