The IRS released proposed regulations on March 21 (REG-105954-22) with extensive guidance on the recently reinstated Superfund chemical excise taxes, including clarifying the definition of importer and providing refund procedures for exports and exempt sales and uses. The IRS also extended relief (Notice 2023-28) from failure-to-deposit penalties through the end of 2023.
The Superfund excise taxes under Sections 4661 and 4671 were reinstated with new rates and rules by the Infrastructure Investment and Jobs Act (Pub. L. No. 117-58) effective for sales and uses on or after July 1, 2022. Section 4661 imposes tax at various rates per ton on 42 “taxable chemicals” sold or used by a manufacturer, producer or importer. Section 4671 imposes tax on the sale or use of imported “taxable substances” made from those taxable chemicals.
The proposed regulations provide helpful clarity on a variety of issues, including the treatment of blended chemicals, the determination of who is considered the importer, the calculation of tax for imported substances, and procedures for exempt sales and refunds. The rules are proposed to be effective for quarters beginning after they are finalized, but can be relied on now if taxpayers follow them in their entirety.
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The tax applies to a broad cross-section of businesses, not just traditional chemical manufacturers and importers. Many manufacturers or retailers in other sectors may use covered chemicals or substances in variety of processes or products. The determination of who is liable for the tax can be complex, and any taxpayer who buys a taxable substance from a foreign supplier could potentially be considered an importer. Taxpayers who are not themselves liable for the tax should still consider the impact on pricing and look for potential opportunities for refunds or tax-free purchases based on any exempt activities.
Taxable chemicals and substances
The 42 chemicals that are taxable under Section 4662 are all specifically identified by statute. The tax on imported substances made from these chemicals under Section 4671 applies to an initial list.
of 51 taxable substances identified in the statute, but also instructs the IRS to add any substance in which taxable chemicals constitute more than 20% of the weight or value. The IRS has provided an initial list (Notice 2021-66) of 101 additional substances for a current total of 152 taxable substances.
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A substance does not become taxable until it is specifically identified by IRS guidance, regardless of whether its taxable chemicals ingredients exceed the 20% threshold. Likewise, the refund for exporting taxable substances is not available until the substance is identified in guidance. The proposed regulations do not provide reference numbers under the Chemical Abstract Services registry to specifically identify taxable chemicals or substances, but the IRS said it is considering the issue and asked for comments. The proposed regulations do include the basic chemical/molecular formula for each of the 42 taxable chemicals. The tax applies to all isomeric forms of the chemical with special rules for xylene.
The rates on taxable chemicals under Section 4661 are all prescribed by statute based on tons, which the regulations define as 2,000 pounds. The guidance requires taxpayers to use actual weight, and provides rules for converting volume to weight.
The rates on imported taxable substances under Section 4671 are defined under the statute as “the amount of tax which would have been imposed by Section 4661 on the taxable chemicals used as materials in the manufacture or production” of the substances. The IRS in IR-2022-132 offered prescribed rates for 122 of the 152 taxable substances. Taxpayers are not required to use the IRS rate and may calculate their own rate. If the IRS has not prescribed a rate, and taxpayers do not calculate and furnish their own rate, then the rate is 10% of the appraised value of the substance at the time of import.
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There has been some uncertainty surrounding the rate calculation for imported substances, and whether taxpayers can base their rate on the amount of taxable chemicals existing in the finished product or whether they must use the amount of taxable chemicals actually used in the process of making the substance. The regulations largely repeat the statutory language that defines the rate based on the amount of taxable chemicals “used as materials in the production or manufacture of the taxable substance.” An example seems to indicate that an importer could make a calculation based on adding up the total weight of materials used to make a taxable substance and determining the percentage of that weight represented by a taxable chemical ingredient. The “conversion factor” used for refund claims seems to use a slightly different calculation, using the ratio of the weight of the chemical used in the production of the substance to the weight of the finished substance itself, rather than the total weight of the materials used to make the substance. The IRS’s own prescribed rates seems to indicate that taxable chemicals can effectively be used up in the process of production as some of the prescribed rates for substances are higher by weight than their chemical ingredients. Importers of substances without prescribed rates should make every effort to calculate their own rate, as the 10% of value default rule is typically significantly higher than a calculated rate, often by an order of magnitude.
The taxes are generally imposed on the first sale or use. For Section 4661 chemicals, it is the producer, manufacturer or importer who reports and remits the tax upon the first sale or use. The term manufacturer is defined broadly 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.” The “use” of a chemical taxable is also defined broadly to include when:
- The chemical is consumed
- It functions as a catalyst
- The chemical composition changes
- It is used in the manufacture or production of a chemical mixture or other substance
- It is put into service in a trade or business for the production of income
The manufacture of a chemical is not in itself a “use,” and use does not include loss through spillage, fire, degradation or other casualty loss.
The tax on substances under Section 4671 applies only to imported substances, and the importer is liable upon the first sale or use. Imported chemicals under Section 4661 are also taxable based on the first sale or use by the importer. The statutory language under each section provides that the importer is “the person entering the taxable [chemical][substance] for consumption, use, or warehousing.” Proposed regulations from 1983 and other rulings have provided that the person considered to be “entering” the chemical or substance is the consignee who files the customs entry summary. The new proposed regulations do not include this language, but do provide special rules for customs brokers and “drop ship” businesses.
