The IRS on June 24 released frequently asked questions and a rate schedule on the Superfund chemical excise taxes taking effect on July 1. The releases provide helpful new guidance on how the taxes will operate, but many unanswered questions remain.
The Infrastructure Investment and Jobs Act (Pub. L. No. 117-58) enacted in 2021 resurrected the Superfund excise taxes under Sections 4661 and 4671 with new rates and modified rules. The taxes had previously expired in 1995.
Section 4661 imposes tax at various rates per ton on 42 “taxable chemicals” sold or used by a manufacturer, producer or importer. Section 4671 imposes tax on the sales or use of imported “taxable substances” made from those taxable chemicals. The statute provides an initial list of 50 taxable substances and instructs the IRS to add any substance in which taxable chemicals constitute more than 20% of the weight or value. The IRS has provided an initial list (Notice 2021-66) of 101 additional substances for a current total of 151 taxable substances.
Grant Thornton Insight:
A substance containing more than 20% of a taxable chemical is not a taxable substance under Section 4671 until it has been identified and added to the list by the IRS. The IRS does not identify taxable chemicals by anything other than a name in formal guidance (such as a Chemical Abstracts Service Registry Number), but draft Form 6627 includes the basic chemical formula. Taxpayers can petition to have a substance added or removed, and chemical manufacturers generally push for additions because of the refund available for export. The IRS is reportedly currently considering hundreds of potential additions.
Rates
The tax rate per ton on chemicals under Section 4661 is prescribed by statute and generally is double the rate in place in 1995. The tax on imported substances under Section 4671 is calculated as “the amount of tax which would have been imposed by Section 4661 on the taxable chemicals used as materials in the manufacture or production” of the substances.
The importer is generally responsible for calculating the tax under Section 4671, though there is little guidance on how that calculation should work apart from the statutory language. The IRS in IR-2022-132 has offered prescribed rates for 121 of the 151 taxable substances. Taxpayers are not required to use the IRS rate and may calculate their own rate. If there is no prescribed rate and the taxpayers does not calculate a rate, then the rate is 10% of the appraised value of the substance at the time of import.
Grant Thornton Insight:
The 10% of value rate is typically significantly higher than a rate calculated based on Section 4661 tax, often by an order of magnitude. Importers of taxable substances without a prescribed IRS rate should strive to calculate a rate based on information from the supplier.
Liable taxpayers
The tax is generally imposed on the first sale or use. For Section 4661 chemicals, it is the producer, manufacturer or importer who reports and remits the tax upon the first sale or use. Taxable substances under Section 4671 are only taxable if imported, and the tax is reported and remitted by the importer upon sale or use. The statute provides that the importer is “the person entering the taxable chemical for consumption, use, or warehousing.”
Grant Thornton Insight:
There is no further guidance on who is considered the importer, though regulations proposed in 1983 and never finalized provided that the person entering the chemical is the consignee who filed the entry summary for consumption or warehouse. However, in certain circumstances in which the consignee was not considered the beneficial owner, the beneficial owner could be deemed the importer.
Reporting and remitting
Taxpayers must report the tax on Form 6627 and attach it to Form 720, which is filed quarterly. The first reporting for the tax will be on the Form 720 for the second calendar quarter of 2022, due on Oct. 31 and covering July, August and September. Drafts of Form 6627 and Form 720 updated for the new taxes have been released but not finalized.
Taxpayers with more than $2,500 in liability in a quarter must make semi-monthly deposits, generally on the 14th and 29th of each month. The first deposit will be due on July 29 for the period from July 1 through July 15. Taxpayers must generally deposit 95% of the net liability for the period, though there is a safe harbor that allows qualifying taxpayers to deposit one-sixth of the total amount from the prior quarter.
The IRS has offered penalty relief (Notice 2022-15) and will waive failure to deposit penalties in 2022 and the first two quarters of 2023 for taxpayers that “make an affirmative showing that such failure is due to reasonable cause and not due to willful neglect.” Taxpayers will be deemed to meet this standard if they make timely deposits (even if incorrect) and any underpayment is paid in full by the quarterly due date for filing the Form 720. The IRS will also forgo its authority to withdraw the right to use the safe harbor deposit method for incorrect deposits.
Grant Thornton Insight:
The relief will generally allow taxpayers to pay any incorrect amount for semi-monthly deposits and avoid a penalty as long as the true liability is paid by the time the Form 720 is filed, which will be due Oct. 31 for the July, August and September period.
Exceptions
The statute provides exceptions from tax and potential refunds for many specific uses, including exports and the use in the production of fertilizer, animal feed or motor fuel. The IRS has not yet provided a procedure filing for refunds and has not yet provided exemption certificates for exports or other nontaxable uses. The 1983 proposed regulations did include exemption certificate templates.
Next steps
The new guidance is helpful for taxpayers, though several outstanding issues remain unresolved by the IRS. Taxpayers who import or manufacture chemicals should work quickly to identify potential liability because deposits will be due by July 29. Taxpayers seeking to pass along the cost to customers should work to have the process and communications in place by July 1, when the tax first takes effect.
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