October 18, 2021
Proposed federal bills would reinstate, expand and increase superfund excise taxes as soon as January 1, 2022
Taxpayers in multiple sectors may soon be obligated to pay superfund excise taxes on products they manufacture or import. Provisions in H.R. 3684, the Infrastructure Investment and Jobs Act (IIJA),1 and H.R. 5376, the Build Back Better Act (BBB),2 as currently drafted, would reinstate significant superfund excise taxes imposed on industrial chemical, petroleum, oil and gas industries. The proposals' breadth would expand the reach of the superfund excise taxes to potentially include consumer product manufacturers and retailers, taxpayers that historically have not been subject to superfund excise taxes.
The IIJA would expand and reinstate superfund excise taxes on the domestic production of certain chemicals, broaden the scope of "taxable substances" sold or used by the importer, and impose tax at twice the historic rate. The IIJA's proposed expanded definition of "taxable substances" would not only impact a broader scope of the oil and gas and advanced manufacturing sectors, but it may subject many consumer product manufacturing and retail companies to superfund excise tax on their imports. The proposed effective date for these provisions is July 1, 2022, creating a narrow window of time for newly affected taxpayers to develop a plan for integrating this cost into their pricing models and figuring out how to comply.
Starting January 1, 2022, the BBB would reimpose and increase the rate of superfund excise taxes for crude oil and petroleum products, in addition to the current oil spill liability tax.
Chemical production and importation excise taxes under the IIJA
Section 80201 of the IIJA would reinstate and amend superfund chemical excise taxes that expired in 1995,3 including the excise tax imposed under Internal Revenue Code (IRC) Section 4661 on the sale of 42 taxable chemicals sold by a "manufacturer, producer, or importer." To be taxable under IRC Section 4661, the chemical would have to (1) be on the list of taxable chemicals4 and (2) be "manufactured or produced in the United States or entered into the United States for consumption, use or warehousing." The statutory list of taxable chemicals includes:
Expansion of taxable substances to include imported intermediate and finished products
IRC Section 4672 would expand this tax in the case of imported "taxable substances" to include a significantly broader list of products including any substance constituting greater than 20% of the weight or value of the materials used to produce the substance. Treasury would be required to review and update the list of taxable substances for importers under IRC Section 4672 by January 1, 2022. In the interim period for reinstated IRC Section 4672, the list of chemicals and chemical byproducts subject to the excise tax as last enumerated by Treasury Notices in 1995 would be in effect.5 If an importer fails to provide the Secretary of the Treasury (Secretary) with information needed to determine the amount of tax imposed (i.e., chemical make-up, weight and specific tax rate), the tax due would be 10% of the appraised value of the substance at the time it enters the United States for consumption, use or warehousing.
The reinstated chemical excise taxes would retain many of the provisions in effect as of their expiration in 1995, such as exceptions included in IRC Section 4662 and exemptions from the tax imposed under IRC Section 4671 for sales of chemicals already subject to excise tax under IRC Sections 4611 (imposing a petroleum excise tax) and 4661. The IIJA, however, would make significant modifications to other provisions while likely expanding the scope of chemicals and chemical compounds subject to tax.
First, the IIJA would effectively double the tax rates imposed on each substance subject to taxation. For example, substances previously taxed at $4.87 per ton would now be taxed at $9.74 per ton. As a further complication, compound substances and byproducts containing taxable substances taxed at different rates would be subject to a unique tax rate that would be computed using the formulary method currently found in Notice 89-61, 1989-1 C.B. 717 or as otherwise determined by the Secretary.
Second, the IIJA would modify provisions in IRC Section 4672 to expand the number of substances subject to tax and increase the potential liability exposure for noncompliance. For purposes of determining whether a substance imported by a taxpayer would be subject to the excise tax, the amount of taxable chemicals in a substance would be decreased from 50% to 20% of the weight or value of the materials used to produce, or contained in, the substance or chemical compound. This complex determination would have to be made by the taxpayer and certified by the Internal Revenue Service (IRS). As with other current excise tax registration requirements, after identifying imported chemicals or chemical compounds that may meet the 20% of weight or value threshold, taxpayers would have to register with the IRS to certify their compliance obligations.6 The IIJA would also double the IRC Section 4671(b)(2) penalty for failure to register and report the required information to the Secretary to 10% (from 5%) of the taxable substance's appraised value.
