As of July 1, 2022, Superfund excise taxes under IRC Sections 4661 and 4671 will be reinstated and apply to all US-based operations, including those in Puerto Rico. These excise taxes were reinstated under the Infrastructure Investment and Jobs Act (IIJA) (see Tax Alert 2021-2059).

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.

Changes to excise taxes

Effective July 1, 2022, the IIJA:

• Expands and reinstates superfund excise taxes on both the domestic production of certain chemicals and the importation of "taxable substances" that were previously subject to the superfund excise tax
• Broadens the scope of qualifying "taxable substances" sold or used by the importer by lowering the taxable chemical content threshold to 20% (from 50%) of the weight or value of the materials used to produce the substance
• Imposes the tax at twice the historic rate for base chemicals

The IRS released further guidance on the excise taxes in Notice 2021-66. In addition to the 50 taxable substances initially listed in IRC Section 4672(a)(3), Notice 2021-66 includes an additional 101 substances that will be taxable if imported into the US (or credited if exported out of the US) (See Tax Alert 2022-0018 for a discussion of Notice 2021-66 and a full list of taxable substances as of the date of this Alert). Taxpayers seeking to add or remove a substance from the list may petition the IRS following the procedures outlined in Revenue Procedure 2022-26 (see Tax Alert 2022-1015).

Temporary penalty relief

In Notice 2022-15, 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 (see Tax Alert 2022-0688) as long as (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 tax is paid in full by the due date for filing the Form 720 return for that quarter.

Implications

When reinstated, the Superfund excise taxes are likely to affect significantly more taxpayers than the prior regime. Companies that manufacture or produce the listed base chemicals and metals in Puerto Rico should begin identifying what sources of information are available (within ERP, purchasing or other systems) to determine the amount of taxable chemicals. Similarly, companies that import chemical substances into Puerto Rico should consider analyzing their import data against the lists of taxable substances to determine exposure and compliance obligations. The U.S. Customs Automated Commercial Environment (ACE) database can provide importers with the information needed to make these determinations.

Due to the effective date of July 1, 2022, companies should immediately determine the effects on their specific manufacturing and sourcing of the taxable chemicals and substances, including pricing increases passed on to them from vendors, and outline specific compliance planning steps to meet the new tax requirements.

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