Superfund Taxes: The Cost Of Cleaning Up The Environment

Nicholas Mowbray of Baker & Hostetler LLP discusses the recently enacted Superfund excise taxes on chemicals and hazardous substances and some compliance concerns and uncertainty surrounding them.

This transcript has been edited for length and clarity.

David Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: better living through taxes.

On July 1 Superfund excise taxes on dozens of chemicals and hazardous substances took effect. These taxes, brought back by the Biden administration after a 25-year lapse, have been viewed favorably by environmental groups. However, chemical industry groups are questioning the taxes and their implementation.

What does the return of these taxes mean for taxpayers and businesses alike? Tax Notes contributing editor Nana Ama Sarfo will talk more about that in just a minute. Ama, welcome back to the podcast.

Nana Ama Sarfo: Thank you, Dave. It’s great to be back.

David Stewart: Could you give us a bit of background on Superfund taxes and what they’re really designed to do?

Nana Ama Sarfo: Yes. The Superfund taxes are excise taxes that are imposed on chemicals and hazardous imported substances to raise revenue to fund environmental cleanups in the United States. Any manufacturer, producer, or importer of chemicals or substances that fall under the law must pay a tax that is graduated per ton based on the danger posed by the chemical or substance.

David Stewart: What is this Superfund cleanup program? What happens there?

Nana Ama Sarfo: The Superfund program was created by Congress in 1980 to clean up highly polluted land and water created by industrial pollution or oil spills, natural disasters or other events. Its official name is the Comprehensive Environmental Response Compensation and Liability Act, CERCLA, but it’s widely known as “Superfund.” It authorizes the U.S. Environmental Protection Agency (EPA) to clean up contaminated sites using funds generated by these excise taxes.

Cleanup happens in a few ways. In the case of industrial pollution, when the EPA knows who is responsible, it can force those parties to clean up the land or reimburse the EPA to do the cleanup. But in cases where the government can’t identify the responsible party, then the EPA cleans up the site using money from the Superfund program.

David Stewart: From the environmental perspective, why are these Superfund excise taxes important?

Nana Ama Sarfo: Well, I think when people think about Superfund cleanups, they often think about abandoned warehouses and factories that are kind of in the middle of nowhere, or condemned land that is far away from population centers. But the reality is that most of us or someone we know actually live close to a Superfund hazardous waste site.

According to the White House, one in every five people in the U.S. live within three miles of a Superfund site. And so that adds up to about 73 million people, which is a really, really large number. And then we also know that some communities are more impacted by these sites more than others. Over 25 percent of Black Americans and nearly 30 percent of Hispanic Americans live within a three-mile radius.

David Stewart: Now, what happened when the original Superfund taxes expired?

Nana Ama Sarfo: Well, a backlog formed and there were dozens of sites that either needed cleanup and couldn’t receive any funding, and then there were dozens more where cleanup had started but needed to pause because funding ran out.

So the EPA announced a few months ago that it was going to release $1 billion to clean up 49 sites that hadn’t been able to receive any funding and then also restart cleanup at other sites around the country.

David Stewart: Do we have a sense of what sort of cleanup sites are being funded?

Nana Ama Sarfo: Yes. The Biden administration said that it will prioritize cleanup in the communities that have been most impacted by this industrial pollution. About 60 percent of the Superfund sites that will receive funding under the new law are in historically underserved communities, according to the EPA.

David Stewart: Now, I understand you recently spoke with someone to give the chemical groups’ side of this issue. Who did you talk to and what did you talk about?

Nana Ama Sarfo: I spoke with Nicholas Mowbray from Baker & Hostetler, who is very well acquainted with these excise taxes. He has represented business groups who are trying to figure out what their obligations are under these new rules.

The reality is that even though the taxes will fund good works, they’re also creating a lot of uncertainty for taxpayers. The government has said that taxable products can be added or subtracted from the list, and taxpayers are trying to sort out the mechanics of that and other compliance issues.

Nick was very gracious to stop by and explain what some of the major issues are.

David Stewart: All right, let’s go to that interview.

Nana Ama Sarfo: Nick, thank you so much for coming on the podcast. It’s a real pleasure to speak with you today.

Nicholas Mowbray: Thank you. It’s great to be here.

Nana Ama Sarfo: Now, on July 1 Superfund excise taxes on dozens of chemicals and hazardous substances went live. As a bit of background, those taxes were resurrected after a 25-year hiatus.

The original Superfund excise taxes expired in 1995, and it took lawmakers 25 years to agree to bring them back. The taxes were reinstated through the recent Infrastructure Investment and Jobs Act (P.L. 117-58), and they’re widely viewed as a bipartisan achievement of that package.

On one hand, the excise taxes are being hailed as a step in the right direction for environmental justice and anti-pollution efforts in the United States because the taxes are expected to raise $14.5 billion that will be used to fund cleanups at hazardous waste sites throughout the country as part of the Superfund cleanup program which is administered by the EPA.

But then on the other hand, chemicals industry groups and others have raised a lot of questions about what they should expect with this new regime.

I’m really happy, Nick, that we have you joining us today as you’ve represented some business groups navigating these new taxes and can give our listeners some context on what this all means from a tax perspective.

My first question for you is can you please provide a little background on the Superfund excise taxes? First, what are they? Secondly, what are they designed to do? Third, how is this new iteration different from the old one?

