Overview of Proposed Regulations Superfund Taxes

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Key Takeaways

On March 29, the IRS and U.S. Treasury Department (Treasury) published proposed regulations regarding the recently reinstated Superfund chemical taxes (Proposed Regulations) and set a May 28 deadline for comments.

The Proposed Regulations provide:

  • Definitions for several key terms, such as manufacturer, sale and use.
  • When the tax under Section 4661 attaches.
  • Clarifications regarding how an importer measures the tax that attaches to a chemical mixture that contains a taxable chemical.
  • Model certificates for claiming exemptions.
  • Procedures for claiming credits or refunds.
Overview

The Proposed Regulations and the preamble (Preamble) consider comments raised previously by taxpayers and discuss the framework of the Superfund chemical taxes. The result is guidance on a number of issues that were not addressed by the statute or prior guidance, which will be well received by taxpayers. This alert summarizes the Proposed Regulations as well as additional guidance relating to the extension of temporary relief for the failure to deposit penalties.

Background

The Superfund chemical taxes – which are under Sections 4661 and 4671 of the Internal Revenue Code – were reinstated by the Infrastructure Investment and Jobs Act, which was signed into law on Nov. 15, 2021.[1] The taxes under Section 4661 apply to manufacturers, producers and importers of 42 listed chemicals on a per-ton basis when sold, consumed or stored in a warehouse in the United States, while the taxes under Section 4671 apply to the sale or use by importers of taxable substances. The Superfund chemical taxes previously expired on Dec. 31, 1995, but are now effective from July 1, 2022, through Dec. 31, 2031.

The Proposed Regulations are set to apply to the Superfund chemical taxes in the calendar quarter beginning on or after the date the regulations are finalized. In the interim, taxpayers may rely on the Proposed Regulations.

Overview of Guidance Issued Prior to the Proposed Regulations

Treasury and the IRS have issued prior guidance on the reinstated Superfund chemical taxes. The following summarizes the guidance issued prior to the Proposed Regulations.

Notice 2021-66[2]

Provides the initial list of taxable substances, guidance on registration requirements and guidance on the procedural rules that apply to the Superfund chemical taxes.

Notice 2022-15[3]

Provides transitional relief with respect to failure to pay and deposit penalties for the third and fourth calendar quarters of 2022 and the first calendar quarter of 2023.

Revenue Procedure 2022-26

Provides an updated procedure by which importers, exporters and interested persons may petition to add or remove a substance from the taxable substances list as contemplated under Section 4661.

Section 4661 – Attachment of the Tax

The Preamble opens by clarifying that, consistent with the legislative history, tax under Section 4661 attaches to the first sale or use of a taxable chemical. The tax, however, does not attach to the sale by a foreign manufacturer to the importer; rather, it attaches to the importer’s initial sale or use of the taxable chemical. This is because the Proposed Regulations clarify that the definition of a taxable chemical is any substance that is (1) listed in the table under Section 4661(b) and (2) manufactured or produced in the United States or entered into the United States for consumption, use or warehousing.[4] The tax also does not attach when a chemical mixture is diluted with a solvent to change the concentration of the chemical mixture. A chemical mixture is defined as any substance “composed of two or more physically combined components that are not chemically bonded” and provides as examples “alloys, solutions, suspensions and colloids.”[5]

With respect to imported chemical mixtures, the Proposed Regulations clarify that the tax does not attach to a foreign manufacturer’s sale to an importer of a taxable chemical listed under Section 4661(b). Instead, the tax attaches to the importer’s first sale or use of the taxable chemical. In addition, tax is imposed on the weight of the taxable chemicals present in a chemical mixture at the time the importer first sells or uses the mixture.[6] The Preamble notes that this rule ensures that foreign and domestic manufacturers of chemical mixtures are treated the same for purposes of calculating the tax under Section 4661.

Section 4661 – Calculation of the Tax

The Section 4661 tax applies at a specified rate per ton.[7] The Preamble notes that the IRS prefers to use the actual weight of taxable chemicals and not some other method because of concerns that other methods may allow a taxpayer to artificially reduce the tax base. Notwithstanding, the Preamble notes that the IRS is open to alternative methods for measuring the weight of a taxable chemical if taxpayers submit additional comments that describe in detail alternative methods for measuring weight and that explain how the methods do not artificially reduce the tax base. In addition, the Preamble asks for comments on the type of documentation available in industry that could be used as support for a taxpayer’s weight measurement.

