As reported in our May 19, 2022 memorandum, the Superfund excise duty on certain chemical substances was reinstated effective July 1, 2022 under the Infrastructure Investment and Jobs Act. The newly introduced tax has surprised many and most taxpayers have problems calculating and reporting the tax. We provide some guidance below and stand ready to help.
There are two separate Superfund chemical excise taxes: a tax on the sale or use of “Rated Chemicals” and a tax on the sale or use of imported “Rated Substances”. The reintroduced taxes impose an excise duty on the sale or use of a taxable chemical by the manufacturer, producer or importer of the taxable chemical and an excise tax on the sale or use of a taxable substance by the importer of the taxable substance. For example, a paint product manufactured outside of the United States and imported into the United States is not subject to excise tax unless the specific component substances are identified as taxable substances, regardless of the elemental content of the components. Assuming that none of the paint components are listed as a taxable substance, the importer can import the product tax-free even if the paint components contain taxable chemicals. On the other hand, if a United States company manufactures a color component using a taxable chemical, the company would be taxed on the use or sale of the taxable chemical regardless of the amount of the chemical in the product. The tax would be levied on the import of the taxable chemical only if the import of the chemical occurs at the same time as the sale of the chemical.
Superfund chemical taxes are reported on Form 720 Quarterly Federal Excise Tax Return and Form 6627 Environmental Taxes. The Internal Revenue Service (IRS) has published Form 6627 instructions and tax FAQs. The IRS also recently issued Revenue Procedure 2022-26, which provides the exclusive procedures for seeking a determination under Section 4672(a)(2) of the Internal Revenue Code (Code) that a substance is added to or subtracted from the taxpayer list removes substances under Section 4672(a) of the Code (List).
A chargeable chemical is a chemical that: (1) is listed in Section 4661(b) of the Code; and (2) manufactured or manufactured in the United States or imported into the United States for consumption, use or storage. Section 4661(b) lists 42 chemicals. Manufacturers, producers, or importers who sell or use these chemicals must pay a tax ranging from $0.44 to $9.87 per tonne, depending on the chemical, one tax rate per tonne of each taxable chemical. Part II of Form 6627 has been updated to reflect the current tax rate per tonne of each taxable chemical.
A taxable substance is any substance that is listed as a taxable substance at the time of sale or use by the importer of the substance – substances that are not listed are not taxable regardless of their content. A substance is listed as a chargeable substance if it is listed under Section 4672(a)(3) or if the Secretary of the Treasury or his designee (Secretary) has added it to the list.
The FAQs state that at the time of publication, 24 June 2022, 151 substances are listed as taxable substances. The FAQs point out that the number is likely to change as substances are added or removed from the list.
On June 24, 2022, the IRS announced that it is mandating tax rates for 121 of the 151 taxable substances. Prices range from $1.49 to $23.65 per ton. Per the FAQ, importers are not required to use the IRS prescribed tax rates for Section 4671 tax and can calculate their own tax rates. The FAQ states: “[t]The amount of Section 4671 tax in respect of chargeable substances is generally the amount of Section 4661 tax that would have been charged on the chargeable chemicals used in the manufacture or production of the chargeable substance if the chargeable chemicals were in the United States States for use in manufacture or production of the taxable substance.”
The instructions for Form 6627 state that in order to calculate tax, taxpayers generally need to know the ratio of the weight of each taxable chemical used to manufacture the substance to the total weight of the substance (the conversion factor). If there is insufficient information to determine the conversion factor and the IRS has provided a tax rate for the substance either online or in the Table of Taxable Imported Chemical Substances in the instructions for Form 6627, that rate will apply. If there is insufficient information to determine the conversion factor and the IRS has not provided a tax rate for the substance, the tax is 10 percent of the substance’s estimated input value. The instructions state that the IRS will provide additional tax rates online or in the Taxable Imported Chemical Substances Table as they become available.
Superfund chemical excise taxes are reported on Form 6627, Environmental Taxes, which is attached to Form 720, Quarterly Federal Excise Tax Return. The first return for the calendar quarter ending on 09/30/2022is due by October 31, 2022.
Taxpayers are required to file semi-monthly Superfund chemical taxes. A semi-monthly period is the first fifteen (15) days of a calendar month or that portion of a calendar month after the 15th day of the month. In Notice 2022-15, the IRS sees relief for the third and fourth calendar quarter of 2022 and the first calendar quarter of 2023in relation to failure to file penalties imposed by Section 6656 for failure to file Superfund chemical excise taxes March 31, 2023.
Procedure for changing the list of substances subject to the Superfund tax
Revenue Procedure 2022-26 provides the exclusive procedures for requesting a determination under Section 4672(a)(2) that a substance be added to or removed from the list. Section 4 of the Revenue Procedure states that an importer or exporter of a substance, or a person other than an importer or exporter of such a substance (interested person), may request to add such a substance to the list or delist such a substance by filing a petition to the IRS. Pursuant to the Revenue Procedure, any request to amend the list submitted prior to the publication of the Revenue Procedure or in response to the request for comment in Notice 2021-66 will not meet the requirements of this Revenue Procedure. The IRS will not process such requests.
A request to list a substance may be made if taxable chemicals represent more than 20 percent of the weight or value (as the sum of all taxable chemicals) of the materials used in the manufacture of such substance. A request to delist a substance may be made if taxable chemicals represent no more than 20 percent by weight and no more than 20 percent by value of the materials used to manufacture such a substance. Separate applications must be made for each substance to be added or removed from the list.
The IRS issues a notice of filing in the federal register, beginning a 60-day comment period on the petition. In the case of a request filed by an importer or exporter of a substance, the IRS makes a decision within 180 days of the filing of the request. The 180-day determination period may be extended by agreement between the petitioner and the IRS. The 180-day determination period does not apply to petitions submitted by interested parties (anyone other than an importer or exporter of such substance).
There’s nothing intuitive or easy about this tax – neither knowing when it’s due nor calculating it. This step can be particularly difficult for customers who are unfamiliar with the chemical components of certain chemical substances. Key points are:
- The tax is payable upon sale or use of the taxable substance or chemical. The tax would be due on import only if the import occurs at the same time as the sale or use;
- A substance is not taxable if it is not on the list;
- The threshold of 20 percent content of taxable chemicals determines which substances can be included in the list, but such content does not automatically trigger inclusion as a taxable substance;
- Taxable substances are added (and removed) through a petition process that includes notices and comments;
- The IRS does not identify taxable chemicals or taxable substances by CAS Registration Number (RN), only by name; and
- Taxable chemicals sold or used in the United States are taxed regardless of the quantity sold or used.