On March 29, 2023, the Internal Revenue Service (IRS) published a notice of proposed rulemaking (NPRM) relating to the Superfund excise taxes imposed on certain chemicals and certain imported substances, effective July 1, 2022. 88 Fed. Reg. 18446. There are two separate Superfund chemical excise taxes: a tax on the sale or use of “taxable chemicals” and a tax on the sale or use of imported “taxable substances.” The NPRM contains proposed regulations under Sections 4661, 4662, 4671, and 4672 of the Internal Revenue Code (Code) to amend the Environmental Tax Regulations (26 C.F.R. Part 52). The NPRM states that Section 4661(a) imposes an excise tax on the sale or use of “taxable chemicals” by manufacturers, producers, or importers, and that Section 4662 provides definitions and special rules for applying the Section 4661 tax. Section 4671(a) imposes an excise tax on the sale or use of “taxable substances” by importers, and Section 4672 provides definitions and special rules for applying the Section 4671 tax. The NPRM states that the proposed regulations provide guidance on the application of the reinstated Superfund chemical taxes. The proposed regulations affect manufacturers, producers, and importers that sell or use taxable chemicals and importers that sell or use taxable substances. Comments on the NRPM and requests for a public hearing are due May 30, 2023.
General Rules Regarding the Section 4661 Tax
Proposed Section 52.4661-1 sets forth general rules regarding the Section 4661 tax, including rules regarding the imposition of tax, the attachment of tax, the persons liable for tax, the amount of tax, and the calculation of the amount of tax.
Attachment of Tax
General Rule; Foreign Manufacturers
Proposed Section 52.4661-1(c)(1) clarifies that the Section 4661 tax attaches to the first sale or use of a taxable chemical by the manufacturer, producer, or importer. The NPRM notes that this is consistent with Congressional intent that the tax apply only once to a given quantity of a taxable chemical. Proposed Section 52.4661-1(c)(2) clarifies that in situations involving a foreign manufacturer, the Section 4661 tax does not attach to the foreign manufacturer’s sale of a substance listed in Section 4661(b) to the importer because the substance is not a taxable chemical at the time of such sale; rather, tax attaches to the importer’s first sale or use of the taxable chemical. According to the NPRM, this rule is consistent with Section 4661(a) and the definition of the term “taxable chemical” in Section 4662(a)(1), as well as the overall statutory scheme of excise taxes and relevant case law.
Dilution of Chemical Mixtures
The NPRM states that proposed Section 52.4661-1(c)(1) clarifies that in the case of chemical mixtures containing one or more chemicals with respect to which tax was paid (tax-paid chemicals), no Section 4661 tax attaches when the chemical mixture is diluted with a solvent to change the concentration of the chemical mixture, provided the solvent is not a taxable chemical. According to the NPRM, the proposed regulations take this approach because the Section 4661 tax has already been paid on the taxable chemicals in the chemical mixture, and the taxable chemicals in the chemical mixture do not lose their identity during the dilution process.
Chemical Mixtures and Chemical Compounds
The NPRM states that a chemical mixture “is generally any substance composed of two or more physically-combined components that are not chemically bonded.” According to the NPRM, chemical mixtures include solutions, suspensions, and alloys. If a taxable chemical is a component of a chemical mixture, the taxable chemical remains a taxable chemical while it is part of the chemical mixture.
In contrast, according to the NPRM, a chemical compound “is generally any substance composed of identical molecules, each of which consists of two or more atoms of the same or different elements held together by chemical bonds.” The NPRM states that a taxable chemical used to produce a chemical compound does not retain its individual properties.
The NPRM states that with regard to domestically produced chemical mixtures, the manufacture or production of a chemical mixture is a “use” of the taxable chemicals in the chemical mixture under proposed Section 52.4662-1(c)(15), and the Section 4661 tax attaches at the time of such use. The NPRM notes that the “use” definition does not capture any taxable chemicals found in imported chemical mixtures, however. Therefore, the taxable chemicals found in an imported chemical mixture “could completely escape the [S]ection 4661 tax unless the importer engages in a manufacturing process of separating the taxable chemicals in the mixture (such a process would make the importer the manufacturer of the taxable chemicals in the mixture) and then sells or uses those taxable chemicals.” The NPRM notes that this would give foreign manufacturers of chemical mixtures a competitive advantage over domestic manufacturers of the same chemical mixtures.