Under the regulations, if the person entering the chemical is merely acting as an agent or a custom broker for another person, then the importer is the first person in the U.S. to sell or use the chemical or substance. If a drop ship business in the U.S. purchases or arranges for a chemical or substance to be shipped to a purchaser in the U.S., then the drop ship business is considered the importer. If the drop ship business is located outside the U.S., then the ultimate purchaser is considered the importer. A drop ship business is a person selling or arranging for the purchase of a chemical or substance and shipping it directly to the purchaser using a third party.
The regulations also provide special rules for taxable chemicals that are imported as part of a mixture (not a taxable substance) in which the chemical retains its chemical identity. In this case, tax will be imposed on the sale or use of the mixture by the importer based on the tax that would have been imposed on the taxable chemicals in the mixture. The term chemical mixture means a substance composed of two or more physically combined components that are not chemically bonded mixtures, such as alloys, solutions, suspensions and colloids.
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The rules generally provide that foreign suppliers of chemicals and substances are not themselves considered importers unless they are warehousing the chemicals in the U.S. This means businesses buying taxable chemicals and substances from foreign suppliers are typically considered the importer unless using a domestic drop ship company or distributor. Companies with foreign suppliers and sales platforms with foreign suppliers should carefully assess the rules to determine whether they have responsibility to remit and report tax.
Reporting and remitting
Taxpayers must report the tax on Form 6627 and attach it to Form 720, which must be filed quarterly by the last day of the month following the close of the quarter. Each business unit that is required to have a separate employer identification number must file separately. Taxpayers with more than $2,500 in liability in a quarter must make semi-monthly deposits, generally on the 14th and 29th of each month. Taxpayers are generally required to deposit 95% of the net liability for the period, though there is a safe harbor that allows qualifying taxpayers to deposit one-sixth of the total amount from the prior quarter.
The IRS initially offered penalty relief (Notice 2022-15) waiving failure to deposit penalties in 2022 and the first two quarters of 2023 for taxpayers that “make an affirmative showing that such failure is due to reasonable cause and not due to willful neglect.” Taxpayers are deemed to meet this standard if they make timely deposits (even if incorrect) and any underpayment is paid in full by the quarterly due date for filing the Form 720. The IRS will also forgo its authority to withdraw the right to use the safe harbor deposit method for incorrect deposits. Notice 2023-28 now extends this relief through the end of 2023.
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The relief will generally allow taxpayers to pay any incorrect amount for semi-monthly deposits and avoid a penalty as long as the correct liability is paid by the time the Form 720 is filed. The relief does not apply if taxpayers fail to make any deposit at all, though it may be possible to request reasonable relief under normal rules.
The statute provides exceptions from the taxes and potential refunds for many specific uses, including:
- Exported taxable chemicals and substances
- Taxable chemicals used in the production of other taxable chemicals
- Nitric acid, sulfuric acid, ammonia or methane used in a qualified fertilizer or animal feed
- Methane or butane used as fuel
- Sulfuric acid used as a byproduct of air pollution control
- Substances derived from coal
- Acetylene, benzene, butylene, butadiene, ethylene, naphthalene, propylene, toluene and xylene used in fuel
- Barium sulfide, cupric sulfate, cupric oxide, cuprous oxide, lead oxide, zinc chloride and zinc sulfate having a transitory presence during the refining process
- Recycled chromium, cobalt and nickel
- Organic taxable chemicals in intermediate hydrocarbon streams
The proposed regulations provide mechanisms to allow for tax-free sales for export or an exempt use, and for refunds in cases in which tax was paid.
In order to make a tax-free sale for an exempt activity, the manufacturer, producer, or importer must generally obtain an exemption certificate from the purchaser and have no reason to believe any of the information is false. The proposed regulations include model certificates for various exempt uses, which can be used for up to one year. If tax was already paid, the taxpayer who used the chemical in an exempt activity can file for a refund by furnishing specific information and obtaining a certificate provided in the regulations from the taxpayer who reported and remitted the tax.
The requirements for tax-free sales or refunds for exported chemicals are more stringent. The manufacturer or producer must obtain from the purchaser a written order or contract that states the chemical will be shipped abroad or a statement certifying that that purchaser will export the chemical abroad. In addition, the manufacturer or producer must obtain proof of export within six months by one of the following methods:
- Copy of the export bill of lading
- Certificate by the export carrier showing actual exportation
- Certificate of lading signed by a customs officer
- Statement of foreign consignee showing receipt (only if the country has no customs administration)
- A statement of the foreign consignee on department or agency letterhead (only if an agency of the U.S. government cannot furnish other proof)
If tax was already paid on an exported chemical, the person who reported and remitted the tax may file for a credit or refund with proof of export, but only if the taxpayer obtains the written consent of the exporter and agrees to pay the exporter the amount of refunded tax. The exporter itself can also apply for a refund, but only if the taxpayer who paid the tax waives the claim.
Grant Thornton Insight
Suppliers and purchasers must generally work together to qualify for and document tax-free sales or to apply for refunds. In many sectors, the tax burden has been effectively passed along throughout the supply chain. All taxpayers should assess the availability of exemptions, regardless of whether they are ultimately responsible for remitting and reporting tax, and consider the impact on any pricing agreements with suppliers or customers.
The new guidance provides important clarity, and businesses should reassess the impact based on the new rules. The tax applies to a broad range of businesses outside the traditional chemical manufacturers, and the determination of who is responsible for reporting and remitting the tax can be complex. There are also a broad range of activities that qualify for exceptions and the IRS has finally offered taxpayers a refund mechanism. Businesses should work with both suppliers and customers to identify opportunities for tax-free purchases and refunds.
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