A federal court has rejected the argument that indirect port congestion effects qualified a business for the Employee Retention Credit (ERC) under Section 2301, in a decision centered on Sevillo Fine Foods that sharply narrows the path for supply chain-based ERC claims.

The ruling matters directly to freight and logistics businesses — carriers, forwarders, warehouse operators and shippers — that filed ERC claims during and after the pandemic by pointing to port backups, vessel delays and supplier disruptions as evidence that a government order had more than a nominal effect on their operations.

The ERC, created under the CARES Act, offered a refundable payroll tax credit to employers that either sustained a significant decline in gross receipts or were fully or partially suspended by a government order. Claims surged across the logistics sector, and a substantial secondary market of ERC promoters encouraged companies to attribute operational disruption to COVID-era port congestion and its knock-on effects.

The Sevillo Fine Foods decision rejects that indirect theory. The court declined to accept the proposition that congestion at ports — an operational consequence of pandemic conditions — amounted to a governmental order suspending the taxpayer's business in whole or in part. The core statutory requirement, a direct governmental order affecting the claimant's own operations, remained unmet where the taxpayer relied on downstream and second-hand effects rippling through the supply chain.

The commercial consequences are immediate. Logistics operators with pending or already-paid ERC claims built on comparable reasoning now face elevated audit and litigation risk. Claims that leaned on the argument that a supplier's inability to deliver, or a port's inability to clear cargo, suspended the claimant's business sit on doctrinal ground the court has now refused to sanction.

For carriers and forwarders, the practical read is that disruption suffered as a market condition — congestion, capacity shortfalls, schedule slippage — does not convert into a tax credit without a qualifying order tied to the claimant itself. The decision draws a line between businesses directly ordered to close or limit operations and those that experienced the pandemic's effects through the supply chain, as most of the industry did.

The ruling also lands amid a broader enforcement tightening around the ERC. The credit became a target for abusive claim mills after its expansion, and the Internal Revenue Service has pursued moratoriums, disclosure programs and litigation to claw back improper refunds. Judicial narrowing of supply chain theories removes one of the more elastic arguments promoters used to stretch eligibility beyond the statutory text.

Companies that claimed the ERC on port-congestion reasoning should expect that position to draw scrutiny. Those with unresolved claims or under examination will find the decision cited against theories resting on indirect effects, and businesses that received refunds on that basis face potential repayment exposure plus interest.

Going forward, the decision signals that courts will police the boundary between direct governmental orders and generalized supply chain disruption strictly, and ERC eligibility disputes in the freight sector are likely to turn on whether a claimant can point to an order that reached its own operations rather than the ports and suppliers upstream of them.