On March 27, 2023, the IRS published an advanced copy of the new proposed regulations related to the federal Superfund chemical excise taxes imposed on certain chemicals and certain imported substances, effective July 1, 2022.
In general, the excise tax on taxable chemicals is imposed on the sale or use of taxable chemicals by manufacturers, producers, and importers of such chemicals. The excise tax on taxable substances is imposed on the sale or use of taxable substances by importers of such taxable substances.
The proposed regulations affect code Sections 4661, 4662, 4671, and 4672 of the Internal Revenue Code to amend the Environmental Tax Regulations (26 CFR part 52). Specifically, taxpayers affected by these regulations include manufacturers, producers, and importers that sell or use taxable chemicals and importers that sell or use taxable substances.
The IRS stated the proposed regulations align with Congress’ intent when reimposing the measure that the tax should only be applied once and intend to provide definitions and clarifications regarding the statutes’ terms and rules. In addition, the proposed regulations provide model certificates and examples for the taxpayer to follow in an effort for taxpayers to consistently apply the Superfund excise tax rules.
Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS. Written or electronic comments and requests for a public hearing must be received within 60 days from the date of the publication. Taxpayers are encouraged to submit public comments electronically through the Federal eRulemaking Portal and indicate IRS and REG-105954-22 when submitting comments.
Highlights of the Proposed Regulation
- 52.4661-1 Imposition of the Tax
- This section included clarification by adding that the tax under §4661 “attaches” when the manufacturer, producer, or importer of a taxable chemical first sells or uses the taxable chemical.
- No §4661 “attaches” when the manufacturer, producer, or importer of a chemical mixture containing one or more tax-paid chemicals, or a subsequent purchaser of such chemical mixture, dilutes the chemical mixture with a solvent to change the concentration of the tax-paid chemical or chemicals in the chemical mixture, provided the solvent is not a taxable chemical.
- No §4661 tax attaches to a foreign manufacturer’s sale of a substance listed in the table under §4661(b) to an importer because the substance is not a taxable chemical at the time of sale. Instead, the §4661 tax attaches to the importer’s first sale or use of the taxable chemical.
- For taxable mixtures, the tax attaches to the importer’s first sale or use of the chemical mixture.
- Clarifies that neither the mining of the ore nor the extraction of the taxable chemical from the ore is a taxable event.
- Gives an overview of how to calculate the tax and determine the weight of a taxable chemical, including conversion requirements and calculations for chemical mixtures.
- Gives examples to illustrate the rules under §4661.
- 52.4662-1 Taxable Chemicals & Other Definitions
- Provides what a taxable chemical is under §4661 and clarifies that all isomeric forms of a substance listed in the table under §4661(b) are treated as having the same name and molecular formula of the substance.
- Defines a chemical mixture to mean a substance composed of two or more physically combined components that are not chemically bonded. Chemical mixtures include alloys, solutions, suspensions, and colloids.
- Clarifies that goods entered into a customs territory for transportation and exportation are not goods entered into the customs territory for consumption, use, or warehousing.
- Defines exportation, exporter, importer, and drop shipments in and outside the United States.
- Clarifies what a manufacturer is and states that a manufacturer does not include a person who dilutes a chemical mixture comprising one or more tax-paid chemicals with a solvent that is not a taxable chemical and further clarifies where the tax attaches when using contract manufacturing.
- Defines molecular formula, taxable chemical registrant, tons, and use.
- Clarifies the loss or destruction of a taxable chemical through spillage, fire, natural degradation, or other casualty is not a use of that chemical.
- 52.4662-2 Exceptions & Special Rules
- Clarifies that methane and butane are treated as taxable only if used otherwise than as a fuel.
- Clarifies that nitric acid, sulfuric acid, ammonia, or methane used to produce ammonia are the only chemicals that qualify as exempt chemicals if used as fertilizers.
- No §4661 tax is imposed on sulfuric acid produced solely as a byproduct of and on the same site as air pollution control equipment.
- Clarifies that the term “taxable chemical” does not include any substances derived from coal.
- No §4661 tax is imposed in the case of nitric acid, sulfuric acid, ammonia, or methane used to produce ammonia if used as an animal feed substance.
- No §4661 tax is imposed on any organic taxable chemical while such chemical is part of an intermediate hydrocarbon stream containing one or more organic taxable chemicals.
- Defines intermediate hydrocarbons as a mixture of organic chemicals that requires further distillation or processing to manufacture or produce a taxable chemical.
- Describes that methane and butane are not organic taxable chemicals at the time of isolation from an intermediate hydrocarbon stream.
- Describes the one-step isolation process and the multistep isolation process for intermediate hydrocarbons.
- Provides the requirements to qualify for the exception in §4662(b)(10) regarding hydrocarbons to include both parties having a G 637 registration and unexpired certificate from the purchaser.
- Provides a sample copy of the model certificate of the taxable chemical registrant.
- 52.4662-3 Inventory Exchanges
- Clarifies that inventory exchanges by two parties registered with activity letter G 637 registration qualify as exempt and provides a sample of the model certificate to be used.
