On March 29, 2023, the U.S. Internal Revenue Service (IRS) published a Proposed Rule to amend the Environmental Tax Regulations, 25 C.F.R. part 52, specifically those provisions governing the chemical excise taxes used to fund the Hazardous Substance Response Trust Fund established pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA)—known as the Superfund Chemical Tax. Because this is the first time the tax will be applied in over 25 years, its effects may not be well understood by affected industry taxpayers, and the IRS’s Proposed Rule offers critical guidance. Companies engaged in the manufacturing, import, or sale of taxable chemicals should evaluate the Proposed Rule and consider submitting comments by the May 30, 2023, deadline.
The Superfund Chemical Tax previously expired in 1995 and was reinstated in November 2021 by Section 80201 of the Infrastructure Investment and Jobs Act (IIJA). The Superfund Chemical Tax applies to (1) any manufacturer, producer, or importer who sells one of 42 taxable chemicals listed in the table under 26 U.S.C. Section 4661(b)—an expansive list covering benzene, butane, ethylene, methane, toluene, cobalt, nickel, and zinc chloride, among others—and (2) any importer that uses or sells a “taxable substance” listed by the Secretary, in accordance with 26 U.S.C. Section 4672(a).
In the Proposed Rule, the IRS proposes to clarify the definitions of “importer,” “manufacturer,” “sale,” and “use”; how to calculate any potential tax; the proposed list of “taxable substances”; and application of the tax for various chemical mixtures, chemical compounds, and varying uses.
For various industries, the Proposed Rule also offers important guidance on special rules and exceptions. For the oil and gas industry, for example, the tax does not apply to methane and butane if used as a fuel or in the manufacture or production of any motor, diesel, aviation, or jet fuel. The Proposed Rule would extend this exception by clarifying that neither methane nor butane is taxed when used in the production of energy.
For the midstream sector, under current law, the tax does not apply to certain chemicals that are part of an intermediate hydrocarbon stream containing one or more chemicals (26 U.S.C. § 4662(b)(10)). However, if the chemical is isolated, extracted, or otherwise removed from or ceases to be part of an intermediate hydrocarbon stream, the individual causing such isolation, extraction, removal, or cessation is subject to the tax. The IRS has proposed to clarify this further for multistep processes. Specifically, when the isolation, extraction, removal, or cessation of a chemical from an intermediate hydrocarbon stream is part of a multistep process, the first person who causes isolation, extraction, or otherwise removal of the chemical from the intermediate hydrocarbon stream (regardless of whether further processing is possible, if not required) would be subject to the tax. Whether it is a single or multistep process, the IRS also proposes to clarify that neither methane nor butane is taxed at the time it is isolated, extracted, or otherwise removed from, or ceases to be part of, an intermediate hydrocarbon stream.
The IRS has similarly sought to clarify special rules and exceptions applicable to other industries, such as agricultural and energy production, pursuant to the statute. For example, the IRS proposed various special rules for qualified fertilizer, motor fuel, and animal feed substances and “blanket” exemption certificates applicable to certain tax-free sales of those substances.
The IRS stated that the Proposed Rule took into consideration industry comments received on interim IRS guidance and requests for information since enactment of the IIJA. Indeed, the IRS’s proposed special rules and blanket exemptions for certain, nuanced uses of taxable chemicals and substances and in its proposed definitions were informed by public comments. To the extent additional considerations have not been raised to the IRS, industry stakeholders are encouraged to participate in the process. The comment period closes May 30, 2023.
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