To address this disparity, proposed Section 52.4661-1(c)(3) provides that when a taxable chemical is part of an imported chemical mixture that is not a taxable substance (as defined in Section 4672(a)(1) and proposed Section 52.4672-1(b)(8)), tax attaches to the first sale or use of the chemical mixture by the importer. Further, proposed Section 52.4661-1(f)(2) includes a rule regarding the calculation of the amount of tax with regard to chemical mixtures. More specifically, according to the NPRM, under proposed Section 52.4661-1(f)(2)(ii), when a taxable chemical is part of an imported chemical mixture that is not a taxable substance, as defined in Section 4672(a)(1) and proposed Section 52.4672-1(b)(8), tax is imposed on the actual weight of any taxable chemicals in the chemical mixture at the time the importer first sells or uses the chemical mixture. The NPRM states that these rules ensure that foreign and domestic manufacturers of chemical mixtures are treated the same for purposes of the Section 4661 tax. The NPRM notes that this approach “is supported by the fact that a taxable chemical in a chemical mixture is assumed to retain its chemical identity while part of the chemical mixture.”
The NPRM states that as with chemical mixtures, the domestic manufacture or production of a chemical compound with one or more taxable chemicals is a taxable use of the taxable chemicals. Therefore, the domestic manufacturer or producer of the chemical compound is liable for the Section 4661 tax. Because a taxable chemical used to produce a chemical compound does not retain its chemical identity, however, the Treasury Department and the IRS lack the authority under Sections 4661 and 4662 to tax the taxable chemicals used in the production of imported chemical compounds. According to the NPRM, this creates an advantage for foreign manufacturers of chemical compounds that are produced with taxable chemicals but that are not taxable substances, as defined in Section 4672(a) and proposed Section 52.4672-1(b)(8). The Treasury Department and the IRS request comments on possible ways to mitigate the disadvantage to domestic manufacturers within the constraints of the statutory scheme.
Ores and Metals
The NPRM notes that several taxable chemicals, including nickel, cobalt, chromium, and phosphorus, are produced from ores. In addition, one taxable chemical, chromite, is an ore. The production of a taxable chemical from ore requires mining the ore to extract the ore from the earth, and an extraction, smelting, or other process to remove or refine the taxable chemical from the ore. The NPRM states that proposed Section 52.4661-1(c)(4)(i) provides, generally, that in the case of ores, the Section 4661 tax attaches to the first sale or use of the taxable chemical by the manufacturer, producer, or importer after extraction of the taxable chemical from the ore, and the person that extracts the taxable chemical from the ore is the manufacturer of the taxable chemical. Proposed Section 52.4661-1(c)(4)(i) further provides that the term “extraction of a taxable chemical from the ore” means the first process in the United States that a person uses to separate the taxable chemical from the ore.
As chromite is both a taxable chemical and an ore, it is treated differently from taxable chemicals that are produced from ores. Proposed Section 52.4661-1(c)(4)(ii) provides that in the case of chromite, the Section 4661 tax attaches to the first sale or use of chromite by the manufacturer, producer, or importer after the chromite is mined. The NPRM notes that under the proposed regulations, the tax treatment of taxable chemicals that are metals under Section 4661 “is generally addressed by the rule regarding ores.” The Treasury Department and the IRS request comments on whether an additional or alternative rule for metals would be appropriate or warranted.
Procedural Rules; Definition of Person
Proposed Section 52.4661-1(d) notes that the procedural rules in 26 C.F.R. Part 40 apply to the Section 4661 tax. Proposed Section 52.4661-1(d) further notes that each business unit that has, or is required to have, a separate employer identification number (EIN) is treated as a separate person for purposes of filing excise tax returns, making semimonthly deposits of excise tax, making payments of excise tax, and applying for the registration required under Section 4662(b)(10)(C) and (c)(2)(B). According to the NPRM, proposed Section 52.4671-1(d) is a similar provision related to the Section 4671 tax.
Calculation of the Amount of Tax
Measurement and Documentation Regarding Tonnage
Proposed Section 52.4661-1(f) provides rules regarding how to calculate the amount of Section 4661 tax, which applies at a specified rate per ton. According to the NPRM, the Treasury Department and the IRS lack sufficient information about possible ways to measure tonnage, other than by using the actual weight of the taxable chemical. The NPRM states that the Treasury Department and the IRS are also concerned that a broad rule, such as one that would allow any reasonable method of measurement, could artificially reduce the tax base. For these reasons, proposed Section 52.4661-1(f)(2)(i) provides that for purposes of calculating the amount of Section 4661 tax, the weight of a taxable chemical, measured in tons, is the actual weight of the taxable chemical at the time of sale or use by the manufacturer, producer, or importer.
