On June 24, 2022, one week before these taxes go into effect on July 1, the highly anticipated response from the IRS on the newly reinstated superfund chemical excise taxes was published through notices IR-2022-131 and IR-2022-132.
Notice IR-2022-131 focused on 15 frequently asked questions (FAQ).
This FAQ details what the superfund chemical excise tax is, how the tax is computed, and who may be liable for the tax. It reiterates the superfund chemical excise taxes will be reported on Form 720, Quarterly Federal Excise Tax Return, and Form 6627, Environmental Taxes, and provides the first return will be due October 31, 2022 for calendar quarter ending on September 30, 2022. It also clarifies that semimonthly deposits are required with the effective date of the tax but guides you to Notice 2022-15, 2022-18 I.R.B. 1043, that provides transitional relief for the third and fourth calendar quarters of 2022, and the first calendar quarter of 2023, regarding the failure to deposit penalties imposed through March 31, 2023.
The notice also confirms the tax will go into effect July 1, 2022 as originally reinstated in the Infrastructure Investment and Jobs Act. The effective date will not be delayed as the chemical industry had requested through comments to the IRS in Notice 2021-66.
The IRS notice clarified further there are two separate superfund chemical excise taxes: one on “taxable chemicals” and another on “taxable substances.” That is, the tax imposed on the sale or use of a taxable chemical by the manufacturer, producer, or importer of the taxable chemical and imposed on the sale or use of a taxable substance by the importer of the taxable substance.
At the time of the publication of this FAQ, 151 substances are listed as taxable substances, but the IRS expects that number will likely change as substances are added to or removed from the list of taxable substances. Q5 answers the two ways a substance can be added or removed from the list of taxable substances pursuant to Internal Revenue Code (IRC) Section 4672(a)(2) and (4).
First, a substance can be added to the list of taxable substances by the secretary, in consultation with the administrator of the U.S. Environmental Protection Agency and the commissioner of the U.S. Customs and Border Protection, if the secretary determines that taxable chemicals constitute more than 20% of the weight (or more than 20% of the value) of the materials used to produce the substance (determined on the basis of the predominant method of production). A substance may be removed from the list of taxable substances if the secretary determines that taxable chemicals constitute 20% or less of the weight and 20% or less of the value of the materials used to produce the substance (determined on the basis of the predominant method of production).
Second, an importer or exporter of a substance (or other interested person) can petition the secretary to add the substance to or remove the substance from the list of taxable substances. For purposes of claiming refunds under §4662(e) for §4661 tax paid on chemicals used in the production of an exported substance, in the case of a petition of an importer or exporter (i) that is filed and accepted by the secretary before January 1, 2023, (ii) that seeks to add the substance to the list of taxable substances, and (iii) based on which the secretary adds the substance to the list of taxable substances, both the filing date of the petition and the date the substance is added to the list of taxable substances will be deemed to be July 1, 2022. More information on the procedures for petitioning the secretary to add or remove substances from the list of taxable substances will be released in advance of July 1, 2022.
Q14 and Q15 focused on registration requirements and reiterated that only persons wanting to engage in tax-free sales of intermediate hydrocarbon streams containing organic taxable chemicals and/or conduct tax-free inventory exchanges must be registered by the IRS under Activity Letter G. Persons can apply for the registration by filing Form 637, Application for Registration (For Certain Excise Activities), with the IRS. Applicants can check on the status of their application by calling the IRS.
Notice IR-2022-132 focused on issuing tax rates for 121 taxable substances.
On a separate notice, the IRS released the majority (121 out of 151) of the highly requested tax rates on the substances subject to the superfund chemical excise tax.
As a background, when these taxes were reinstated through the Infrastructure Investment and Jobs Act, tax rates were only provided for the 42 chemicals subject to the tax under IRC §4661 and not for the taxable substances under IRC §4672(a)(3) and Notice 2021-66.
It is important to note as of the date of this publication that 151 substances are subject to this tax and we only received 121 via Notice IR-2022-132. The IRS stated that tax rates for the additional substances will be released later and published on the IRS website via Form 6627 as soon as they become available.
Some taxpayers are still attempting to determine if they are required to use these prescribed rates; however, the IRS stated that taxpayers are not required to use the IRS-prescribed tax rates for the §4671 tax and may calculate their own rates. However, the notice was silent as to how the IRS will view under possible examination and audit the varying difference in rates between taxpayer-calculated rates versus IRS-prescribed rates.
The IRS website lists the taxable substances with prescribed rates as of June 24, 2022 ranging from $1.49 to $23.65 per ton.
Executive Summary
With the reinstatement of superfund excise tax on certain chemicals, taxpayers are navigating the compliance responsibilities to properly comply. As a level of uncertainty still remains on tax rates and the application to certain types of chemicals, further delay of IRS guidance may pose a challenge to be properly compliant. We anticipate additional guidance in the coming weeks for further clarification.
If you have any questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.