General Definitions

The Proposed Regulations also provide definitions of several key terms not defined by the statutes. Several of these definitions are noted below.

Manufacturer

The Proposed Regulations define the term “manufacturer” as “any person [who] produces a taxable chemical from new or raw material, feedstocks, or other substances, or from scrap, salvage, waste or recycled substances.”[8] It additionally includes in the definition any person who produces a taxable chemical by processing or manipulating a substance through the oxidation process. The Preamble also notes that any person who produces a taxable chemical from scrap, raw materials, salvage, waste or recycled substances is a manufacturer.

Importer

The Proposed Regulations define the term “importer” as “the person entering the taxable chemical for consumption, use or warehousing.”[9] An agent or customs broker who enters a taxable chemical into the United States for another person is not treated as an importer; instead, the importer is the first person in the United States to sell or use the taxable chemical.

Definition of Sale

The Proposed Regulations define the term “sale” as “the transfer of title or substantial incidents of ownership (whether or not delivery to, or payment by, the purchaser has been made) in a taxable chemical for a consideration, which may include, but is not limited to, money, services or property.”[10]

Definition of Use

A taxable chemical is “used” when the taxable chemical is “consumed, when it functions as a catalyst, when its chemical composition changes, when it is used in the manufacture or production of a chemical mixture or other substance (including by mixing or combining the taxable chemical with other substances), or when it is put into service in a trade or business for the production of income.”[11] The Proposed Regulations make clear that the mere manufacture or production of a taxable chemical is not a use of that chemical.

Exceptions to the Section 4661 Tax

Section 4662(b) provides a number of exceptions and special rules that apply to the Section 4661 tax, including:

  1. Methane and Butane – The Proposed Regulations build on the statute and provide that methane and butane are treated as taxable chemicals only if they are used otherwise than in the manufacture or production of any motor fuel, diesel fuel, aviation fuel or jet fuel.[12] Therefore, unlike other chemicals included in the list of taxable chemicals, the status of methane and butane as taxable chemicals cannot be determined until the time of their respective uses. Thus, there may be several sales of methane or butane that do not result in the attachment of tax. The Proposed Regulations provide an example where methane is treated as a taxable chemical when it is used to make antifreeze.[13]
  2. Qualified Fertilizer Substance – The Proposed Regulations also build on the statutory exemption for certain taxable chemicals that are qualified fertilizer substances. The Proposed Regulations provide that generally no Section 4661 tax is imposed on nitric acid, sulfuric acid, ammonia or methane used to produce ammonia if used as a qualified fertilizer substance.[14] A “qualified fertilizer substance” is defined as (A) any substance used by the manufacturer, producer or importer in a qualified fertilizer; (B) any substance sold for use by any purchaser in a qualified fertilizer use; or (C) any substance sold for resale by any purchaser for use, or resale for ultimate use, in a qualified fertilizer use.[15] The term “qualified fertilizer use” is defined as “any use in the manufacture or production of fertilizer or for direct application as a fertilizer.”[16] The Proposed Regulations also provide taxpayers with a model exemption certificate and a blanket exemption certificate that can be used for a period of up to one year.[17]
  3. Qualified Fuel Substance – The Proposed Regulations provide that no Section 4661 tax is imposed on acetylene, benzene, butylene, butadiene, ethylene, naphthalene, propylene, toluene or xylene that is used as a qualified fuel substance.[18] The Proposed Regulations define “qualified fuel substance” as (A) any substance used by the manufacturer, producer or importer thereof in a qualified fuel use; (B) any substance sold for use by any purchaser in a qualified fuel use; or (C) any substance sold for resale by any purchaser for use, or resale for ultimate use, in a qualified fuel use.[19] The term “qualified fuel use” is defined as “any use in the manufacture or production of any motor fuel, diesel fuel, aviation fuel or jet fuel, or any use of a fuel chemical as such a fuel.”[20]
  4. Qualified Animal Feed Substance – The Proposed Regulations provide that no Section 4661 tax is imposed on nitric acid, sulfuric acid, ammonia or methane used to produce ammonia that is used as a qualified animal feed substance.[21] A “qualified animal feed substance” is defined as (A) any substance used by the manufacturer, producer or importer in a qualified animal feed use; (B) any substance sold for use by any purchaser in a qualified animal feed use; or (C) any substance sold for resale by any purchaser for use, or resale for ultimate use, in a qualified animal feed use.[22] The term “qualified animal feed use” is defined as “any use in the manufacture or production of animal feed, animal feed supplements, or ingredients used in animal feed or animal feed supplements.”[23] A tax-free sale of a qualified animal feed substance can be made if an exemption certificate is obtained from the purchaser prior to the sale.[24] The Proposed Regulations provide a model exemption certificate.
  5. Intermediate Hydrocarbon Stream – No Section 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.[25] An “intermediate hydrocarbon stream” is defined as a mixture of organic chemicals that requires further distillation or processing to produce a taxable chemical.[26] The Proposed Regulations define “organic taxable chemical” as “any taxable chemical that is an organic substance” and that “an organic substance is a substance that contains carbon and hydrogen atoms.”[27] The isolation or extraction of an organic taxable chemical from an intermediate hydrocarbon stream is treated as the use of a taxable chemical by a person isolating or extracting the organic taxable chemical.
  6. Exporter – The Proposed Regulations define the term “exporter” as the person named as the shipper or consignor on an export bill of lading.[28] A proof of export is required in order to claim an exemption for export. The Proposed Regulations state that a copy of the export bill of lading, a certificate by an agent or a representative of the export carrier indicating an actual exportation of the taxable chemical, and a certificate of lading signed by a customs officer of a foreign country qualify as proof of export. The person who originally paid tax under Section 4661 is allowed to claim a credit or refund if a taxable chemical is eventually exported.
Credits for and Refunds of the Section 4661 Tax