The Treasury Department and the IRS request comments on any other appropriate methods that could be used to measure tonnage, with specificity and without artificially reducing the tax base. The Treasury Department and the IRS also request comments on the types of documentation available in the industry that could be used as records to support a weight measurement.
Conversion Required for Volumetric Measurements
The NPRM notes that a taxable chemical may be measured in volumetric units. Because the Section 4661 tax is imposed at a rate per ton, any volumetric units must be converted to weight units to calculate the amount of Section 4661 tax. Proposed Section 52.4661-1(f)(2)(iii) requires that any volumetric measurement of a taxable chemical be converted to a weight measurement and provides a formula for volume-to-weight conversions.
Definitions Relating to Sections 4661 and 4662
According to the NPRM, several commenters requested that the Treasury Department and the IRS provide definitions of the terms “manufacturer,” “importer,” “sale,” and “use.” The NPRM states that the definitions in proposed Section 52.4662-1 include those definitions requested by commenters, “as well as others that are necessary to provide clarity with regard to the application of [S]ections 4661 and 4662.”
Taxable Chemical
The NPRM notes that Section 4662(a)(1) “generally defines the term ‘taxable chemical’ as any substance (A) that is listed in the table under [S]ection 4661(b), and (B) that is manufactured or produced in the United States or entered into the United States for consumption, use, or warehousing.” The NPRM notes that the table under Section 4661(b) includes only the name of each taxable chemical and that the taxable chemicals listed in the table include metals, metalloids, minerals, and an ore (chromite).
According to the NPRM, the proposed regulations clarify that a substance is a taxable chemical “only if it satisfies both prongs of the definition of ‘taxable chemical’ in [S]ection 4662(a)(1).” In addition, the proposed regulations provide that, except as provided in Section 4662(b), a substance is listed in the table under Section 4661(b) if it has the same name and molecular formula as a substance listed in the table under Section 4661(b). The proposed regulations further provide that all isomeric forms of a substance listed in the table under Section 4661(b) are treated as having the same name and molecular formula of the substance. Therefore, the NPRM states, except as provided in Section 4662(b)(7) with respect to xylene, an isomer of a substance listed in the table under Section 4661(b) is a substance listed in the table under Section 4661(b).
Importer
Section 4662(a)(3) defines the term “importer” as the person entering the taxable chemical for consumption, use, or warehousing. The NPRM states that the proposed regulations clarify that if the person entering the taxable chemical for consumption, use, or warehousing is “merely acting as an agent or a customs broker for another person, then the agent or customs broker is not the importer, and the importer is the first person in the United States to sell or use the taxable chemical after entry of the taxable chemical for consumption, use, or warehousing.” The proposed regulations also address how to identify the importer with regard to sales that involve drop shipping a taxable chemical when the party shipping the taxable chemical is outside the United States.
Manufacturer
According to the NPRM, neither Section 4661 nor Section 4662 defines the term “manufacturer.” Proposed Section 52.4662-1(c)(6)(i) defines the term “manufacturer” as “any person that produces a taxable chemical from new or raw material, feedstocks, or other substances, or from scrap, salvage, waste, or recycled substances.” The NPRM notes that under the proposed regulations, a manufacturer includes any person that produces a taxable chemical from the mining process, or extracts, isolates, separates, or otherwise removes a taxable chemical from an ore or from another substance. A manufacturer also includes any person that produces a taxable chemical by processing or manipulating a substance, such as through the oxidation process. The NPRM states that the term manufacturer “does not include a person that dilutes a chemical mixture comprised of one or more tax-paid chemicals with a solvent that is not a taxable chemical.”
According to the NPRM, one commenter requested that recyclers be excluded from the definition of the term “manufacturer.” The NPRM notes that Section 4662(b)(8)(A) provides that no Section 4661 tax is imposed on any chromium, cobalt, or nickel that is diverted or recovered in the United States from any solid waste as part of a recycling process (and not as part of the original manufacturing or production process). The NPRM states that “explicit reference to recycling activities in [S]ection 4662(b)(8)(A), combined with the absence of a general exception for recycling activities in [S]ections 4661 and 4662, suggest that Congress did not intend to exclude persons engaged in recycling activities from the definition of the term ‘manufacturer.’” Accordingly, the proposed regulations do not adopt this suggestion.
