The Infrastructure Investment and Jobs Act (IIJA), signed by President Joe Biden on Nov. 15, 2021, revives an excise tax last effective in 1995 on the sale or use of 42 identified chemicals as well as certain substances manufactured or produced from such chemicals.
The chemical tax was originally established by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980. Often collectively referred to as the superfund taxes, Congress imposed excise taxes on domestic crude oil, imported petroleum products and identified chemicals, as well as imported substances comprised of such chemicals. Together, these taxes funded the Hazardous Substance Response Trust Fund, which was used by the U.S. Environmental Protection Agency (EPA) to clean up hazardous waste sites.
The IIJA revives the tax on chemicals with some important modifications. While the bipartisan infrastructure bill does not revive the tax with respect to domestic crude oil and on imported petroleum products, drafts of the Build Back Better legislation would.
Background on Chemical Tax
The provisions related to the chemical tax can be found in Sections 4461, 4462, 4671 and 4672 of the Internal Revenue Code. The latter two provisions, focused on importation of taxable substances, were added by the Superfund Amendments and Reauthorization Act (SARA) of 1986.
The chemical tax is imposed on the sale or use of one of 42 listed taxable chemicals on the manufacturer, producer or importer thereof, unless an exception for that chemical can be found. For example, although Section 4661 lists nitric acid as a taxable chemical, Section 4662 exempts nitric acid from the tax if used to produce a qualified fertilizer substance. There is an no tax imposed on those who export a taxable chemical.
The static list of 42 taxable chemicals should not be confused by the definition or list of taxable substances. Under the previous iteration of the chemical tax, a taxable substance is one that is comprised of more than 50 percent of the weight (or more than 50 percent of the value) of a taxable chemical. While SARA established a presumptive list of what is a taxable substance, it also gave the Internal Revenue Service (IRS) authority to make modifications to that list. After enactment, the IRS established a process, under Notice 89-61, under which petitions could be filed to either request an addition or subtraction to the list provided in SARA. Over time, the IRS considered numerous petitions and adjusted the list of taxable substances.
The definition of a taxable substance and what is included on the changeable list is important because 1) importers of taxable substances are subject to the excise tax and 2) exporters of taxable substances can seek a refund if the excise tax was paid on the taxable chemical used to manufacturer or produce the taxable substance.
Changes Effectuated Through the IIJA
As revived, the chemical tax would be effective for almost 10 years, beginning in July 2022. The tax rate per ton on taxable chemicals is doubled. While the list of taxable chemicals remains the same list of 42, the law modifies the definition of a taxable substance by reducing the threshold – previously a taxable substance was one comprised of more than 50 percent of the weight (or more than 50 percent of the value) of a taxable chemical – but under the IIJA that percent is lowered to 20 percent. The law also gives deference to the list of taxable substances contained in existing law, as modified over time by the IRS through guidance and requires IRS to issue an initial list of taxable substances.
Next Steps
Companies should take inventory now to determine the impact of the revitalized chemical tax. This includes reviewing IRS Notice 2021-66, which provided taxpayers with an initial list of substances that are considered to be taxable substances, and IRS Notice 2022-15, which provides some relief on semi-monthly deposits. Companies need also monitor the Build Back Better legislation in the event it changes in the IIJA's revitalization of the chemical tax.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.
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