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In Notice 2022-15 (April 15, 2022), the IRS stated that it will not impose penalties on taxpayers that fail to deposit superfund chemical taxes required under IRC Section 6656 for the third and fourth calendar quarters of 2022 and the first calendar quarter of 2023. Superfund chemical taxes, with modifications, were reinstated by Section 80201 of the Infrastructure Investment and Jobs Act (IIJA),¹ effective July 1, 2022.

The IRS also updated Form 637, Application for Registration (For Certain Excise Tax Activities), to add Activity Letter G, which must be used by taxpayers claiming exemptions from the tax because they are (1) making inventory exchanges of certain taxable chemicals or (2) selling or buying intermediate hydrocarbon streams.

Reporting and deposit requirements

The superfund chemical taxes, which are imposed on certain chemicals under IRC Section 4661 and certain imported substances under IRC Section 4671, must be reported on IRS Form 720, Quarterly Federal Excise Tax Return. If the net liability for the taxes listed in Part 1 of Form 720 is $2,500 or more for the quarter, then taxpayers must make tax deposits for each semi-monthly period in which the tax liability is incurred. Taxpayers also must submit Form 6627, Environmental Taxes, to substantiate the tax deposits.

The tax deposit for each semi-monthly period must be at least 95% of the net tax liability incurred during that period unless a taxpayer meets the deposit safe harbor in Treas. Reg. Section 40.6302(c)-1(b)(2)(ii) or (iii). The deposit safe harbor is based on the superfund chemical tax liability of the second preceding quarter, referred to as the “look-back quarter.” Because the superfund chemical taxes are newly reinstated, however, taxpayers will not have a look-back quarter so they cannot calculate the deposit safe harbor until the first calendar quarter of 2023.

Given these circumstances, the IRS will not impose penalties if (1) taxpayers make timely deposits of superfund chemical taxes (even if the deposits are computed incorrectly) and (2) any underpayment of the quarterly superfund chemical taxes is paid in full by the due date for filing the Form 720 return for that quarter. If taxpayers meet these requirements, the IRS will not withdraw their ability to use a deposit safe harbor in the future.

Registering certain exemptions

IRS Notice 2021-66 (released in December 2021) provided guidance on registering inventory exchanges of taxable chemicals under IRC Section 4662(c)(2) or selling or buying intermediate hydrocarbon streams under IRC Section 4662(b)(10), which are activities exempt from the superfund chemical taxes, provided all parties comply with the applicable requirements (see Tax Alert 2022-0018).Taxpayers must file Form 637 using the reinstated activity letter “G” for these exemptions. The IRS has 60 days to process Form 637 applications once they are assigned to an agent.

Implications

Companies should continue to evaluate anticipated effects of from the reinstatement of the superfund chemical taxes if they (1) produce, manufacture or import taxable chemicals defined in IRC Section 4661, or (2) import taxable chemical substances defined in IRC Section 4672, as expanded under Notice 2021-66. As previously detailed in Tax Alert 2022-0018, companies that believe they may be subject to this tax should consider:

• Identifying imported taxable chemicals and taxable chemical substances
• Identifying taxable chemicals sourced, produced or manufactured in the US
• Preparing process mapping and documentation necessary to support identified taxable items
• Evaluating technology-enabled data extraction, analysis and reporting processes
• Conducting a comprehensive tax compliance and tax technical assessment to meet the compliance requirements under the tax

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ENDNOTE

¹ Infrastructure Investment and Jobs Act Section 80201, Pub. L. No. 117-58, 135 Stat. 1328-1330.