Proposed Section 52.4662-1(c)(6)(ii) addresses contract manufacturing. More specifically, according to the NPRM, proposed Section 52.4662-1(c)(6)(ii) provides that “if a person manufactures or produces a taxable chemical for a second person, pursuant to a contract, order, or agreement and in accordance with the second person’s specifications, or if a person manufactures or produces a taxable chemical for a second person from materials owned by the second person, the second person (and not the first person) is treated as the manufacturer of the taxable chemical manufactured or produced by the first person.”
Sale
The NPRM notes that neither Section 4661 nor Section 4662 defines the term “sale.” Proposed Section 52.4662-1(c)(8) defines 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.”
According to the NPRM, one commenter requested an exclusion from the definition of the term “sale” for sales of intermediate hydrocarbon streams and inventory exchanges if both parties to the sale or exchange are taxable chemical registrants. The NPRM notes that Section 4662(b)(10) and (c)(2) provide exceptions to the Section 4661 tax in the scenarios described by the commenter when both parties are registered; “therefore, there is no need for a carve out from the definition of the term ‘sale.’”
Ton
Section 4662(a)(4) defines the term “ton” to mean 2,000 pounds, which is a short ton. Proposed Section 52.4662-1(c)(13) follows the statutory definition.
Use
Neither Section 4661 nor Section 4662 defines the term “use.” Proposed Section 52.4662-1(c)(15) defines the term “use” broadly. More specifically, according to the NPRM, proposed Section §52.4662-1(c)(15) provides that “a taxable chemical is used when it 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.” According to the NPRM, the loss or destruction of a taxable chemical through spillage, fire, natural degradation, or other casualty is not a use. The NPRM states that “[t]he mere manufacture or production of a taxable chemical is not a use of that chemical.”
Special Rules and Exceptions Relating to the Section 4661 Tax
According to the NPRM, Section 4662(b) provides a number of exceptions and special rules that apply to the Section 4661 tax. Some of the provisions in Section 4662(b) provide exceptions to the definition of “taxable chemical”; other provisions provide general exceptions to the Section 4661 tax.
Methane or Butane Used as Fuel
Methane and butane are included in the list of taxable chemicals in Section 4661(b). According to the NPRM, Section 4662(b)(1) provides that methane or butane is treated as a taxable chemical “only if it is used otherwise than as a fuel or otherwise than in the manufacture or production of any motor fuel, diesel fuel, aviation fuel, or jet fuel.” In such cases, the person so using the methane or butane is treated as the manufacturer.
The NPRM notes that the Section 4662(b)(1) rule impacts the timing of the imposition of the Section 4661 tax. Unlike other chemicals included in the list of taxable chemicals in Section 4661(b) that are taxable chemicals at the time of manufacture, production, or importation, the status of methane or butane as a taxable chemical cannot be determined until the time of use. As a result, it is possible that methane or butane will never become a taxable chemical and no Section 4661 tax will attach. It is also possible that there will be intervening sales of methane or butane before the Section 4661 tax is imposed.
Proposed Section 52.4662-2(a)(2) provides that methane or butane is used otherwise than as a fuel when it is used other than in the production of energy. Proposed Section 52.4662-2(a)(2) further provides that methane or butane is used as a fuel when it is used in the production of energy. It also provides examples of when methane or butane is used as a fuel. According to the NPRM, the rule in the proposed regulations regarding use as a fuel is consistent with existing guidance in other areas of excise tax.
Qualified Fertilizer, Fuel, and Animal Feed Substances
According to the NPRM, Section 4662(b)(2), (5), and (9) provide exceptions to the Section 4661 tax for certain taxable chemicals that are qualified fertilizer, fuel, or animal feed substances. Proposed Section 52.4662-2(b) provides rules regarding the exception for qualified fertilizer substances. Proposed Section 52.4662-2(e) provides rules regarding the exception for qualified fuel substances. Proposed Section 52.4662-2(f) provides rules regarding the exception for qualified animal feed substances.
Sulfuric Acid Produced as a Byproduct of Air Pollution Control Equipment
The NPRM notes that Section 4662(b)(3) provides that no Section 4661 tax is imposed on sulfuric acid produced solely as a byproduct of and on the same site as air pollution control equipment. The statute does not define the term “air pollution control equipment” for purposes of this exception. Further, the statute is silent with regard to whether the exception applies to sulfuric acid produced solely as a byproduct of and on the same site as air pollution control equipment located outside the United States.
