The phosphorylation state of the carboxyl-terminal domain (CTD) of RNA polymerase (RNAP) II is directly linked to the phase of transcription being carried out by the polymerase. Enzymes that affect CTD phosphorylation can thus play a major role in the regulation of transcription. A previously characterized HeLa CTD phosphatase has been shown to processively dephosphorylate RNAP II and to be stimulated by the 74-kDa subunit of TFIIF. This phosphatase is shown to be comprised of a single 150-kDa subunit by the reconstitution of catalytic activity from a SDS-polyacrylamide gel electrophoresis purified protein. This subunit has been previously cloned and shown to interact with the HIV Tat protein. To determine whether this interaction has functional consequences, the effect of Tat on CTD phosphatase was investigated. Full-length Tat-1 protein (Tat 86R) strongly inhibits the activity of CTD phosphatase. Point mutations in the activation domain of Tat 86R, which reduce the ability of Tat to transactivate in vivo, diminish its ability to inhibit CTD phosphatase. Furthermore, a deletion mutant missing most of the activation domain is unable to inhibit CTD phosphatase activity. The ability of Tat to transactivate in vitro also correlates with the strength of inhibition of CTD phosphatase. These results are consistent with the hypothesis that Tat-dependent suppression of CTD phosphatase is part of the transactivation function of Tat.