After a 26-year break, on July 1 the IRS will once again begin collecting a Superfund chemical excise tax imposed on a wide variety of commonly used chemicals that are manufactured or imported into the U.S. The tax was reinstated under the 2021 Infrastructure Investment and Jobs Act (IIJA) and could create compliance challenges for some businesses using the chemicals subject to the tax and may lead to increases in the prices U.S. businesses will pay for their chemicals.
The Superfund chemical taxes were initially implemented in 1980 to fund the newly established Hazardous Substance Response Trust — commonly referred to as the “Superfund” — to help finance the federal government’s cleanup of hazardous waste sites. The tax was collected until Dec. 31, 1995, when the tax expired. The new Superfund chemical excise taxes will be collected until Dec. 31, 2031.
The Superfund chemical taxes will be reported on Form 6627, Environmental Taxes, which should be attached to a taxpayer’s Form 720, Quarterly Federal Excise Tax Return. Taxpayers must make semimonthly deposits of the tax. Fortunately, the IRS has issued transitional relief for the third and fourth quarters of 2022 and the first quarter of 2023 (Notice 2022-15) regarding failure to deposit penalties.
Tax on sale or use of taxable chemicals or substances
According to a FAQ released by the IRS in June, the Superfund excise tax applies in two situations:
- The sale or use of “taxable chemicals” under §4661 of the U.S. Tax Code
- The sale or use of imported “taxable substances” under §4671
There are 42 taxable chemicals listed in §4661(b) and the tax is imposed when they are manufactured or used in the United States, or when they are imported into the country for consumption, use or warehousing. The IIJA doubled the amount of tax that must be paid on taxable chemicals so that the most heavily taxed items, such as acetylene, benzene and butane, are taxed at $9.74 per ton. Potassium hydroxide is the lowest-taxed chemical at a rate of 44 cents per ton.
There are some exemptions to the Superfund excise tax under §4662(b) that are based on how the taxable chemicals are used. For example, chemicals used either as fuel or in the production of fuel are exempt from the excise tax. Additionally, chemicals used in the production of fertilizer are exempt.
A taxable substance is any substance that is listed in §4672(a)(3) or has been added to the list of taxable substances by the U.S. Secretary of the Treasury. The initial list of more than 100 taxable substances was included in IRS Notice 2021-66. However, the IRS has yet to release guidance addressing the tax rate to be applied to the listed taxable substances.
A substance is taxable when it is comprised of 20% or more of the chemical by weight or value. Under the previous version of the Superfund excise tax, the threshold was 50%.
Many tax professionals lack compliance experience
Given that it’s been more than two decades since U.S. businesses were required to pay the Superfund excise tax, many tax professionals are unfamiliar with it. Changes to how the IRS defines taxable substances also means that a new version of the tax will apply to more taxpayers than the previous version that expired in 1995. As a result, tax professionals should reach out to their clients who manufacture, produce or import chemicals for sale or for use to determine whether they have the processes in place for reporting and remitting the tax.
Tax professionals should also be aware of compliance issues that may result from the use of chemicals manufactured for one purpose but used for a different one. For example, a business that purchases a chemical that was exempt from the Superfund excise tax as fuel could be liable for the tax if it is used for a non-exempt purpose.
Tax could increase manufacturing costs
An analysis of the Superfund excise tax that was released by the American Chemistry Council in July 2021 found the return of the Superfund excise tax would lead to price increases that go beyond the taxed commodities. It noted that the chemicals that have been singled out for taxation are the basic building blocks for manufacturing countless items and will lead to price increases for items such as plastics, consumer electronics, batteries, solar panels and paints.
Additionally, the council noted that the markets for chemicals and chemical products are global in nature. As a result, U.S. manufacturers that pay more for chemicals that are subject to the tax will be at a competitive disadvantage relative to foreign manufacturers whose suppliers are not subject to the tax.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.