Proposed Section 52.4662-2(c) defines the term “air pollution control equipment” as “any equipment used to comply with the Clean Air Act, including any amendments thereto, as codified in 42 U.S.C. [C]hapter 85, or any similar provision under state law.” According to the NPRM, this definition “effectively limits the exception to domestically-produced sulfuric acid.” The Treasury Department and the IRS request comments on the definition of “air pollution control equipment” in proposed Section 52.4662-2(c). To the extent commenters believe the definition should be modified, the Treasury Department and the IRS request comments on the type of documentation that is available to demonstrate that sulfuric acid produced outside the United States was, in fact, produced solely as a byproduct of and on the same site as air pollution control equipment.
Taxable Chemicals Produced from Coal
Section 4662(b)(4) provides that the term “taxable chemical” does not include any substance derived from coal. Proposed Section 52.4662-2(d) defines the term “coal” as bituminous coal, subbituminous coal, anthracite, and lignite.
Intermediate Hydrocarbon Streams
According to the NPRM, Section 4662(b)(10)(A) provides that 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. Section 4662(b)(10)(B) provides that if any organic taxable chemical on which no Section 4661 tax was previously imposed by reason of Section 4662(b)(10)(A) is isolated, extracted, or otherwise removed from, or ceases to be part of (collectively, isolation), an intermediate hydrocarbon stream, such isolation is treated as a use by the person causing the isolation, and such person is treated as the manufacturer of the organic taxable chemical so isolated.
Definition of “Organic Taxable Chemical”
Section 4662(b)(10)(D) defines “organic taxable chemical” as “any taxable chemical that is an organic substance.” The NPRM states that “[a]t the most basic level, an organic substance is a substance that contains carbon and hydrogen atoms.”
The organic substances that are listed in the table under Section 4661(b) are acetylene, benzene, butane, butylene, butadiene, ethylene, methane, naphthalene, propylene, toluene, and xylene. According to the NPRM, neither the statute nor the legislative history addresses the interplay between Section 4662(b)(1) and (10) with regard to methane and butane, however. Although methane and butane are organic substances that are listed in the table in Section 4661(b), the NPRM notes that they are treated as taxable chemicals only when used otherwise than as a fuel or otherwise than in the production of any motor fuel, diesel fuel, aviation fuel, or jet fuel. Therefore, according to the NPRM, methane and butane are not organic taxable chemicals at the time of isolation from an intermediate hydrocarbon stream. Proposed Section 52.4662-2(g)(2)(i) clarifies that no Section 4661 tax is imposed on methane or butane at the time the methane or butane is isolated from an intermediate hydrocarbon stream and includes an example to illustrate this rule.
Multi-Step Isolation Process
The NPRM states that the rule in Section 4661(b)(10) is clear with regard to organic taxable chemicals isolated from an intermediate hydrocarbon stream as part of a single-step isolation process. Neither the statute nor the legislative history addresses what happens when isolation is a multi-step process, however.
The NPRM states that in Murphy Oil USA, Inc. v. United States, 81 F. Supp. 2d 942 (W.D. Ark. 1999), the court considered the applicability of Section 4662(b)(10) to a multi-step process of isolating propylene from a C3/C4 hydrocarbon stream. According to the NPRM, the court held that the splitting process designed to isolate and extract the propylene content from the C3/C4 stream as refinery-grade propylene was the point of isolation, even though the resulting refinery-grade propylene was a mixture of propylene and propane that could have been further processed into a purer grade of propylene. The court further held that because the weight of the propylene in the refinery-grade propylene could be determined with specificity, the Section 4661 tax was imposed only on the weight of the propylene in the refinery-grade propylene.
The NPRM states that proposed Section 52.4662-2(g)(3)(ii) follows the holding in Murphy Oil and “clarifies that when the isolation of an organic taxable chemical from an intermediate hydrocarbon stream is a multi-step process, the first process that a person uses to isolate, extract, or otherwise remove the organic taxable chemical from the intermediate hydrocarbon stream (even if the organic taxable chemical is, at that time, still mixed with other substances and further processing is possible, but not required) is treated as a use by the person causing the isolation, and such person is treated as the manufacturer of the organic taxable chemical so isolated.” Proposed Section 52.4662-2(g)(3)(ii) further clarifies that if the organic taxable chemical is part of a chemical mixture at the time of isolation, the Section 4661 tax “is imposed on the weight of the entire chemical mixture, unless the person causing the isolation can establish, with specificity, the weight of the organic taxable chemical or chemicals contained in the chemical mixture.”