Finally, the IIJA would extend the expiration date of the chemical excise taxes to December 31, 2031. Historically the provisions' expiration dates were linked to funding thresholds based on the Hazardous Substance Superfund financing rate under IRC Section 4611 — the provision that effectively expired these taxes in 1995. By de-linking the expiration date from revenue collection caps, the IIJA would ensure the restored chemical excise taxes would remain in effect regardless of the amount of revenue generated.
Crude oil and petroleum excise tax under the BBB
Section 136701 of the BBB would reinstate dormant superfund excise taxes imposed on crude oil when received at a refinery and imported petroleum products; the reinstated tax would be in addition to the currently-in-force oil spill liability tax.7 The rate of this revived additional excise tax would be increased from 9.7 cents to 16.4 cents per barrel as of January 1, 2022. The current oil spill liability tax, which is imposed at 9 cents per barrel under IRC Section 4611(c)(2)(B)(ii), would not be changed.
The reinstatement of the superfund excise taxes as currently proposed coupled with changes in business and supply chain practices during the 25 years the tax has been dormant would extend the reach of superfund excise taxes to significantly more taxpayers than were impacted under the prior regime. This proposal would significantly affect taxpayers that import or produce chemicals, chemical compounds or chemical byproducts subject to the reduction from 50% to 20% of the IRC Section 4671 taxable chemical content weight or value threshold.
Retail companies and consumer product manufacturers traditionally have not been impacted by superfund excise taxes, but to the extent they directly import taxable substances they would be exposed to these taxes. If the proposed superfund excise taxes are enacted as proposed, affected industries would be faced with complex compliance determinations that would involve understanding the chemical composition of imported manufactured products and chemical compounds — both by weight composition and component values — before even registering to pay the taxes with the IRS. Further, varying rates based on each type of chemical included within a taxable substance would create a new complex rate calculation.8 The added tax compliance and liability burden would be especially pronounced where taxpayers are subject to the chemical excise taxes and the reinstituted crude oil and petroleum product excise tax in addition to the existing oil spill excise tax.
While this legislation is still pending final enactment, there are steps taxpayers should take now. These include:
Overall, the IIJA provisions, combined with the proposed reimposition of the crude oil and petroleum product hazardous substance superfund taxes and increased rate on the related petroleum excise tax contained in the BBB, if enacted, would have a significant impact on any taxpayers that manufacture, import or otherwise use chemicals in any aspect of their business operations. Taxpayers should consider planning now for the possibility of additional compliance requirements to avoid the doubled non-reporting penalties.
1 H.R. 3684, which was originally passed by the House on July 1, 2021, was amended and passed by the Senate on August 10, 2021 and returned to the House.
2 H.R. 5376, which is currently being considered by the House, was introduced on September 27, 2021.
3 Chemical excise taxes that would be impacted by the IIJA include the "Tax on Certain Chemicals" imposed in 1980 by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (P.L. 96-510) and the "Tax on Certain Imported Substances Derived From Taxable Chemicals" imposed in 1986 by the Superfund Amendments and Reauthorization Act of 1986 (P.L. 99-499).
4 See IRC Section 4661(b).
5 See IRS Notice 89-61, 1989-1 CB 717, modified by Notice 95-39, 1995-1 CB 312, for the IRS procedures for requesting whether a chemical is subject to tax under IRC Section 4672. This list of chemicals and chemical byproducts was expanded to include synthetic linear fatty alcohols and synthetic linear fatty alcohol ethoxylates in 2007. See Treasury Notice 72 FR 62730 (Nov. 6, 2007).
6 Registration for these excise taxes is accomplished using Form 637. See IRS 637 Registration Program and IRS Form 637, Application for Registration (For Certain Excise Tax Activities).
7 Reinstated by Pub. L. No. 116-94, "Further Consolidated Appropriations Act, 2020" and extended in effect until December 31, 2025, by Pub. L. No. 116-260, "Taxpayer Certainty and Disaster Tax Relief Act of 2020."
8 While there is an initial table of rates set forth in the statutes, most taxpayers would need to request a unique calculation of the taxability and tax rate for each of their products from the IRS, subject to a default rate of 10% of assessed value for substances later determined to be taxable due to containing as little as 20% of the weight or value of certain substances but not properly registered. This proposed administrative process follows a 30-year-old revenue procedure that was not designed to accommodate the significantly expanded class of taxable substances being proposed.