On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA), reinstating the Superfund excise tax on certain chemical substances under Sections 4661 and 4671 of the Internal Revenue Code (Tax Code). Effective July 1, 2022, the tax many were glad to see expire is back; the first deposit of the tax is due on July 29, 2022. This article discusses the tax and the challenges it poses.
Background
Prior to their expiration in 1995, the Superfund excise tax was used to fund the Hazardous Substance Superfund, established by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. Since the Superfund excise tax expired almost three decades ago, the industrial chemical community’s familiarity with its application has diminished substantially. The U.S. Environmental Protection Agency (EPA) used the funds to clean up domestic hazardous waste sites. The application of the tax and the deployment of funds were well understood; the U.S. Internal Revenue Service (IRS) developed robust guidance documents to explain how the tax operated.
Taxable Chemicals
Fast forward to today. Many in the chemical community are unfamiliar with the Superfund excise tax legacy, and the IRS is unprepared for the learning-curve challenge reactivating the tax has created. The Superfund excise tax will apply to a list of taxable chemicals and taxable substances, as of July 1, 2022, through December 31, 2031, if not extended. The excise tax applies to companies that manufacture, produce, or import any of the 42 specific chemicals listed in Section 4661 of the Tax Code, including ammonia, butane, benzene and mercury. Manufacturers, producers or importers that sell or use any of these chemicals must pay a tax of $0.22 to $4.87 per ton, depending on the chemical. The tax rates have doubled from the previous iteration of the Superfund tax.
Exemptions from the excise tax are listed in Tax Code Section 4662(b). These include taxable chemicals that are exempt due to their specific use — for example, methane or butane used as a fuel; or nitric acid, sulfuric acid, ammonia, or methane used in production of fertilizer. Ethylene and propylene may also be exempt, but only when used in the production of fuel (motor fuel, diesel fuel, aviation fuel or jet fuel). Section 4662(c)(2) provides an additional exemption from tax liability where a company imports a taxable chemical and exchanges that chemical as part of an inventory exchange with another entity. In these cases, the other entity would be liable for paying the excise tax, not the initial importer.
Taxable Substances
The IIJA also reinstated the Superfund excise tax on the import for sale or use of any taxable substance under Section 4671 of the Tax Code. Section 4672 defines a taxable substance as any that, at the time of sale or use by the importer, is listed as taxable. Taxable substances include the initial list of 50 taxable substances in Section 4672(a)(3) and 101 others added by the IRS in December 2021, through IRS Notice 2021-66.
Notice 2021-66 does not specify the tax rate for each taxable substance. Section 4671(b) provides the amount of tax imposed is equal to the amount of tax that would have been imposed by Section 4661 on the taxable chemicals used as materials in the manufacture of the taxable substance, if such taxable chemicals had been sold in the United States for use in the manufacture or production of the taxable substance. As of press time, the IRS is expected to issue guidance prior to July 1, 2022.
Relief Regarding Failure to Deposit Penalties
Companies required to report Superfund excise taxes must do so on their third-quarter 2022 Form 720, due by October 21, 2022. This is for the period July 1–September 30, 2022. Semi-monthly deposits are required, however. This makes the first tax deposit covering the first half of July 2022 due by July 29, 2022. Under the rules, a late fee of 5% may be applied on the amount due for each month the form remains delinquent up to a total penalty of 25%.
Discussion
It has been almost 30 years since the Superfund excise tax was in effect and, so, its return is catching many off guard. Companies need to be aware of this tax, evaluate the chemicals and substances they import, determine whether they owe any excise taxes, and make a deposit soon.