Credits 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. According to the NPRM, multiple commenters requested that the Treasury Department and the IRS provide guidance on claims for credits and refunds. Proposed Section 52.4662-4 provides rules regarding claims for credit and refund under Section 4662(d). The provisions in proposed Section 52.4662-4 explain the general rules, conditions to allowance, and supporting information required for claims for credit and refund. Proposed Section 52.4662-4 also includes a model certificate to support a claim for credit or refund. The NPRM notes that the approach taken in the proposed regulations is consistent with other areas of excise tax law.
Exports
According to the NPRM, Section 4662(e)(1)(A) provides that no Section 4661 tax is imposed on the sale by the manufacturer or producer of any taxable chemical for export or for resale by the purchaser to a second purchaser for export. Section 4662(e)(1)(B) provides that rules similar to Section 4221(b) (relating to exports exempt from manufacturers’ excise taxes codified in Chapter 32) apply. Proposed Section 52.4662-5(b) provides rules regarding how to effectuate tax-free sales for export under Section 4662(e)(1). The NPRM states that the rules in proposed Section 52.4662-5(b) are based on the rules in Section 48.4221-3 of the Manufacturers and Retailers Excise Tax Regulations and include a model exemption certificate and a model statement of export.
Section 4662(e)(2) provides the general rule for claims for credit or refund of the Section 4661 tax in the case of taxable chemicals that are exported, and taxable chemicals used as materials in the manufacture or production of a substance that is a taxable substance (that is, it is listed on the Taxable Substances List) at the time of export. Proposed Section 52.4662-5(c) provides rules regarding claims for credit or refund under Section 4662(e)(2).
According to the NPRM, several commenters expressed concern about not being able to make credit or refund claims for taxable chemicals used in the manufacture of substances that meet the more than 20 percent weight or value test but have not yet been added to the Taxable Substances List. The NPRM notes that the requirement that a substance be on the Taxable Substances List at the time of export to make a claim for credit or refund is statutory. The Treasury Department and the IRS request comments on possible ways to mitigate the impact of the express statutory language in Section 4662(e)(2).
Section 4662(e)(3) provides a mechanism for an exporter to make claims for credit or refund. Proposed Section 52.4662-5(d) provides rules regarding claims for credit or refund under Section 4662(e)(3).
General Rules Regarding the Section 4671 Tax
General rules regarding the Section 4671 tax are set forth in proposed Section 52.4671-1, including rules regarding the imposition of tax, the persons liable for tax, the attachment of tax, the amount of tax, and the calculation of the amount of tax. Proposed Section 52.4671-2 provides rules regarding tax-free sales under Section 4671(d)(1) and claims for credit and refund under Section 4671(d)(2).
Definitions Relating to Sections 4671 and 4672
Proposed Section 52.4672-1 provides definitions applicable to Sections 4671 and 4672. According to the NPRM, to the extent there is overlap, the definitions in proposed Section 52.4672-1 with respect to the Section 4671 tax track the definitions in Section 52.4662-1 with respect to the Section 4661 tax.
Predominant Method of Production
According to the NPRM, although Sections 4671(b)(3) and 4672(a)(2) use the term “predominant method of production,” the term is undefined by statute. The NPRM states that the legislative history is limited and provides only that with regard to the determination of substances on the Taxable Substances List, “the determination is to be made ‘on the basis of the predominant method of production (with respect to imported derivatives) using stoichiometric material consumption assuming a 100-percent yield.’”
Proposed Section 52.4672-1(b)(4) defines the term “predominant method of production” to mean the method used to produce the greatest number of tons of a particular substance worldwide, relative to the total number of tons of the substance produced worldwide. According to the NPRM, the definition uses worldwide production as the metric because the term “predominant method of production” applies only in the context of the Section 4671 tax, which is imposed on imported substances.
The Treasury Department and the IRS request comments on the predominant method of production, or any other relevant information (such as the weight or value of the taxable chemicals used in the manufacture or production of the taxable substance), for the following taxable substances that are included in the statutory list in Section 4672(a)(3): ferronickel; formaldehyde; hydrogen peroxide; methanol; nickel powders; nickel waste and scrap; polystyrene resins and copolymers; styrene-butadiene, snpf; synthetic rubber, not containing fillers; unwrought nickel; vinyl resins; vinyl resins, nspf; and wrought nickel rods and wires.
