Prior to its revitalization through the Infrastructure Investment and Jobs Act, the Superfund tax on chemicals was last effective in 1995. That year, taxpayers thought they were paying it for the final time.
Many were caught off guard when Congress reinstated the Superfund tax on chemicals more than a quarter century later. Those who were closely monitoring the infrastructure bill through the legislative process, and thus aware that it was under serious consideration as a revenue raiser, worked quickly to advocate for its exclusion, or at bare minimum some statutory changes. Such advocacy was successful, but only to an extent.
Through helping numerous clients as they grapple with the reinstated Superfund tax on chemicals—what it means, what is their exposure, what is the process of collecting and remitting the tax—what strikes me over and over again is the danger in reinstating a tax without updating it to reflect current realities in 2022.
A lot can change in 27 years.
The relevant provisions are found in Internal Revenue Code Sections 4461 and 4462. The Superfund tax on chemicals is a tax imposed on the sale or use of one of 42 statutorily listed taxable chemicals on the manufacturer, producer or importer thereof at sale or use, unless an exception applies. Exceptions to this tax are limited and include, for example, when taxable chemical butane is used as fuel or when taxable chemical ammonia is used as a fertilizer.
The chemical tax was originally established by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and the revenue generated from the tax was to be used to clean up sites designated by the US Environmental Protection Agency as Superfund sites when no other liable party could be found to pay for cleanup costs.
The Superfund tax on chemicals is also a tax on the import of taxable substances. It’s codified in IRC Sections 4671 and 4672, both of which were added by the Superfund Amendments and Reauthorization Act of 1986. Unlike the static list of 42 taxable chemicals, the taxable substance list is subject to change. A taxable substance is one that is comprised of more than 20% of the weight (or more than 20% of the value) of a taxable chemical. While SARA established a presumptive list of what is a taxable substance, it also gave the IRS authority to make modifications to that list. There are currently more than 100 taxable substances so designated.
It continues to be apparent that many taxpayers will be caught unaware that Congress reinstated this tax. In addition, for every taxpayer who owes the government money, many more downstream consumers will be blindsided as the cost of this tax is passed along the supply chain.
Awareness of this tax is only one small hurdle compared to the questions that emanate from such awareness. Taxpayers continue to have questions for which answers are elusive. The last time that the Superfund tax on chemicals was effective, the IRS had never issued final regulations and withdrew the only proposed regulations that existed. While the IRS has posted some frequently asked questions and a few notices, it has yet to address many questions that have piled up from stakeholders. This is unfortunate given that many of these questions are being sought to ensure compliance with this tax.
For example, stakeholders have asked the IRS to provide guidance on the most fundamental questions such as who is a “manufacturer” or “producer” subject to the tax. To ensure compliance, taxpayers have also asked the IRS to provide citation matching each taxable chemical or taxable substance to a US Harmonized Tariff Schedule code, as doing so will allow a taxpayer to identify whether they owe the tax on the importation of such taxable chemicals. Finally, among the more fundamental questions is what documentation taxpayers should maintain to claim an exemption under the law. Again, all of these questions are focused on taxpayers simply trying to comply with their obligations under the law.
Such interpretative guidance might also alleviate fundamental flaws created by reinstating a tax last effective 27 years ago, without a hard look at what updates are warranted given current realities. When first enacted, Congress estimated that there would be some 700 producers and the 42 taxable chemicals ultimately selected in statute were those that Congress believed could result in environmentally hazardous pollution from inactive waste sites or which are used to produce hazardous waste.
Moreover, the statutory exceptions to the tax—such as those for fertilizer, sources of fuel, or created as a byproduct of pollution control—matched policy priorities in 1980. When these exceptions were originally created, they were included to “assure equity and encourage recycling and reuse.” In reinstating the tax, Congress did not consider whether the taxing of the 42 chemicals was still appropriate and certainly didn’t consider whether the exceptions needed rework.
Yet here we are, working off an outdated law and without the guidance needed to ensure that taxpayers are meeting their obligations. Many continue to be restless as they work through the Superfund tax on chemicals.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Nicole Elliott is a partner with Holland & Knight LLP in Washington, D.C. She counsels clients on understanding and navigating the complexities of tax policy, and represents clients seeking legislative and regulatory changes to tax laws.
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