Section 4662(d) provides a mechanism for a credit or refund of the Section 4661 tax with regard to certain specified uses of taxable chemicals. Any Section 4661 tax paid by a manufacturer, producer or importer with respect to a tax-paid chemical that is subsequently used by any person in the manufacture or production of any other substance that is a 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 Section 4661 tax.[29] In addition, a refund can be claimed for certain tax-paid chemicals (discussed above) used to eventually make qualified fertilizer substances, qualified fuel substances or qualified animal feed substances.

A claim for credit or refund of the Section 4661 tax is permitted only if (i) the first tax was paid to the IRS and not credited or refunded; (ii) after payment of the first tax, the subsequent manufacturer used the tax-paid chemical to manufacture or produce a subsequent taxable chemical, multiple subsequent taxable chemicals, a subsequent taxable chemical and another substance, or one or more subsequent taxable chemicals and one or more other substances; (iii) the subsequent manufacturer sold or used the subsequent taxable chemical for which a credit or refund is sought and Section 4661 tax was imposed on such sale or use; (iv) the subsequent manufacturer has filed a timely claim for credit or refund; and (v) the subsequent manufacturer has a certificate from the initial manufacturer.[30]

Section 4671 – Attachment of the Taxes

The Section 4671 tax is imposed on any “taxable substance” sold or used by the importer thereof. The Section 4671 tax attaches at the time the importer first sells or uses the taxable substance.[31]

There are two ways that a substance can be listed as a taxable substance. The first is if the substance is included in the initial list of taxable substances, as enacted by the Superfund Revenue Act.[32] The second is if the IRS determines, in consultation with the administrator of the Environmental Protection Agency and the commissioner of U.S. Customs and Border Protection, that taxable chemicals constitute more than 20 percent of the weight or more than 20 percent of the value of the materials used to produce such substance, determined on the basis of the predominant method of production.[33] In addition, modifications to the list of taxable substances must be made in accordance with the procedures in Revenue Procedure 2022-26.

