Superfund Taxes Are Back. Are You Liable?
July 17, 2023
At a glance
- The main takeaway: The revived Superfund Taxes on specified chemicals and substances took effect on July 1, 2022, with new proposed regulations released in March 2023 that clarify and expand the taxes.
- Impact on your business: Manufacturers and importers of taxable chemicals and substances are now subject to the additional tax at the point of sale or use.
- Next Steps: Assess your potential increased tax liability by scheduling a consultation with Aprio’s Tariffs and Customs advisor.
The full story:
After expiring nearly 30 years ago, the Infrastructure Investment and Jobs Act (IIJA) of 2021 reinstated the Chemicals Superfund Tax and the Hazardous Substances Tax (the “Superfund Taxes”), effective July 1, 2022, through January 1, 2032. The Superfund Taxes were originally enacted in 1980 to generate revenue that fed into a trust known as the Superfund, which financed hazardous waste cleanup efforts. The original Superfund Taxes remained in effect until their ultimate expiration until December 31, 1995. Under the IIJA, the Superfund Taxes now encompass a lower threshold for taxability and impose new rules and exemptions that taxpayers must heed.
The Superfund Taxes are divided into taxable chemicals and taxable substances.
Taxable chemicals include a defined group of 42 chemicals, each with a unique tax rate specified in IRC Section 4661(b). Only these listed chemicals, and no others, are subject to the tax. The tax code also provides various exceptions for some of the identified chemicals based on how the chemical is used. For example, butane typically carries a $9.74/ton tax, except when used as a fuel.
Many of the listed taxable chemicals are also used to produce common substances, such as the use of butane to create substances like butanol. Therefore, the IRS defined a list of approximately 100 taxable substances, specified in IRC Section 4672(a)(3), with adjusted tax rates specific to those substances based on the proportion of taxable chemicals present in the substances. For example, while the rate of butane is $9.74/ton, the IRS has calculated the rate for butanol at $6.31/ton. Of course, this rate still only applies when the butanol is not being used as a fuel.
The list of taxable substances includes substances composed of at least 20% of a listed taxable chemical, and the list of taxable substances is expected to grow over time.
Superfund Taxes are imposed at the point of sale or use.
For both taxable chemicals and taxable substances, the Superfund Tax is imposed on the manufacturer or the importer of the chemical, based on the actual weight of the chemical, and is due either at the point of sale or first use in the U.S. The point of sale is relatively easy to define, but determining first use can be more nuanced. Neither code section for chemicals nor substances defines “use,” and the IRS only recently provided a broad definition in the proposed regulations and updated guidance released on March 29, 2023. This Notice defines the term “use” in the context of taxable chemicals, stating the chemical is used when:
- it is consumed,
- when it functions as a catalyst,
- when its 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.
Proposed regulations for the revived Superfund Taxes provide some clarity and pose new questions.
As previously mentioned, the proposed regulations provide new definitions and examples for critical functions of the Superfund Taxes, such as when a chemical is “used” for purposes of imposing the tax. Other notable updates include:
- Parties acting as an agent or customs broker to bring taxable chemicals into the U.S. are not considered importers and are not taxable; the importer is the first party in the U.S. to sell or use the chemical after entry.
- Parties manufacturing or producing taxable chemicals under contract by another party are not taxable, consistent with the treatment of importers and contract manufacturers for other excise tax purposes.
- Parties to transactions may be eligible for tax-free sales via exemptions and claims certificates for credits or refunds, with examples provided in the proposed regulations.
The proposed regulations also signify some notable expansions of the tax from its previous form, leading to additional questions and concerns among taxpayers. For instance, chemical compounds remain untaxed as any taxable chemicals used would not retain the same chemical identity; however, chemical mixtures containing a taxable chemical will now be taxed at the first sale or use.
The bottom line
Companies that import chemicals or substances subject to the Superfund Taxes should begin preparing and filing the necessary tax forms for the 2022 tax year. Aprio’s Tariffs and Customs advisors can assist with reviewing whether any imported chemicals or substances are, in fact, taxable, as well as prepare a calculation of the taxable rates and the necessary tax forms.
Schedule a consultation to assess what new tax liability you may have with the reintroduction of the Superfund Taxes.
Related Resources/Assets/Aprio.com articles/pages
Stay informed with Aprio.
Get industry news and leading insights delivered straight to your inbox.
About the Author
Jay Cho is an international trade advisor and a lawyer by training who helps multinational companies better navigate US import and export complexities. He specializes in providing compliance risk management and strategies to help clients save on duty fees. With a decade of experience on both the consulting and legal sides of international trade, Jay is also well-positioned to offer guidance on many different customs enforcement matters, including customs inquiries, verification requests, audits, investigations and penalty cases.