Tax-Free Sales under Section 4671(d)(1)
Section 4671(d)(1) provides that rules similar to those in Section 4662(b)(2), (5), and (9) apply with respect to taxable substances used or sold for use as described in such rules. Proposed Section 52.4671-2(b) provides rules regarding how to effectuate tax-free sales under Section 4671(d)(1); the rules are similar to those in proposed Section 52.4662-2(h).
Credits and Refunds under Section 4671(d)(2)
Section 4671(d)(2) provides that rules similar to Section 4662(d)(2), (3), and (4) apply with respect to taxable substances used or sold for use as described in such rules. Proposed Section 52.4671-2(c) provides rules regarding claims for credit or refund under Section 4671(d)(2); the rules are similar to those in proposed Section 52.4662-4.
Types of Substances Eligible for Addition to the Taxable Substances List
According to the NPRM, when the Superfund chemical taxes were previously in effect, Notice 89-61 provided a determination process by which importers and exporters of substances could request modifications to the Taxable Substances List pursuant to the flush language of Section 4672(a)(2). The NPRM states that Notice 89-61 provided that textile fibers, yarns, and staple and fabricated products that are molded, formed, woven, or otherwise finished into end-use products were ineligible for addition to the Taxable Substances List. Notice 95-39 modified Notice 89-61 to allow polymers extruded in fiber form to be added to the Taxable Substances List.
The NPRM states that proposed Section 52.4672-1(b) incorporates the rules from Notice 89-61 and Notice 95-39 regarding the types of substances that may be added to the Taxable Substances List if they otherwise meet the more than 20 percent weight or value test.
Other Issues
Sales between Certain Registrants
According to the NPRM, two commenters requested that the Treasury Department and the IRS adopt a practice with respect to sales of taxable chemicals that is similar to what is in place for “S” registrants for fuel transactions. One commenter suggested an expansion of “G” registration and an allowance of tax-free sales among all “G” registrants.
The NPRM notes that in the fuel excise tax area, Section 4081 of the Code establishes the bulk transfer system and the ability for “S” registrants to make tax-free sales of taxable fuel. More specifically, Section 4081(a)(1)(B)(i) expressly exempts certain removals and entries of taxable fuel within the bulk transfer system and imposes registration requirements. According to the NPRM, “[t]here is no such statutory directive with regard to the Superfund chemical taxes, and such an approach would be inconsistent with the statutory text and legislative history of the [S]ection 4661 tax.” Therefore, the proposed regulations do not adopt this suggestion.
Modifications to the Taxable Substances List
The NPRM states that several commenters requested the addition of substances to or the removal of substances from the Taxable Substances List. According to the NPRM, such comments “are not considered requests to add to or remove from the Taxable Substances List and will not be processed.” All requests to add substances to or remove substances from the Taxable Substances List must be submitted in accordance with the procedures set forth in Rev. Proc. 2022-26, which provides the exclusive process by which importers, exporters, and other interested persons may petition to add a substance to or remove a substance from the Taxable Substances List.
Delayed Implementation of Superfund Chemical Taxes
The NPRM notes that multiple commenters requested that the Treasury Department and the IRS delay implementation of the Superfund chemical taxes until January 1, 2023. Since the Infrastructure Investment and Jobs Act (IIJA) reinstated the Superfund chemical taxes as of July 1, 2022, the Treasury Department and the IRS do not have the authority to modify the effective date of the Superfund chemical taxes, which is statutory. Accordingly, the Superfund chemical taxes are effective July 1, 2022, as required by law.
Harmonized Tariff Schedule (HTS) and Chemical Abstracts Service Registry Numbers® (CAS RN®)
According to the NPRM, several commenters requested that the Treasury Department and the IRS provide HTS numbers and CAS RNs for all taxable chemicals and taxable substances to ensure uniform identification by stakeholders and the IRS.
The U.S. International Trade Commission maintains and publishes HTS numbers. Chemical Abstracts Service maintains CAS RNs. According to the NRPM, the Treasury Department and the IRS are considering the request to provide HTS numbers and CAS RNs and how those numbers can be verified with the appropriate experts. The Treasury Department and the IRS request comments on the degree of specificity that would be required for HTS numbers and CAS RNs. Specifically, the Treasury Department and the IRS request comments on the appropriate number of decimal places for the HTS numbers and CAS RNs that would be used to identify taxable chemicals and taxable substances.