Section 4671 – Calculation of the Tax

The amount of Section 4671 tax is the amount of Section 4661 tax that would have been imposed on the taxable chemicals used as materials in the manufacture or production of a taxable substance if such taxable chemicals had been sold in the United States for use in the manufacture or production of the taxable substance.[34] If the importer fails to furnish sufficient information to determine the amount of Section 4671 tax imposed on any taxable substance, the amount of tax imposed shall be 10 percent of the appraised value of the substance as of the time the taxable substance was entered into the United States for consumption, use or warehousing.[35]

Exceptions to the Section 4671 Tax
  1. Taxes Already Imposed – No Section 4671 tax is imposed on the sale or use of any substance if tax is imposed on such sale or use under Section 4611 or 4661.[36]
  2. Qualified Fertilizer Substance/Qualified Fuel Substance/Qualified Animal Feed Substance – No Section 4671 tax is imposed on the use of certain fuels or in the production of fertilizer or animal feed,[37] on the tax-free sales of chemicals used as fuel or in the production of fertilizer or animal feed,[38] or on any credit or refund of tax on certain chemicals used as fuel or in the production of fertilizer or animal feed.[39]
Additional IRS Guidance

In addition to the Proposed Regulations, the IRS also released guidance addressing penalty relief. Notice 2023-28 extends Notice 2022-15 penalty relief to deposits made in the second, third and fourth quarters of 2023, even if the deposits are computed incorrectly. Taxpayers are required, however, to make timely deposits of the Section 4661 tax and pay in full any underpayments by the date for the filing of their IRS Form 720. In addition, the IRS has agreed not to withdraw a taxpayer’s right to use the deposit safe harbor in the fourth quarter of 2023 and the first and second quarters of 2024.


[1] P.L. 117-58.

[2] 2021-52 I.R.B. 901.

[3] 2022-18 I.R.B. 1043.

[4] Prop. Treas. Reg. § 52.4662-1(b)(1).

[5] Prop. Treas. Reg. § 52.4662-1(c)(1).

[6] Prop. Treas. Reg. § 52.4661-1(f)(2)(ii).

[7] Prop. Treas. Reg. § 52.4661-1(e).

[8] Prop. Treas. Reg. § 52.4662-1(c)(6)(i).

[9] Prop. Treas. Reg. § 52.4662-1(c)(5)(i).

[10] Prop. Treas. Reg. § 52.4662-1(c)(8).

[11] Prop. Treas. Reg. § 52.4662-1(c)(15).

[12] Prop. Treas. Reg. § 52.4662-2(a).

[13] Prop. Treas. Reg. § 52.4662-2(a)(3)(ii).

[14] Prop. Treas. Reg. § 52.4662-2(b).

[15] Prop. Treas. Reg. § 52.4662-2(b)(2)(i).

[16] Prop. Treas. Reg. § 52.4662-2(b)(2)(ii).

[17] Prop. Treas. Reg. § 52.4662-2(h).

[18] Prop. Treas. Reg. § 52.4662-2(e).

[19] Prop. Treas. Reg. § 52.4662-2(e)(2)(i).

[20] Prop. Treas. Reg. § 52.4662-2(e)(2)(ii).

[21] Prop. Treas. Reg. § 52.4662-2(f).

[22] I.R.C. § 4662(b)(9)(B).

[23] I.R.C. § 4662(b)(9)(C).

[24] Prop. Treas. Reg. § 52.4662-2(h).

[25] I.R.C. § 4662(b)(10)(A).

[26] Prop. Treas. Reg. § 52.4662-2(g)(1).

[27] Prop. Treas. Reg. § 52.4662-2(g)(2).

[28] Prop. Treas. Reg. § 52.4662-1(c)(4).

[29] I.R.C. § 4662(d)(1).

[30] Prop. Treas. Reg. § 52.4662-4(a)(3).

[31] I.R.C. § 4671(c).

[32] I.R.C. § 4672(a)(2)(A).

[33] I.R.C. § 4672(a)(2)(B).

[34] I.R.C. § 4671(b)(1).

[35] I.R.C. § 4671(b)(2).

[36] I.R.C. § 4671(c).

[37] I.R.C. § 4671(d).

[38] I.R.C. § 4671(d)(1).

[39] I.R.C. § 4671(d)(2).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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