Two reinstated excise taxes on the chemical industry are likely to create significant compliance challenges, to the detriment of U.S. companies, tax professionals and trade association researchers have said ahead of the upcoming effective date.
Background.
The Infrastructure Investment and Jobs Act (IIJA; PL 117-58) brought back the tax on sales of taxable chemicals under Code Sec. 4661 and the tax on specified sales or uses of imported taxable substances under Code Sec. 4671. The levies, known as the Superfund excise taxes, become effective July 1. The Superfund refers to the hazardous-substance cleanup program created by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).
The Superfund excise taxes originally expired on December 31, 1995. Given the passage of time as well as the evolution of technologies since the mid-1990s, transitioning back to these regimes won’t be easy.
“Given the amount of time that has passed since the Superfund excise tax was last imposed, new chemical manufacturers, producers, and importers will not have experience with compliance, and even established chemical companies may have lost their internal knowledge base during the intervening decades,” Robert Friedman, partner at Proskauer Rose LLP, told Checkpoint. His comments were joined by Thomas Multari, a law clerk in the firm’s tax department.
2022 Superfund excise taxes.
The IIJA reinstates the two taxes with several modifications. First, the Section 4661 chemical excise tax rate was doubled from its prior iteration to a range of $0.44 per ton up to $9.74, depending on how a chemical (from a list of 42) is sold or used. Also, the Section 4671 substance excise tax now applies to significantly more substances, as the IIJA expanded the definition of a taxable substance. Notice 2021-66 features a comprehensive list of taxable substances that will be subject to the new excise tax. (See IRS issues guidance on reinstated Superfund chemical excise taxes; 12/15/2021.)
Friedman said the list “will evolve” as the IRS makes additions, creating “a major compliance burden on importers.”
While the Section 4661 rate can be applied for calculating the Section 4671 rate, taxpayers can elect for the alternative method of using 10% of the taxable substance’s value upon import into the U.S. The threshold of what’s considered a taxable substance is now substantially lower. If a substance is composed of at least 20% of chemicals under Code Sec. 4662, it is taxable. Previously the threshold was 50%.
Reporting requirements.
Taxpayers will need to report Superfund chemical taxes on Form 6627, Environmental Taxes, which is attached to the taxpayer’s Form 720, Quarterly Excise Tax Return. The first due date will be for the third quarter of 2022, due in October. Additionally, taxpayers with a quarterly liability greater than $2,500 will be required to make semimonthly deposits of at least 95% of the net tax liability incurred during the tax period unless a deposit safe harbor applies.
Failure to make a required deposit will generally incur a penalty, but the IRS is providing penalty relief for the third and fourth quarters of calendar year 2022, as well as the first calendar quarter of 2023. For more, see IRS Provides Relief from Superfund Chemical Tax Deposit Failures (4/18/2022).
Practitioner advice.
Tax professionals across major firms have been reminding clients that will be subject to the reinstated taxes of the looming effective date. There are concerns among experts that the taxes will pose significant hurdles.
Companies have a limited time frame to determine which of their chemicals or substances are taxable, according to John Heithaus, indirect-tax principal at EY. Speaking at a December 13 panel on a webcast presented by the firm, Heithaus advocated for the use of data systems to accurately assess liability. This involves a deeper dive into a company’s manufacturing process.
Heithaus described the new Superfund regimes as “very broad” and warned that the lowered substance threshold “radically expands the world of potential substances that meet the definition and the statute of an imported taxable substance.” The EY panelists said calculating tax owed when considering the various parties involved at different stages of the supply chain may be time-consuming and difficult.
Deloitte, in a joint article by several practitioners, raised the issue of the tax treatment of butane and methane, which are taxable only when first used as something other than a fuel. “This creates a potential liability for downstream product sales such that the first company that uses the methane or butane in a manner other than as a fuel will have to report and remit the Superfund Excise Tax,” the firm explained.
To alleviate the administrative burden of complying with the new taxes, Deloitte suggests that taxpayers implement automated tax calculation and reporting processes, stressing that “it is critical” for companies to work with their information technology departments, though some necessary data elements may not be available.
In the latest issue of PricewaterhouseCoopers’ quarterly indirect-tax compliance newsletter, published in May, the firm noted that exemptions from the Superfund excise taxes are available. These include exported taxable chemicals and substances, and those used for certain animal feed, fertilizer, and fuel purposes. Companies should be knowledgeable about registration and documentation requirements for claiming a refund.
According to Friedman, closer analysis of these exceptions can lead to confusion as technical aspects of chemicals are factored in.
“For example, some refiners use hydrofluoric acid or propylene in their alkylation units to make gasoline,” he explained. “The tax on butane could also be avoided if it is blended into gasoline; methane could avoid the tax if it is burned as a fuel in a power plant or used as a refinery feedstock, but could be taxed if it is used to make methanol” for downstream chemical production.
Multari and others on the Proskauer team wrote in May on the firm’s tax blog that the complexities of the two taxes shift the burden onto taxpayers, who must—as other firms agreed—”undertake a detailed, granular level review” of their internal processes and business as applicable to the new requirements. Proskauer also recommends cross-department data collection synchronization to avoid noncompliance and possible penalty.
Industry pushback.
When the Superfund excise tax provisions of the IIJA were under consideration as the legislation was pending, researchers at the American Chemistry Council published a paper in opposition to the proposal to reinstate the two excise taxes.
Issued in July 2021 by the council’s economics and statistics unit, the paper predicted that the Superfund excise taxes would cost the U.S. chemical sector over $1.2 billion per year “because cost pass-throughs are unlikely in a globally competitive environment.” According to the researchers, foreign companies not subject to the taxes would have an advantage over U.S. companies as domestic costs would increase and be passed onto customers. This could potentially lead to plant closures and job losses, particularly in the East Coast region and in Texas, the paper determined.
“The loss of productive activity would also result in lower tax collections,” the Council argued.
Such sentiments aren’t limited to the chemical industry itself. There are broader concerns that reintroducing the taxes now, at a time when inflation is high and steadily increasing, would have adverse effects on the economy.
Biden administration initiatives.
The federal government nonetheless remains optimistic that the taxes are worth reviving because of how the revenues will be used. The reinstated Superfund excise taxes are projected to raise approximately $14.5 billion in revenue over the next decade, according to the Congressional Budget Office.
In December, the Environmental Protection Agency announced it would use the first $1 billion raised to “initiate cleanup and clear the backlog of 49 previously unfunded Superfund sites” and boost cleanup efforts at other sites throughout the U.S.
The $1 billion figure is part of the $3.5 billion set aside for environmental remediation at Superfund sites. A report delivered to Congress by the White House Council on Environmental Quality described the funding as “one of the largest investments in American history to address the legacy pollution that harms the public health of communities and neighborhoods.”
The May 20 report is a follow-up to recommendations from the White House Environmental Justice Advocacy Council, which was established by an executive order from President Joe Biden. It was mandated pursuant to the Federal Advisory Committee Act.
“Approximately 60 percent of the sites to receive funding for new cleanup projects are in historically underserved and overburdened communities,” the report stated.
Looking ahead.
The guidance the IRS has released thus far has been seen as a decent start, but more clarity is needed to bring Superfund tax compliance into the 21st century, experts said. Notice 89-61 was temporarily suspended as the IRS considers an update to reflect the IIJA.
According to Friedman, this has created confusion over the procedure for a taxpayer to receive a written determination of whether their product is a taxable substance. Additionally, the IRS will need to address technological advances in the production of chemicals made with or from renewable feedstocks or from recycled plastics, he said.
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