The chemicals Superfund tax was initially enacted in 1980 as a response to high-profile environmental disasters relating to hazardous waste. Congress set up a trust fund, or “Superfund,” to clean up and mitigate environmental damage using new taxes imposed on 42 taxable chemicals that Congress identified as having the potential to cause harm upon improper handling or disposal.
In 1986, Congress enacted the hazardous substances tax on imported derivatives of the 42 chemicals. The statute listed 50 substances and gave the IRS authority to add to the list. Both taxes expired in 1995 and lay dormant in the tax code until the Infrastructure Investment and Jobs Act became law on Nov. 15, 2021.
The Superfund chemical excise tax and the hazardous substances tax took effect on July 1, 2022.
What’s on the List?
The IRS has added over 100 hazardous substances to its list of taxable chemicals. However, the agency has not provided definitions related to taxable substances.
Importantly, the statute provides that a substance is only taxable if, at the time of its sale or use by the importer, it is listed as a taxable substance. In other words, the statute seems to apply a bright-line rule that if a substance is listed, it’s taxable, and if it’s not listed, it’s not taxable. This application of the statute may seem relatively straightforward, but a closer look at the substances on the list makes clear that additional analysis is required.
Some listed substances, such as urea and hydrogen peroxide, are specific raw material products with an identifiable chemical formula. Other listed substances seem to be broad categories—such as polyethylene resins, total, or synthetic rubber, not containing fillers—that may include multiple raw material products with various possible chemical formulas. It’s not always obvious whether an imported raw material chemical derivative falls into one of these categories.
To add to the confusion, the chemicals industry now imports many products that are copolymers or mixtures of various listed substances and non-listed substances. In addition, many taxpayers import extremely large volumes of products and lack a streamlined method to identify taxable chemicals and substances. Arguably, using the available import data is the most efficient way to sort through voluminous records. Neither Congress nor the IRS has provided guidance for these challenges.
A Viable Shortcut?
The Harmonized Tariff Schedule is a list of imported product categories maintained by the US International Trade Commission, assigning a 10-digit code to all commercial goods imported into the US. The HTS has 99 chapters and hundreds of individual codes representing a range of products from “Live horses, Purebred breeding animals, Males” to “Painting, drawing and pastels, executed entirely by hand, of an age exceeding 100 years, Mosaics.” Indeed, each imported chemical, chemical derivative, and mixture is designated with a particular HTS code when it has been imported.
The HTS arguably is a straightforward, administrable mechanism to identify imported taxable substances. Unfortunately, the IRS hasn’t provided guidance that would tie listed substances to individual HTS codes. Based on historical context, it’s unclear whether the agency would issue such guidance.
The HTS’ current form was introduced in 1989. Before that, importers used a different tariff schedule called the Tariff Schedule of the United States. An archived version, which correlates to the list of substances in the tax code, can be found on the Trade Commission’s website. For example, both polyethylene resins and synthetic rubber, not containing fillers are specifically named in TSUSA. In contrast, the current HTS divides imported ethylene products into several subcategories, ranging from polymers of ethylene, in primary forms to various specific copolymers. None of the subcategories for synthetic rubber in the HTS includes the modifier “not containing fillers,” although the notes preceding the chapter indicate that the presence of fillers is not permitted.
Thus, even though the statutory list of taxable substances generally correlated to the TSUSA upon enactment in 1986, it doesn’t link up in a similar fashion to today’s HTS. Nevertheless, the HTS code remains the best resource for identifying potentially taxable substances and eliminating nontaxable products, particularly for those taxpayers with large volumes of imported products. However, once the initial HTS analysis is complete, taxpayers will need to manually evaluate imported products that could fall into one of the broad substance categories.
What About the Tax Rates?
Tax rates further complicate the issue. The tax rate imposed on an imported substance is meant to equal the amount of tax that would be imposed on the precursor chemicals had the substance been produced domestically, using the predominant method of production. The IRS published default rates for 121 of the 151 currently listed taxable substances but has not explained how it computed these default rates.
Further, taxpayers must calculate rates for 30 substances, which tend to be the substances that fall into the broad categories. Finally, taxpayers have indicated that the default rates do not necessarily align with real-world methods of production used in the US today, resulting in a competitive disadvantage in some cases. To the extent taxpayers are passing along the economic burden of the hazardous substances tax, their customers may be expecting a different rate of tax—or no tax at all.
Absent IRS guidance, taxpayers must carefully consider their imported chemical derivative products to determine which ones may be categorized by the IRS as taxable substances, especially copolymers, mixtures, and products that arguably fall within a broad substance category. Furthermore, taxpayers may need to understand the chemical inputs used to produce a taxable substance to calculate the tax or assess whether the IRS default rate is appropriate.
Due to uncertainty and lack of guidance, some taxpayers may take a conservative approach to identifying taxable substances and pay a higher rate of tax, potentially finding themselves at a competitive disadvantage to other taxpayers who interpret the list of taxable substances more narrowly or use the lower default rates.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Rachel Smith is a senior manager and Taylor Cortright is a managing director in the state and local tax group of the Washington national tax practice of KPMG LLP.
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