July 1, 2022
US IRS issues new guidance ahead of 1 July 2022 effective date for Superfund excise tax
In Revenue Procedure 2022-26 (released 28 June 2022), the United States (US) Internal Revenue Service (IRS) provided detailed procedures for requesting a determination to add or remove a substance from the list of taxable substances under Internal Revenue Code (IRC) Section 4672(a) (List). In Notice 2021-66, the IRS had suspended the former determination procedures in Notice 89-61, as modified by Notice 95-39 (prior guidance) and added new substances to the List.
In Revenue Procedure 2022-26, the IRS:
In draft instructions for IRS Form 6627, released 22 June 2022, the IRS provided tax rates per ton for most taxable substances. In a set of Frequently Asked Questions, last updated on 24 June 2022, the IRS stated that it will release tax rates for the taxable substances as they are calculated and noted that taxpayers may calculate their own rates in lieu of using the IRS-prescribed tax rates.
Substances that contain more than 20% of taxable chemicals (as listed in IRC Section 4661(b)) by weight or value qualify as taxable substances. Under IRC Section 4672(a)(1), taxable substances only include those substances that are (1) listed by the Treasury Secretary (Secretary) at the time of sale or use by the importer; and (2) imported into the United States or credited or refunded if exported out of the United States (the current list of taxable substances is attached to this Alert).
Revenue Procedure 2022-26 defines various terms used in determining the taxability of a given substance. Similar to prior guidance, the term "substance" does not include the following:
Petition to add or remove a substance from the List
Importers and exporters of substances may petition the IRS to add or remove a substance from the List. Petitioners requesting to add a substance to the List must show that the substance meets the weight or value test. Petitioners requesting to remove a substance from the List must show that the substance meets neither the weight nor value tests.
Revenue Procedure 2022-26, Section 6, outlines the information that a petitioner must provide for the IRS to determine whether a substance contains more than 20% of taxable chemicals by weight or value. Among other things, the required information includes:
A separate petition must be submitted for each substance.
Revenue Procedure 2022-26 includes an example of the stoichiometric material consumption equation and conversion factor for dimethyl terephthalate, which is reproduced in an attachment to this Alert for illustrative purposes.
Upon accepting a petition, the IRS has 180 days to make a determination. Initially, the IRS will publish a Notice of Filing and request public comments for 60 days. Following its review, the IRS will publish a Notice of Determination, which will include the reason(s) for the IRS's determination to add or remove a substance from the List, the effective date of the determination and the applicable tax rate for the taxable substance.
Petitioners may submit determination requests via email (until further notice), e-fax (preferred method) or certified mail. Revenue Procedure 2022-26 includes details such as the e-fax number, size limitations and encryption for electronic submissions and the physical mailing address for submissions by certified mail.
Transition guidance for effective date of determinations
In general, substances added to the List will be taxable beginning on the first day of the second quarter following the quarter in which the determination is made (e.g., a substance whose determination is made in January 2023 will be taxable 1 July 2023). For purposes of refund claims, Revenue Procedure 2022-26 deems exported substances to have been added to the List as of the date the petition was filed.
Petitions filed with the IRS between 1 July 2022 and 31 December 2022, will be treated as filed on 1 July 2022. Therefore, if the IRS ultimately adds the substance to the List, companies that export substances that are the subject of a petition filed on or before 31 December 2022, will be able to claim a credit or refund for exports that take place between 1 July 2022 and 31 December 2022.
Revenue Procedure 2026-22 advises taxpayers to file a protective claim for refund of a tax overpayment if the statute of limitations for claiming an export refund is approaching (generally three years from the time the return was filed) and their petition is still pending.
IRC Section 4672(b)(2) places the burden on the petitioner to furnish sufficient information to the Secretary to add or remove a substance from the List. Revenue Procedure 2022-26 provides a detailed and rigorous set of requirements for fulfilling this statutory requirement.
Determining whether a substance contains at least 20% taxable chemicals by weight or value requires a description of the predominant method of production of the substance, which may differ from the production process used by the taxpayer, and the associated stoichiometric and molecular formulas.
Revenue Procedure 2026-22 largely borrows from prior guidance but contains several important additions, including:
As in prior guidance, the term "substance" does not include certain synthetic organic chemical substances and inorganic chemical substances that have been finished into end-use products. Unlike prior guidance, however, Revenue Procedure 2026-22 does not clearly state that Congress intended the tax to apply only to chemicals intended for further chemical conversion. It is unclear how the IRS will use information about whether the substance is imported in a form or packaging for retail sale at entry. Indeed, significant ambiguity remains as to what is considered a finished product upon import and whether certain substances that may undergo some transformation in the United States, but experience no actual chemical conversion, are subject to the tax.
According to Revenue Procedure 2022-26, the IRS will treat all petitions filed between 1 July 2022 and December 31, 2022, as effective on July 1, 2022. This transition guidance is important, as it gives exporters additional time to identify potential taxable substances, gather the required information and claim an export credit or refund for exports occurring on or after 1 July 2022 for those taxable substances that are eventually added to the List.
Companies that import or export substances that may contain at least 20% taxable chemicals should consider the following steps:
Companies not required to remit the tax because they do not manufacture or produce taxable substances in the United States or import taxable substances could experience downstream price increases if those liable for the tax pass the cost onto their customers. For those companies, as well as companies producing a substance containing at least 20% taxable chemicals, requesting to add the substance to the List may be beneficial, as they could recoup the cost of the tax through a credit or refund. Such credits or refunds are not available for substances exported before the effective date of the determination.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Excise Tax
Ernst & Young LLP (United States), Global Trade
List of superfund chemicals
RP 2022-26 examples