Editor: Mo Bell-Jacobs, J.D.
On Nov. 15, 2021, President Joe Biden signed into law the Infrastructure Investment and Jobs Act (Infrastructure Act), P.L. 117-58. The Infrastructure Act provides $550 billion in new spending over the next five years on many infrastructure projects. One of the provisions in the Infrastructure Act is the reinstatement and modification of the Superfund excise tax on chemicals and imported taxable substances. The reinstated tax will affect many industrial manufacturers and importers of certain taxable chemicals. It is scheduled to be effective from July 1, 2022, through Dec. 31, 2031. This item addresses and summarizes the key provisions of the Infrastructure Act as it pertains to the reinstated Superfund tax, along with some taxpayer considerations related to the tax.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), P.L. 96-510, was enacted to create a hazardous substance cleanup program funded in part by Secs. 4661 and 4671 until its expiration on Dec. 31, 1995. CERCLA was enacted, more or less, to hold businesses in the chemical industries financially accountable for the pollution their industrial operations tended to create. The Superfund taxes fund a dedicated trust fund for cleanup of Superfund sites. When the tax expired in 1996, funding for Superfund cleanup projects was reduced, and funds for cleanup were allocated from the Treasury general fund. The reinstatement of the Superfund tax on chemical manufacturing and chemical imports will once again provide dedicated funding for Superfund cleanup.
Superfund tax on chemicals
Sec. 4661 imposes tax on the sale or use by the manufacturer, producer, or importer of 42 listed chemicals. Prior to 1996, the rates of tax on those chemicals ranged from $0.22 per ton to $4.87 per ton. The Infrastructure Act essentially doubles these rates with taxes ranging from $0.44 per ton to $9.74 per ton. There are several exemptions to the tax listed under Sec. 4662(b), which include but are not limited to methane or butane used as a fuel, substances used in the production of fertilizer, substances derived from coal, and substances used in the production of motor fuel.
Additionally, various activities give rise to a credit or refund of the chemical tax. Sec. 4662(d) provides refunds of the tax for chemicals that are: (1) used in the manufacture of any other substance that is a taxable chemical; (2) used in the production of a qualified fertilizer substance that is used as a qualified fertilizer substance; (3) a qualified fuel that are used as a qualified fuel; or (4) used in the production of a qualified animal feed substance that is used as a qualified animal feed substance.
Superfund tax on imported taxable substances
Sec. 4671 imposes tax on "taxable substances" sold or used by an importer.Sec. 4672(b)(1) provides that an importer is a person who enters a taxable substance into the United States for consumption, use, or warehousing.A taxable substance is any substance that is listed under Sec. 4672(a)(3) at the time the substance is sold or used by the importer.
The amount of tax imposed on a taxable substance is equivalent to the amount of tax that would have been imposed on the taxable chemicals used as materials in the manufacture of the taxable substance if the substance had been manufactured in the United States. An importer may furnish information to Treasury by submitting a taxable substance petition. Prior to the enactment of the Infrastructure Act, if an importer did not furnish sufficient information to determine the amount of tax imposed on a taxable substance, a 5% default tax on the appraised value of the substance at the time of entry into the United States would be imposed. However, the Infrastructure Act increases the rate to a 10% default tax on the appraised value of the taxable substance at the time of entry.
An initial list of taxable substances is provided in Sec. 4671. In December 2021, Treasury and the IRS, following the mandate in the statute, published a list of 100 taxable substances that will be subject to tax (Notice 2021-66).
Importers of any taxable substance may file a petition for the substance to be added or removed from the list of taxable items. Petitions provide information on the weight of chemicals and thus the precise amount of tax due, which may be less than the 10% default tax. The government has not yet published procedures on the petition process. The previous guidance, Notice 89-61, was suspended in Notice 2021-66.
Similar to Sec. 4661, Sec. 4671 provides certain exemptions from the tax. Some of these exemptions include but are not limited to taxable substances used as fuel or in the production of fertilizer and animal feed. Moreover, Sec. 4672(d) provides refunds of the tax paid for the use of certain chemicals that are: (1) used in the production of a qualified fertilizer substance that is used as qualified fertilizer substance; (2) a qualified fuel used as a qualified fuel; or (3) used in the production of a qualified animal feed substance that is used as a qualified animal feed substance.
Notice 2021-66 addresses the reporting and registration requirement of the Superfund tax. The tax will be reported quarterly on Form 720, Quarterly Federal Excise Tax Return, with an accompanying Form 6627, Environmental Taxes. Further, application for registration for certain tax-free sales and uses of taxable chemicals must be made on Form 637, Application for Registration (For Certain Excise Tax Activities).
How to prepare for the tax
In order to prepare for the Superfund tax, taxpayers should determine the chemicals that might be subject to tax, identify any compliance gaps, and calculate any potential tax exposure. Further, taxpayers should develop excise tax compliance procedures and reporting processes. In doing so, taxpayers should evaluate transactions that may qualify for tax-free sales, exemptions, or credit opportunities. In preparation for the July 2022 deadline, taxpayers should prepare and file their Form 637 registration, consider preparing comments to Treasury on areas of uncertainty, and evaluate customer contracts and set pricing for July.
The reinstatement of the Superfund tax will impose increased costs on taxpayers that manufacture, use, or import relevant chemicals. Additionally, businesses that purchase these chemicals may see increased prices, as the amount representing tax may be included in updated contracts for these products. With such a relatively short amount of time before the tax becomes effective, it is imperative that businesses potentially subject to the tax familiarize themselves with the existing statutes, regulations, and tax forms relevant to the tax. Further, taxpayers should consult with their tax advisers to avoid potential compliance issues.
Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP.
Unless otherwise noted, contributors are members of or associated with RSM US LLP.