November 10, 2021
Reinstatement and expansion of superfund excise taxes under Infrastructure Investment and Jobs Act could mean taxpayers in multiple sectors must pay tax on products they manufacture or import
NOTE: President Biden signed the Infrastructure Investment and Jobs Act into law on November 15, 2021.
On November 5, 2021, the House of Representatives passed H.R. 3684, the Infrastructure Investment and Jobs Act (IIJA). President Joe Biden is expected to sign the bill into law as early as the week of November 15. Effective July 1, 2022, the IIJA will:
The reach of the expanded superfund excise taxes potentially includes industrial and consumer product manufacturers, taxpayers that historically have not been subject to superfund excise taxes. Consequently, taxpayers in multiple sectors may be obligated to pay superfund excise taxes on products they manufacture or import.
Given the IIJA's effective date, newly affected taxpayers have a narrow window of time to develop a plan for integrating this cost into their pricing models and figuring out how to comply. Steps affected taxpayers should consider taking now include:
Taxpayers also should continue to monitor H.R. 5376, the Build Back Better Act (BBB).1 As currently drafted, the BBB would reinstate and increase the rate of superfund excise taxes for crude oil and petroleum products, in addition to the current oil spill liability tax. Taxes on those items would be effective July 1, 2022.
Chemical production and importation excise taxes under the IIJA
When enacted, Section 80201 of the IIJA will reinstate and amend superfund chemical excise taxes that expired in 1995,2 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 a taxable under IRC Section 4661, the chemical must be (1) on the list of taxable chemicals,3 and (2) "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
When reinstated by the IIJA, IRC Section 4672 will expand the scope of the chemical excise tax on imported "taxable substances" so it applies to 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 will be required to review and update the list of taxable substances for importers under IRC Section 4672 by January 1, 2022. Until IRC Section 4672 is reinstated, the list of chemicals and chemical byproducts subject to the excise tax as last enumerated by Treasury Notices in 1995 will apply.4 If an importer fails to provide Treasury with the information needed to determine the tax imposed (i.e., chemical make-up, weight and specific tax rate), the tax due will be 10% of the appraised value of the substance at the time it enters the United States for consumption, use or warehousing.
When reinstated, the chemical excise taxes will retain many of the provisions in effect as of their expiration in 1995, such as exceptions 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, will expand the scope of chemicals and chemical compounds subject to tax and will significantly modify the following provisions.
First, the IIJA will effectively double the tax rates imposed on each chemical subject to taxation. For example, substances previously taxed at $4.87 per ton will now be taxed at $9.74 per ton. As a further complication, compound substances and byproducts containing taxable substances taxed at different rates are subject to a unique tax rate computed using the formulary method currently found in Notice 89-61, 1989-1 C.B. 717, or as otherwise determined by Treasury. For example, imported phenol previously was taxed at $6.33 per ton based on its production and composition, including 78.9% by weight of the taxable chemicals benzene and propylene. Using a conversion factor formula and the rates in force at that time, the IRS calculated and published the rate for phenol.5 Under the IIJA, the IRS must recompute the rate based on the doubled rates for the base chemicals.
Second, the IIJA will 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 or chemical compound imported by a taxpayer is subject to the excise tax, the taxable chemical contents threshold at which a substance or chemical compound becomes taxable will decrease 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 must be made by the taxpayer and certified by the IRS. As with other current excise tax registration requirements, taxpayers will have to register with the IRS to certify their compliance obligations after they identify imported chemicals or chemical compounds that may meet the 20%-of-weight-or-value threshold.6 Coupled with this, the IIJA will also double the IRC Section 4671(b)(2) penalty for failure to register and report the required information to Treasury to 10% (from 5%) of the taxable substance or compound's appraised value.
Finally, the IIJA will 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 eliminated these taxes in 1995. By decoupling the expiration date from revenue collection caps, the IIJA will keep the restored chemical excise taxes in effect regardless of how much revenue is 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 on imported petroleum products; the reinstated tax would be in addition to the current oil spill liability tax.7 The rate of this revived additional excise tax would increase from 9.7 cents to 16.4 cents per barrel as of July 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 change.
When reinstated, the superfund excise taxes under the IIJA, coupled with changes in business and supply chain practices during the 25 years the taxes have been dormant, will affect significantly more taxpayers than the prior regime. The IIJA will significantly affect taxpayers that import or produce chemicals, chemical compounds or chemical byproducts subject to the new 20% threshold under Section 4671 for taxable chemical content weight or value.
Companies with US-based manufacturing that were not traditionally subject to the superfund excise taxes may now be subject to these taxes to the extent they directly import taxable substances. With the reinstatement and expansion of the superfund excise taxes, affected industries will be faced with complex compliance determinations that will 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 will create a new complex rate calculation.8 If the BBB is enacted as currently proposed, the added tax compliance and liability burden would be especially pronounced where the chemical excise taxes and the reinstituted crude oil and petroleum product excise tax apply in addition to the existing oil spill excise tax.
Overall, these reinstated and expanded superfund excise taxes, if enacted, will significantly affect any taxpayers that manufacture, import or otherwise use chemicals in any aspect of their business operations. Taxpayers need to begin planning now for the additional compliance requirements to avoid the doubled non-reporting penalties.
1 H.R. 5376, which is currently being considered by the House, was introduced on September 27, 2021.
2 Chemical excise taxes 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).
3 See IRC Section 4661(b).
4 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).
5 US Internal Revenue Service Announcement 94-50; 1994-14 I.R.B. 22; April 4, 1994
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 an initial table of rates is set forth in the statutes, most taxpayers will 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 does not address the taxable substances being added.