Beginning this month, US-based businesses that sell, use, or import certain base materials and products may be subject to tax as a result of Congress’s revival of a long-dormant statute referred to as the Superfund Chemical Excise Tax (“Superfund Tax”). With the deadline for the initial tax filings and deposits nearing, businesses should ensure they have appropriately assessed the extent to which the “new” tax applies to them, whether their operations and systems capabilities adequately support determining the correct amount of tax, and whether their business strategies optimize their cash flows around Superfund Tax.
In a 1980 effort to fund the cleanup of hazardous waste sites when the original owner or operator could not be found, Congress created the Superfund Tax, imposing tax on the first use, import, or sale of certain “taxable chemicals” and “taxable substances” (compounds which contain substantial amounts of taxable chemicals). Of course, the term “taxable chemical” means more than a chemical extracted from a crude oil or natural gas stream and includes both metals like nickel, cobalt, zinc compounds, etc. and substances formed from any of these materials. Despite several critical uncertainties around the application of the tax and its administration, the U.S. Department of Treasury issued no regulations regarding Superfund Tax, and the Internal Revenue Service (“IRS”) issued very few rulings in the area. When Superfund Tax lapsed in 1995 (following several failed legislative efforts to revive it), most taxpayers thought it was permanently buried. As a result, experts in the area largely retired, and companies abandoned their (pre-Y2K) compliance systems. However, Congress wielded its powers late last year to resurrect the Superfund Tax and reinstate it effective July 1, 2022. Under current law, Superfund Tax is scheduled to sunset (again) on December 31, 2031.
Superfund Tax is imposed on the sale or use of any one or more of 42 enumerated chemicals by its manufacturer, producer, or importer (significantly, the Superfund Tax law is silent on the appropriate treatment of chemicals recycling). Each chemical bears a different rate of tax on a per-ton (or fraction of a ton) basis as detailed in Appendix A.
Prior to the first imposition of Superfund Tax, various industries successfully lobbied for exemptions. Thus, Congress exempted certain chemicals from Superfund Tax to the extent they are used as or in the production of fuels or animal feed; produced as byproducts from air pollution control; or derived from coal, only present transitorily during refining; etc. See Appendix C for a comprehensive list of exemptions. Furthermore, any inventory exchange of a taxable chemical between two “G” registrants under Form 637, is exempt from Superfund Tax, although subsequent sales or uses of the exchanged chemical would be subject to tax.
Because the tax is focused on taxable chemicals that remain within the United States, any chemicals that are sold for export (or for resale by the purchaser to a second purchaser for export) are also exempt from Superfund Tax to the extent the party claiming exemption obtains proof that the chemical was either exported or resold for export. The IRS will recognize such proof if it comports with the standards of proof provided for export exceptions of other federal excise taxes. Although no relevant procedural guidance exists, a credit or refund of tax may be claimed if the Superfund Tax is inadvertently paid on product that can be shown to have been exported.
Superfund Tax is also imposed on the sale or use of any one or more taxable substances by an importer of such substances. A taxable substance is basically any substance that contains more than 20 percent of a taxable chemical by weight or value, and the applicable tax rate is based roughly on the taxable chemical content of the particular substance. The Internal Revenue Code provides a list of per se taxable substances, and the IRS has issued a Notice identifying additional taxable substances. All current “taxable substances” are listed in Appendix B (although the scientifically precise will note that the list contains a number of material, definitional ambiguities). Prospectively, the IRS also has authority to add or remove taxable substances from taxation.
The IRS recently prescribed per-ton tax rates for all but 30 of the current taxable substances, as indicated in Appendix B. Importantly, importers are not required to use the prescribed rates and may calculate their own rates based on the taxable chemical content of a taxable substance. Importers calculating their own rates are required to provide “sufficient information” to the government regarding the taxable chemical content of the substance to calculate Superfund Tax. If sufficient information is not provided, Superfund Tax will be imposed at the rate of 10 percent of the appraised value of the substance. Importers of taxable substances whose content or purity varies should plan to make their own calculations and provide sufficient support, being cognizant of the fact that the law does not specify the form of measurement or whether content is measured on an input or post-manufactured basis.
Taxable substances used as fuels or in the production of fertilizer or animal feed may be imported on a tax-free basis, as may substances on which petroleum import tax or Superfund Tax has already been paid. Similar to taxable chemicals, refunds or credits may be claimed if Superfund Tax was inadvertently paid on such exempt substances. Importantly, according to recently issued guidance, the IRS will generally not subject to Superfund Tax any substance which has been finished for end-use.
A taxpayer reports its Superfund Tax liability on Form 6627, Environmental Taxes, which is attached to Form 720, Quarterly Federal Excise Tax Return. Deposits of Superfund Tax must be made semimonthly and must not be less than 95 percent of the amount of net tax liability incurred during the semimonthly period. However, a safe harbor may apply that protects the taxpayer from penalties in the event of an underpayment of the Superfund Tax.
Because the Superfund Tax is “new,” failures to remit tax or to calculate it properly will not result in underpayment penalties through March 31, 2023, so long as the failure or miscalculation is due to reasonable cause and not willful neglect. The IRS will assume reasonable cause exists when a taxpayer has made timely deposits and paid any underpayment in full by the end of each quarter.
If you would like to discuss your specific situation, how the rules might apply to you, and your best prospective business and tax strategy for Superfund Tax, please contact Jon de Jong, Albert Liguori, Brian Pedersen, or Chase Ezell.
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