Superfund excise taxes are back

Superfund background

In 1980, the Comprehensive Environmental Response, Compensation, and Liability Act established the Superfund, which was funded, in part, by taxes and was administered by the Environmental Protection Agency. According to the legislative history, the fees were intended to be imposed at the beginning of the commercial chain of production, distribution, consumption, and disposal of hazardous substances. By imposing the taxes on the party that brings the substance into the U.S. or that first manufactures it and collecting the tax at the beginning of the production cycle, the efficiency of the marketplace broadly distributes the risk of chemicals on all industrial sectors in the chain of production, transportation, use, and disposal of hazardous substances.

Superfund taxes originally expired in 1985 but were extended several times. Before being reinstated by the IIJA, Superfund excise taxes had last expired on Dec. 31, 1995. Two separate Superfund excise taxes exist: a tax on the sale or use of “taxable chemicals" under IRC Section 4661 and a tax on the sale or use of imported "taxable substances" under IRC Section 4671.

IRC Section 4661(a) imposes an excise tax on any taxable chemical sold by a manufacturer, producer, or importer. The Section 4661 tax is imposed as a tax per ton of a taxable chemical. IRC Section 4661(b) lists 42 chemicals subject to the tax and the amount of tax per ton imposed by Section 4661(a) on each.

IRC Section 4671(a) imposes an excise tax on the sale or use of a taxable substance by the importer of the taxable substance. IRC Section 4672(a) lists 50 chemicals that are subject to tax and provides the secretary of the treasury authority to list additional chemicals subject to the tax under IRC Section 4672(a). Notice 2021-66 lists an additional 101 substances as taxable substances. Section 4671(b) provides that the amount of tax imposed by Section 4671(a) on a taxable substance is equal to the amount of tax that would have been imposed by Section 4661 on the taxable chemicals used to manufacture or produce the taxable substance had the taxable chemicals been sold in the U.S. to manufacture or produce the taxable substance.

Exemptions from the Superfund excise taxes include taxable chemicals and substances that are exported and those that are used for certain animal feed, fertilizer, and fuel purposes. However, IRC Sections 4662(b) and (c) provide that taxpayers must register with the IRS to take advantage of the exemptions regarding use.

Reporting and deposits

The Superfund excise taxes are reported on Form 6627, “Environmental Taxes,” which is attached to Form 720, “Quarterly Federal Excise Tax Return.” The first return for the calendar quarter beginning on July 1, 2022, and ending on Sept. 30, 2022, is due by Oct. 31, 2022. If the net excise tax liability doesn't exceed $2,500 for the quarter, the taxes are payable with Form 720 when filed.

Unless a deposit safe harbor applies, taxpayers with a quarterly net excise tax liability in excess of $2,500 generally are required to make a semimonthly deposit of at least 95% of their net excise tax liability. Under Treasury Regulation Section 40.6302(c)-1(c)(1), the deposit for a semimonthly period is due by the 14th day following that period. This typically will be the 29th day of a month for the first semimonthly period and the 14th day of the following month for the second semimonthly period. If the 14th or the 29th day falls on a Saturday, Sunday, or legal holiday, the deposit must be made by the immediately preceding day that isn't a Saturday, Sunday, or legal holiday. For semimonthly depositors, the first deposit of excise taxes (covering the first 15 days of July 2022) is due by July 29, 2022.

The lookback quarter deposit safe harbor in Treasury Regulation Section 40.6302(c)-1(b)(2) allows taxpayers to use the second preceding calendar quarter as their basis for making current quarter deposits. For example, a taxpayer making a deposit for the third quarter of a calendar year can base its deposit for that quarter on the net tax liability as reported in the first quarter of that year. Because the deposit safe harbor rules require a second preceding calendar quarter (lookback quarter) to determine deposit amounts for the current quarter, a taxpayer liable for any Superfund taxes will be unable to use the deposit safe harbor to calculate semimonthly deposits of Superfund taxes until the first calendar quarter of 2023.

The IRS has acknowledged the short time frame between the reinstatement of the Superfund taxes and the due date of the first deposit as well as the unavailability of the lookback quarter safe harbor. Notice 2022-15 provides transitional relief for failure to deposit penalties for the third and fourth calendar quarters of 2022, and the first calendar quarter of 2023, for failure to deposit Superfund taxes through March 31, 2023.

Next steps

It’s been nearly three decades since the Superfund taxes last were effective. Taxpayers that were not in existence when the last Superfund taxes were in effect or those that have not maintained Superfund tax compliance procedures are likely to face significant challenges when it comes to complying with the reinstated taxes. Taxpayers should focus on some key items as the taxes go into effect:

• Identify imported and domestically manufactured or processed taxable chemicals and substances.
• Determine how to obtain information on the weight of imported and domestically manufactured or processed taxable chemicals and substances.
• Consider which chemicals and substances are not subject to tax based on exempt use or because they are being exported.
• Ensure that deposit and electronic payment mechanics are compliant considering the reinstated Superfund taxes, which could be required to be deposited as early as July 29.