January 5, 2022
IRS lists substances subject to reinstated Superfund excise tax, offers procedural guidance and suspends Notice 89-61
In Notice 2021-66 (released December 14, 2021), the IRS provided guidance on Superfund excise taxes, which are reinstated as of July 1, 2022, under the Infrastructure Investment and Jobs Act (IIJA) (see Tax Alert 2021-2059).
Notice 2021-66 does the following:
The Notice also requests comments from taxpayers by January 28, 2022, on issues that require clarification or additional guidance.
The IIJA instructed the Treasury Department to review and update the list of taxable substances for importers under IRC Section 4672 by January 1, 2022. Notice 2021-66 meets this requirement. In addition to the 50 taxable substances initially listed in IRC Section 4672(a)(3), the Notice published an additional 101 substances that will be taxable if imported into the US (or credited if exported out of the US).
When updating the list of taxable substances in Notice 2021-66, the IRS applied the IIJA's 20% threshold for qualifying as a taxable substance (replacing the previous threshold of 50%). Despite this expanded list (attached to this alert), the importer or exporter of any substance has the burden of requesting a substance's inclusion or removal from the list. The Secretary then has 180 days to respond.
As specified in Notice 89-61, the 1995 Instructions for Form 6627 included specific rates, per ton, of each taxable substance. To calculate these rates, the IRS and the EPA applied complex formulas that evaluated the molecular weight of each taxable chemical used to produce one ton of a taxable substance. Because the IIJA doubled the tax rate on the initial 42 taxable substances listed in IRC Section 4661 (see Tax Alerts 2021-2059 and 2021-1896), these formulas need to be recalculated to determine the appropriate tax rate per ton for a given taxable substance. Notice 2021-66, however, is silent on the previously determined applicable tax rate per ton for each of the prior taxable substances, suggesting that the default tax calculation will be 10% of the assessed import value.
IRC Section 4672(b)(2) places the burden on the importer to furnish sufficient information to the Secretary to determine whether the imported substance contains more than 20% of a taxable base chemical and if so, what tax rate should be applied to the imported taxable substance. Absent furnishing that information to the Secretary, importers of taxable substances compute the tax at 10% of the substance's appraised value at the time the substance entered into the US for consumption, use or warehousing (generally the Customs entry value) in accordance with amended IRC Section 4671(b)(2).
Petitions to modify list of taxable substances
Treasury and the IRS intend to update Notice 89-61 to reflect the changes made to IRC Section 4672(a)(2) by the IIJA and any additional guidance that may be issued on procedures for petitioning to add or delete a substance from the list of taxable substances.
Registration for certain exceptions
The IRS is revising Form 637, Application for Registration (For Certain Excise Tax Activities), to add Activity Letter G, which must be used by persons either (1) making inventory exchanges of taxable chemicals under IRC Section 4662(c)(2) or (2) selling or buying intermediate hydrocarbon streams under IRC Section 4662(b)(10). Until the revised Form 637 is released, applicants may use the current Form 637 by writing in Activity Letter G and providing the following information: (1) a list of the taxable chemicals the applicant exchanges and/or the intermediate hydrocarbon streams the applicant sells or buys; and (2) a description of the applicant's processing plants, the products produced, the handling and storage facilities, and the processes involving hydrocarbon streams, as appropriate.
Notice 2021-66 confirms that the Superfund taxes will be reported on Form 6627, Environmental Taxes, which is attached to Form 720, Quarterly Federal Excise Tax Return.
Companies that manufacture or produce the listed base chemicals and metals (either directly or as a byproduct of other processes) should begin identifying what sources of information are available (within ERP, purchasing or other systems) to determine the amount of taxable chemicals. For example, many taxpayers purchase or source feedstocks containing multiple chemicals that only become taxable when processed through a reactor or other conversion process that separates the base chemical from the feedstock, compound, gas, petroleum or aggregate.
Companies that import chemical substances should consider analyzing their import data against the lists of taxable substances to determine exposure and compliance obligations. Use of the U.S. Customs Automated Commercial Environment (ACE) database can provide importers with valuable information needed to make these determinations.
Companies that purchase any of the base chemicals or the taxable substances, or products containing either, even if from US sources, should consider analyzing the potential impacts of the tax being incorporated into the price of products and consider how to mitigate, where possible, overall tax exposure. In particular, consideration should be given to non-taxable sales or uses, in particular the exportation of taxable chemicals or taxable substances, even if the party using or exporting the product was not the original taxpayer.
Due to the impending effective date of July 1, 2022, companies should immediately determine impacts to their specific manufacturing and sourcing of the taxable chemicals and substances, consider submitting comments to the IRS in response to Notice 2021-66, and outline specific compliance planning steps to meet the new tax requirements.
Superfund list of substances