Effective July 1, 2022, as required by the Infrastructure Investment and Jobs Act (IIJA) passed last November, the Internal Revenue Service (IRS) has reinstated the Superfund Chemical Excise Tax on a wide range of chemicals and substances. These taxes have not been in effect since 1995, so companies that haven’t had to deal with them for the past 27 years are now scrambling to understand the complexities and requirements of this new iteration of the law.
The following is an FAQ to help companies get up to speed on what the Superfund Chemical Excise Taxes will require of them. The information here is by no means comprehensive, but it does provide a basic understanding of the law and its implications for affected companies.
What is the purpose of the Superfund Chemical Excise Taxes?
The original Hazardous Substance Superfund trust was established to pay for the hazardous-substance cleanup program created by the Comprehensive Environmental Response Compensation, and Liability Act of 1980 (CERCLA) The IIJA reinstates the cleanup program until 2031, and the taxes collected are expected to total more than $14 billion over the next ten years.
What does the excise tax apply to under the new law?
Under the new law, the excise tax applies to the use, sale, or import of 42 taxable “chemicals” and 151 “hazardous substances.” The IRS has issued lists for both the chemicals and substances included (under Section 4661 and 4671 of the Internal Revenue Code, respectively), but has cautioned importers that items on the list could change as chemicals or substances are either added or removed from the list over time.
Are exporters being taxed?
No. The taxes apply only to imported chemicals or substances, not those for export. In fact, companies that export products comprised of taxable chemicals or substances are entitled to a refund if they paid prior to manufacturing.
Are the new Superfund Tax rates the same as the old ones?
No. When the IIJA reinstated these two taxes, it doubled the previous rates. Now, according to Section 4661, the tax rate for chemicals ranges from $0.44 to $9.74 per ton, depending on how the chemical is being sold, used, or stored.
Is the rate different for taxable “substances”?
Yes. The applicable tax for a hazardous substance depends on its chemical composition. A “taxable substance” is defined as a substance that contains 20% or more by weight or value of any one of the chemicals listed in Section 4661 (down from 50% in the previous iteration of the law).
Find out how organizations are responding to the reinstated and expanded Superfund Excise Tax in our free on-demand webinar.
How are the tax rates calculated?
There are three ways to arrive at a tax determination for the Superfund Tax:
- Use the default rates published by IRS.
2. Self-assess the rate based on 10% of the appraisal value of the imported substances.*
3. Calculate the rate based on the percentage amount of each listed chemical included in the substance. For example, if load of scrap metal contains 50% nickel (taxed at $8.90 per ton) and 20% chromite (taxed at $3.04 per ton), the tax rate would be calculated as: ($8.90 x .50 = $4.45) + ($3.04 x .20 = .61) = $5.06 per ton.
*Note: Self-assessing based on 10% of appraisal value will almost always yield a higher tax rate than either of the other methods.
At what point in a transaction do the new taxes kick in?
For chemicals, the “taxable event” is the sale or use by the manufacturer, producer, or importer of the chemical, and the tax is due in the U.S. upon the first use or sale. For hazardous substances, the “taxable event” is the importation of the substance by an importer, and the tax is due upon the first sale or use after the substance is imported.
Are there any available exemptions for the Superfund Chemical Excise Taxes?
Yes. Exemptions are available for some exported taxable chemicals and substances, as well as for chemicals/substances used in certain kinds of fertilizer, animal feed, and fuel. For example, butane and methane are exempt if they are being used as fuel, but NOT if they are being used for some other purpose. There are other exemptions as well—e.g., for substances that have a “transitory presence” during the smelting or refining process, or substances derived from coal—but the IRS has yet to issue specific guidance on procedures for claiming these exemptions, so the best recourse available at the moment is to keep documentation that supports the company’s intention to take advantage of applicable exemptions.
When are the new Superfund Chemical Excise taxes due?
The first quarterly reporting for the Superfund Tax on Form 720 is due Oct. 31, 2022. However, importers with estimated tax totals of more than $2,500 per year are required to start making bi-weekly deposits to the Superfund Tax as early as July 29, 2022.
What do companies need to do in order to prepare for these taxes?
As soon as possible, companies that import any of the taxable chemicals or substances on the IRS’s list need to conduct a thorough assessment of their manufacturing processes to find out when, where, and how the Superfund Chemical Excise Tax might apply. IT and tax departments in particular will need to collect transactional data all along the supply chain, as well any applicable master data. Systems and processes will also need to be established in order to properly calculate and remit taxes that are due, as well as apply for refunds or exemptions.
How does a company report the Superfund Chemical Excise Tax?
Superfund Chemical Excise Taxes are reported on Form 6627 (Environmental Taxes), which attaches to Form 720 (Quarterly Federal Excise Tax Return). Semi-monthly payments should be made by the 15th and 30th of each month, but the IRS is providing relief from penalties for non-payment up through the first quarter of 2023.
ONESOURCE Determination gives companies the ability to quickly comply with Superfund Excise and Hazardous Substance taxes by automatically and accurately calculating the amount of excise tax owed.