Proposed Applicability Dates
The proposed regulations would apply to sales or uses in calendar quarters beginning on or after the date the Treasury decision adopting the proposed regulations as final is published in the Federal Register. The IRS states that taxpayers and their related parties, within the meaning of Sections 267(b) and 707(b)(1) of the Code, “may rely on the provisions of these proposed regulations prior to that date provided that they follow the proposed regulations in their entirety (as applicable) and in a consistent manner until the date the Treasury decision adopting these rules as final regulations is published in the Federal Register.”
Commentary
Bergeson & Campbell, P.C. (B&C®) applauds the IRS for proposing these regulations and for having considered the comments and questions that taxpayers have been asking since the tax was reinstated. B&C urges taxpayers to review carefully the proposed rules and to comment. The IRS has been clear that it is open to suggestions, recognizing that the IRS is not expert in chemical supply chain complexities. B&C suggests also that comments refer to existing regulatory schemes, definitions, and authorities. Using these existing schemes, definitions, and authorities will help ensure consistency across these areas, limit the need for the IRS to define or redefine key terms, and provide the IRS with an authoritative government source upon which to base its guidance and regulations. There are several key areas in which we view opportunities to comment.
As readers are probably aware, identifying an importer of record is often complex. In its proposed rule, the IRS proposes that the tax “attaches when the manufacturer, producer, or importer of a taxable chemical first sells or uses the taxable chemical.” Similarly, the IRS proposes the tax “attaches at the time the importer first sells or uses the taxable substance.” For purposes of clarity, the IRS might revise the rules to specify that the tax attaches at the time that the taxable chemical or taxable substance is first sold or used in the United States, without specifying that it is the importer that is the seller or user. This would cover more complex scenarios wherein there might me multiple parties involved in an import transaction, and where one or more transfers of ownership may occur prior to customs entry, involving one or more parties (e.g., an owner, broker, and customer). Once the substance is entered in the customs territory, it may be transferred, without sale, to a recipient that later sells or uses the chemical or substance. By specifying that the tax attaches upon first sale or use in the United States, the rule eliminates the need to determine with specificity which entity was the importer of record. If there is not sale (including transfer of title) after import but prior to the first sale or use within the United States, one can conclude that the entity that sold or used the substance was either the importer or is closely related by ownership to the importer such that the entity meets the definition of importer. This subtle but important change can make identifying the taxpayer more straightforward in complex import scenarios without limiting the IRS’s ability to collect tax.
Another important area on which the IRS requests comments and we urge potential taxpayers to comment is increased specificity related to the taxable chemicals and taxable substances. Several entries (e.g., “butanol”) are not clear as to whether those entries are meant to be narrow (e.g., only 1-butanol) or broad (any isomer of butanol). In the proposal, the IRS states that such entries are meant to incorporate all isomers. The proposal also states that the category is based on molecular formula. The first statement is fairly definitive and would include n-butanol, isobutanol, and tert-butanol, but one might also conclude that it includes cyclobutanol. Only the first three have the same molecular formula, so, presumably cyclobutanol, with two fewer hydrogens than the other isomers, is not within the category of butanol. This uncertainty can be eliminated by the IRS providing specific CAS RNs whenever a category has a finite set of members (such as the isomers of butanol). In other cases, the chemical or substance represents a category that is not finite. For example, “phenolic resins” is listed as a taxable substance. “Phenolic resins” could be quite broad, and it is not clear how broadly the IRS would interpret this category. Taxpayers might comment that these categories — most of which are polymers — could include example CAS RNs of polymers in that category and specifically limit the definition to polymers that contain more than 2 percent of the identified taxable substance. For example, a polymer with less than 2 percent of propylene is not considered to be a polypropylene resin. The 2 percent threshold matches the thresholds under the Toxic Substances Control Act (TSCA) for including a monomer in the identity of a polymer. For both the finite sets (like butanol) and the infinite categories (like phenolic resins), commenters should provide the suggested CAS RNs (with CA Index names) and a suggestion to coordinate with the Office of Chemical Safety and Pollution Prevention at the U.S. Environmental Protection Agency (EPA) to review whether those CAS RNs are the complete set or a representative set. Consider also including some counterexamples (e.g., provide one or more CAS RNs that are not included in the category). Even when taxable chemicals or taxable substances are not amenable to confusion (e.g., 1,4-butanediol), the list of taxable chemicals and taxable substance would benefit from the addition of CAS RNs.
Potential taxpayers might also comment on when a taxable substance or a taxable chemical is imported as part of a finished product that the substance or chemical not be subject to tax. Again, existing definitions from other authoritative government entities, such as the TSCA definition of an article, can provide the IRS with an existing government paradigm on which to base its definitions.