- 52.4662-4 Credit or Refund of Tax Under §4662(d)
- Clarifies that any §4661 tax paid by the manufacturer, producer, or importer (initial manufacturer) with respect to a tax-paid chemical that is subsequently used by any person (subsequent manufacturer) in the manufacture or production of any other substance that is a taxable chemical (subsequent taxable chemical) will be allowed as a credit or refund to the subsequent manufacturer in the same manner as if it were an overpayment of the §4661 tax. The subsequent manufacturer may file a claim for credit or refund (without interest) for the amount of the overpayment.
- Discusses the conditions to allowance of a claim for credit or refund, including supporting information required, and illustrates the allocation rules with examples.
- Provides a copy of a sample model certificate to support a claim for credit or refund.
- 52.4662-5 Exports
- Provides the circumstances under which a credit or refund (without interest) of the §4661 tax is allowed to the person who paid the §4661 tax.
- Provides that a manufacturer or producer of a taxable chemical may sell a taxable chemical tax free only if the person who purchases the taxable chemical from the manufacturer or producer (first purchaser) intends to export the taxable chemical or resell it to a second purchaser that intends to export the taxable chemical.
- Provides that a manufacturer or producer may not sell a taxable chemical tax free to a first purchaser for resale to a second purchaser if the second purchaser does not intend to export the taxable chemical itself but instead plans to sell it to a third purchaser that will resell the taxable chemical or export it.
- Discusses in detail what happens when exported chemicals return to the U.S. and how to make a tax-free sale of a taxable chemical for export to a first purchaser that is located outside the U.S. and what documentation will be needed at the time of shipment.
- Gives guidance on what proof of export will be required when the manufacturer or producer is the exporter and when the manufacturer or producer is not the exporter and provides a model statement for export.
- Gives guidance on the conditions to allowance of claim for credits or refunds, including the supporting information required.
- 52.4671-1 Imposition of the Tax
- States that §4671 tax “attaches” at the time the importer first sells or uses the taxable substance.
- Clarifies the amount of §4671 tax with respect to any taxable substances is the amount of §4661 that that would have been imposed on the taxable chemicals used as materials in the manufacture or production of the taxable substance if the taxable chemicals had been sold in the U.S. for use in the manufacture or production of the taxable substance.
- Describes that the tax rate prescribed by the Secretary equals the amount of §4671 tax that would have been imposed if the taxable substance were produced using the predominant method of production of such substance using a stoichiometric material consumption equation that assumes a 100% yield.
- Importers of taxable substances are not required to use the rate or rates prescribed by the Secretary and may instead calculate the amount of §4671 tax pursuant to §4671(b)(1) and 52.4671-1(e)(1).
- 52.4671-2 Certain Fertilizer, Fuel, & Animal Feed Uses
- Discusses tax-free sales of a taxable substance pursuant to §4671(d)(1).
- Provides a sample model certificate to support tax-free sales of taxable substances under §4671.
- Discusses credits and refunds mechanisms and conditions to allowance of a claim for credit or refund, including supporting requirements and a sample model certificate to support the claim for credit or refund.
- 52.4672-1 Definitions
- Defines conversion factors, importer, drop shipments, predominant method of production, taxable chemical, taxable substance, weight, and value tests.
- 52.4672-2 List of Taxable Substances
- Provides the link to the current list of taxable substances and mechanisms by which substances may be added to or removed from the list.
- Describes how synthetic organic substances and inorganic substances are eligible for addition to the list of taxable substances through weight or value test.
In addition to publishing the proposed regulations under REG-105954-22, the IRS also released a notice and revenue procedure addressing penalty relief and timing of when the taxable substances become eligible for refund.
Extension of Temporary Relief Related to the Penalty for Failure to Deposit Superfund Chemical Taxes Through Notice 2023-28
Notice 2023-28 extends the temporary relief provided under §3(a) of Notice 2022-15 related to the failure to deposit penalty imposed by code §6656. Specifically, the relief is extended in connection with the deposits of the Superfund chemical taxes for semimonthly periods in the second, third, and fourth calendar quarters of 2023 even if the deposits are computed incorrectly, provided (a) the taxpayer makes timely deposits and (b) any underpayment is paid in full by the due date for filing the Form 720 return for that calendar quarter. The notice also extends the relief provided by §3(b) of Notice 2022-15 related to the authority of the IRS to withdraw a taxpayer’s rights to use the deposit safe harbor rules through the second quarter of 2024 (June 30, 2024).
IRS Clarifies the Date on Which a Taxable Substance Is Added or Removed to the Taxable Chemicals List for Purposes of Claiming a Refund Under Code §4662(e)
Revenue Procedure 2023-20 modifies Rev. Proc. 2022-26 to clarify that the date on which a taxable substance is added to the Secretary’s list of taxable substances for purposes of refund claims under §4662(e) is the first day of the calendar quarter in which the petition is filed (for an interested person) or the day on which the petition is deemed filed (for an importer or exporter). Section 4672(a)(2) of the Code allows an importer or exporter of any chemical substance to request a determination of whether such substance should be listed as a taxable substance on the list or be removed from the list. Rev. Proc. 2022-26, 2022-29 I.R.B. 90, provides the procedures for importers, exporters, and interested persons to request a determination that a substance be added to or removed from the list.
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