Superfund Chemical Excise Tax Reinstated

The IRS recently announced an extension of temporary relief from penalties for taxpayers making semimonthly Superfund chemical tax deposits. Originally, penalty relief was provided for payments made through the first quarter of 2023. The relief has been extended to include Superfund chemical tax deposits in the second, third, and fourth quarters of 2023. To qualify for penalty relief, taxpayers must make timely deposits (even if an incorrect amount) and pay the full amount due by the normal Form 720 due date (last day of the month following the quarter-end).

The Superfund Trust Fund is administered by the Environmental Protection Agency and finances cleanup and enforcement efforts at environmentally hazardous waste sites nationwide. The reinstated excise tax on chemicals and substances containing chemicals funds a portion of the Superfund Trust Fund. The Infrastructure Investment and Jobs Act (IIJA), signed into law in November 2021, reinstated the Superfund Chemical Excise Tax. The tax is effective July 1, 2022, through December 31, 2031.

The original Superfund Chemical Excise Tax was enacted with the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and expired on December 31, 1995.

What is included in the Infrastructure Investment and Jobs Act?

Like the original Superfund Chemical Excise Tax, the tax is imposed on chemicals and chemical substances.

The reinstated tax includes some additional modifications. Most notably, the tax on the amount of chemical per ton doubled. The threshold of taxable chemical composition of imported substances was also lowered from more than 50% of the weight or value of the materials used to produce a chemical substance to more than 20% of weight or value (IRC Section 4672).

What are Taxable Chemicals?

Under IRC Section 4662, the tax applies to any taxable chemical manufactured or produced in the United States or imported for consumption, use or warehousing. The tax liability is created when the chemical is sold or used by the manufacturer, producer, or importer. Unless otherwise prohibited through contractual agreements, the excise tax may be passed on to customers.

The list of 42 taxable chemicals can be found in IRC Section 4661 (Table 1). This list of chemicals did not change with Infrastructure Investment and Jobs Act. The new tax amounts range from $0.44/ton to $9.74/ton.

Several exceptions and special rules exist based on the use or production of the otherwise taxable chemicals, which include:

• Methane or butane used as fuel
• Substances used in the production of fertilizer
• Sulfuric acid produced as a byproduct of air pollution control
• Substances derived from coal
• Substances used in the production of motor fuel, etc.
• Substances having transitory presence during the refining process
• Separated isomer of xylene
• Recycled chromium, cobalt, and nickel
• Substances used in the production of animal feed
• Hydrocarbon streams containing mixtures of organic taxable chemicals (IRC Section 4662(b))

Special rules apply where taxable chemicals are manufactured or produced and then used to create a second taxable chemical by the same taxpayer. In this case, an initial tax is owed on the first taxable chemical when it is used to manufacture or produce the second chemical. A second tax, based on the rate applicable to the second chemical, is then applied on the sale of the second chemical. An offsetting credit or refund is available equal to the tax that was imposed on the first chemical at the time of its use to create the second chemical.

What are considered Imported Taxable Chemical Substances?

IRC Section 4671 imposes a tax on chemical substances at the time of sale, use or warehousing by the importer. An importer is defined as the person entering the taxable substance for consumption, use or warehousing in the United States.

Taxable chemical substances include substances specifically listed in IRC Section 4672 and Notice 2021-66; substances where the chemical composition includes more than 20% of the weight or value of a taxable chemical; and substances the IRS adds after a request for review.

Tax on imported chemical substances can be calculated using the same method that would be used to calculate tax on chemicals that were being manufactured or produced for sale or use in the United States. If an importer does not calculate tax, the taxpayer may utilize the IRS’s prescribed rates for the taxable substance. The chemical substance rates can be found here. As a final alternative, taxpayers can pay 10% of the substance’s value as a safe harbor.

How do you Report the Superfund Chemical Excise Tax?

Form 6627, Environmental Taxes, will be filed with Form 720, Quarterly Federal Excise Tax Return. If a taxpayer has a quarterly tax liability greater than $2,500, Form 720 deposits are required semimonthly for the period the tax liability is incurred, generally the first use or sale in the United States.

If semimonthly payments are required, the first required excise tax deposit will cover the first 15 days of July and is due July 29, 2022. In consideration of the difficulties associated with the initial administration and payment, taxpayers with semimonthly payment obligations may receive relief from penalties for calendar quarters three and four of 2022 and the first calendar quarter of 2023 if certain requirements are met (Notice 2022-15). Specifically, the taxpayer must demonstrate the tax delinquency is due to reasonable cause, not willful neglect. In addition, the taxpayer must have made timely excise tax deposits, even if the deposit amounts are incorrectly computed, and pay the full the amount of any semimonthly underpayment by the end of the month following the calendar quarter, the due date for the Form 720 for that quarter.

As discussed above, the rule requiring 95% of excise tax liability to be paid each semimonthly period is not in effect through the first quarter of 2023, effectively eliminating the ability to use the general excise tax safe harbor based on the second preceding calendar quarter. A taxpayer’s right to the prior period safe harbor to determine semimonthly payments will not be withdrawn during the first three quarters of 2023.

An offsetting credit or refund may be available for taxes paid on taxable chemicals and taxable substances that are exported. Timing of the initial tax and the credit may depend on when and where title passes. Guidance on other reporting issues, including details regarding the credits and refunds, is expected to be forthcoming.

What Do I Do Next?

1. Determine when the Superfund Chemical Excise Tax liability will be incurred (i.e., the first use or sale in the United States).

2. If you are a manufacturer or producer of chemicals, complete a full review of the chemicals you sell or use and compare it to the list of 42 taxable chemicals.

• Determine the amount of taxable chemicals sold and/or used in manufacturing or production.
• Estimate the amount of excise tax due based on tax rates per ton and prepare for the tax liability payment.

3. If you import chemicals, complete a full review of the chemicals you import and compare it to the list of 42 taxable chemicals.

• Determine the amount of taxable chemicals sold and/or used in manufacturing or production.
• Estimate the amount of excise tax due based on tax rates per ton and prepare for the tax liability payment.

4. If you import chemical substances, complete a full review of the taxable chemical substances you import and compare to the list of taxable chemical substances (including the original list of 50 substances and additional 101 substances released by the IRS in Notice 2021-66).

• Determine the amount of taxable chemical substances imported.
• Estimate the amount of excise tax due using one of the following methods:
  • utilizing the taxable substance rates published by the IRS
  • calculating tax on substances you believe to contain more than 20% of taxable chemicals by weight or value
  • paying the 10% safe harbor
• Prepare for the tax liability payment.

5. Consider necessary changes to your existing accounting systems to generate the information necessary to report and pay the tax on a timely basis. According to IRS Notice 2022-15, an accurate calculation and payment will be necessary by October 31, the due date for the third calendar quarter of 2022.

Additional information regarding the Superfund Chemical Excise Tax and IRS updates can be found on irs.gov.