In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which revived and expanded long dormant excise taxes (known as the Superfund Chemicals Taxes) used to address hazardous waste sites in the United States. The new taxes, which go into effect on July 1, 2022, will apply to the sale of certain chemical substances, and to an importer’s sale or use of specified substances.
EXCISE TAX ON CHEMICAL SALES
26 U.S.C. § 4661 imposes an increased per-ton tax on the sale of 42 different chemicals. The new tax rates are twice as high as the historical per-ton rates that existed when the tax was allowed to expire at the end of 1995:
|Chemical subject to
§ 4661 tax
|New Tax Rate (per ton)||Prior Tax Rate (per ton)|
Under 26 U.S.C. § 4661, these above taxes are set to expire on December 31, 2031 26 U.S.C. § 4662 provides for certain exceptions to the imposition of the tax:
The § 4661 tax will also not be imposed on the sale of taxable chemicals for export, if properly substantiated.
EXCISE TAX ON IMPORTERS OF TAXABLE SUBSTANCES
26 U.S.C. §§ 4671-4672 impose taxes on an importer’s sale or use of 50 different substances:
|Ammonium nitrate||Propylene glycol|
|Polyethylene resins, total||Propylene oxide|
|Styrene-butadiene, latex||Ethylene oxide|
|Styrene-butadiene, snpf||Ethylene dichloride|
|Synthetic rubber, not containing fillers||Cyclohexane|
|Ferrochromium nov 3 pct||Phthalic anhydride|
|Ferrochrome ov 3 pct. carbon||Ethyl methyl ketone|
|Nickel waste and scrap||Carbon tetrachloride|
|Wrought nickel rods and wire||Chromic acid|
|Nickel powders||Hydrogen peroxide|
|Phenolic resins||Polystyrene homopolymer resins|
|Polystyrene resins and copolymers||Acrylic and methacrylic acid resins|
|Ethyl alcohol for non-beverage use||Vinyl resins|
|Ethylbenzene||Vinyl resins, NSPF.|
Although this list of taxable substances is published in 26 U.S.C. § 4672(a)(3), the IRS released a number of IRS Notices between 1990 and 1995 concerning taxpayer requests for a determination whether a listed chemical substance met the definition of “taxable substance.” These IRS Notices increased the taxable substances list to more than 100 individual chemical substances.
On December 13, 2021, the IRS published IRS Notice 2021-66, which included an additional list of approximately 100 taxable substances that the IRS considered in the early 1990s via individual IRS Notices and that will now be subject to the Superfund Excise Taxes.
The tax is imposed on the importer of the taxable substances and becomes due upon the first sale or use after import. The tax rate for taxable substances is dependent on the individual chemical composition of the substance. Before the Superfund Excise Taxes expired, a chemical substance that was composed of at least 50% of chemicals listed in 26 U.S.C. § 4662 could be found to be a taxable substance. The Infrastructure Bill lowered this threshold to 20%. Therefore, a chemical substance could qualify as a taxable substance if taxable chemicals listed constitute more than “20 percent of the weight (or more than 20 percent of the value) of the materials used to produce such substance.”
Taxpayers may again request a written determination from the IRS whether a product they export or import qualifies as a taxable substance, that is, whether its chemical makeup includes at least 20% of a listed taxable chemical in 26 U.S.C. § 4661. However, IRS Notice 2021-66 suspended prior guidance (IRS Notice 89-61) on how to request this determination, so taxpayers must await additional guidance from the IRS on the procedure to do so. IRS guidance is expected before the new taxes go into effect on July 1, 2022.
With the new, lower 20% weight or value threshold, certain additional substances may now be considered Taxable Substances. If a substance is not on the List of Taxable Substances, then importers of those substances will not owe Taxable Substances Excise Tax. However, if those same substances are exported and contain Taxable Chemicals, then the U.S. manufacturer will not be able to obtain a refund for Chemical Sales Excise Tax because the substance is not on the List of Taxable Substances.
The rate levied by 26 U.S.C. §§ 4671-4672 is the same rate that would have been imposed by § 4661 on the taxable chemicals used as materials. However, should a taxpayer fail to report or provide data to the IRS to determine the tax in a timely manner, the tax levied would be 10% of the appraised value of the taxable substance at the time the substance entered the U.S. for consumption, use, or warehousing – a 5% increase from the historical calculation.
TAX DEPOSIT, PAYMENT AND REPORTING
Businesses not already filing excise tax returns will need to become familiar with Form 720, Quarterly Federal Excise Tax Return, and making required deposits twice a month. The Superfund Chemical Taxes are reported on Form 6627, Environmental Taxes, filed as an attachment to Form 720. Superfund Chemical Taxes will need to be reported on the third-quarter 2022 Form 720 due October 31, 2022, for the period July 1, 2022, through September 30, 2022. Late-filing penalties of 5% of the amount due may apply to each month the form remains unfiled, up to a penalty of 25%.
Like other environmental taxes reported on Form 720, deposits twice a month are required. Given the July 1, 2022, effective date of the Superfund Chemical Taxes, the first deposit of tax covering the first 15 days of July is due by July 29, 2022.
Penalties may apply to late deposits, ranging from 2% to 15% depending on the number of late days. However, acknowledging the various compliance challenges facing taxpayers, the IRS recently provided temporary failure-to-deposit penalty relief in Notice 2022-15, which effectively provides protection from failure-to-deposit penalties through the third quarter of 2023. The Notice provides specific criteria a taxpayer must satisfy to qualify for penalty relief, which differs based on the quarter of the year for which the relief is being sought. For the third and fourth calendar quarters of 2022, and the first calendar quarter of 2023, a taxpayer will be deemed to have acted with reasonable cause with no failure-to-deposit penalty imposed if (i) the taxpayer makes timely deposits of applicable Superfund Chemical Taxes, even if the deposit amounts are computed incorrectly; and (ii) the amount of any underpayment of the applicable Superfund Chemical Taxes for each calendar quarter is paid in full by the due date for filing the Form 720 for that quarter.
For the first, second, and third quarters of 2023, the IRS will permit taxpayers to rely on the deposit safe harbor and will not impose a penalty for failure to deposit even if the technical requirements of the safe harbor are not met as long as, for the look-back quarter at issue (i.e., the second preceding calendar quarter), (i) the taxpayer made timely deposits of applicable Superfund Chemical Taxes, even if the deposit amounts were computed incorrectly; and (ii) the amount of any underpayment of the applicable Superfund Chemical Taxes for each calendar quarter is paid in full by the due date for filing the Form 720 for that quarter.
The penalty relief in Notice 2022-15 essentially provides taxpayers until October 31, 2022, to determine whether a chemical manufactured or imported is subject to a Superfund Chemical Tax and the amount of tax due. It is recommended that taxpayers focus their efforts in the near term on determining whether they owe tax and, if so, on preparing to make a deposit of some amount on July 29, 2022.