Nicholas Mowbray: Absolutely. When people refer to Superfund taxes, they’re generally referring to excise taxes that are imposed on taxable chemicals listed under section 4661 and then taxable substances that are listed under section 4672(a)(3) which are made from taxable chemicals.

As you mentioned, the Superfund taxes were first enacted in the early 1980s as one of several provisions intended to fund a hazardous substance cleanup program. They were really enacted to address concerns raised by the EPA relating to pollution and contamination.

The taxes relate to hazardous substances and are intended to attach at the beginning of the commercial chain of production, meaning that they apply when a taxable chemical is distributed, consumed, sold, or otherwise disposed of.

As you mentioned, they expired in the mid-1990s, so while these provisions remained in the code, they were essentially dormant. The Infrastructure Investment and Jobs Act turned these back on. They sunset December 31, 2031, so they’re going to be around for the next decade.

As you mentioned, revenues from them will be used primarily to address a backlog of Superfund sites awaiting funding. That’s sites that need cleanup, but they need to be funded before they can be cleaned up.

Companies that manufacture, produce, or import taxable chemicals — the keyword there is “taxable chemicals” — are subject to a tax under section 4661 and 4662 based on the tonnage of the taxable chemical that is used, manufactured, or produced. The rates per ton are prescribed by statute.

One of the big differences with this iteration of these taxes versus the old ones is they’ve sort of doubled up on what that rate is in the statute. There’s a statutory prescribed list of 42 taxable chemicals.

With respect to the second provision I mentioned, for taxable substances, importers that sell or use taxable substances are also subject to a tax under section 4671. There are several taxable substances listed in the statute. But the statute also instructs the IRS to add any substance in which taxable chemicals — again “taxable chemicals” is the key word, and those are defined in section 4661 — constitute more than 20 percent of the weight or value of the substance. The 20 percent figure is also a change from the previous statutes. Under the previous statute, it was 50 percent.

There are two ways a substance is added to this list. The statute has a number of them in it, but it also provides a mechanism to add or subtract substances from it.

The first is that the Treasury Department, in consultation with the EPA, has to determine that a taxable chemical constitutes more than 20 percent of the weight or value of the materials used to produce the substance. The IRS has done this initially with a Notice 2021-66, which was issued pretty shortly after these were enacted in the Infrastructure Investment and Jobs Act.

The second is if an importer or exporter petitions the IRS to add or remove a substance. Importers have to calculate the tax for taxable substances under section 4671.

There’s really very little guidance on how to do this calculation. The IRS recently offered prescribed rates for 121 of the 151 taxable substances, but taxpayers aren’t required to use that IRS rate.

Nana Ama Sarfo: Thank you so much for that very comprehensive overview. I think from everything that you described it’s very clear that we’re dealing with a complex regime with many, many moving parts.

I understand that there are some concerns about the definitions of manufacturers, producers, and importers, and there are also concerns about the definition of “taxable substances” and how those substances can be added or subtracted from the list and what the scope of an item on the list encompasses. I’m hoping that you can explain what some of those concerns are.

Nicholas Mowbray: There’s a number of concerns regarding gaps by the statute and the lack of guidance filling those gaps. With respect to taxable substances, there’s a number of concerns. I’ll cover a few here.

The first is that the statute defines 50 or so specific substances and allows Treasury to add or subtract items from that list. So far, Treasury and the IRS have issued Notice 2021-66, which added an initial list of taxable substances identical to the list in place pre-1996. Thus, I think there’s some questioning whether the list really needs some refreshing.

The second concern is clarity regarding some of the substance contained on the list of taxable substances and what the process will be to request a determination that a substance either be removed or added to the list. There’s really two concerns there. One is clarification of what’s on it, and the second is adding and removing a taxable substance from the list.

With respect to clarification, there’s a number of comment letters that have made this point, that the list should include some further classification, such as a schedule B number or a chemical abstract service number to create uniformity and consistency in how the tax is applied.

In layman’s terms, that means that there would be some type of identification number. For a chemist, they would clearly know what that means.

The concern that this is getting at is that there are things on the list such as vinyl resins that, again, to a layman, vinyl resins seems somewhat specific, but apparently there’s really some more clarity as that could be a vague term to a chemist.

With respect to adding or removing taxable substances, Notice 2021-66 suspended a prior notice that was in place when these taxes were last in place. It’s Notice 89-61. That notice established the process to request a determination to add or remove something from the list of taxable substances.

The IRS issued an FAQ recently saying that they would give guidance soon on the procedures for adding and removing substances. Hopefully that’s something that happens in the coming days.

The third of these points is how to calculate the rate, or the amount of tax for taxable substances. There’s some questions about whether it should be calculated based on the volumes of a taxable chemical used to produce a substance. If it is the volume, when should a taxpayer calculate that? Is it the amount used to produce it, or is it the amount that appears in the final product?

These are things that the statute hasn’t filled and it’s left open for taxpayers to interpret.

Nana Ama Sarfo: Those are a lot of open questions that you just raised. I would love to know where exactly are we in terms of IRS guidance. What has been issued and what are taxpayers waiting for?

Nicholas Mowbray: Sure. I mentioned Notice 2021-66. That was issued shortly after the passage of the Infrastructure Investment and Jobs Act, and it really addressed taxable substances and then provided that initial list. Certain registration requirements for specific exemptions that are granted under section 4662, and then they also requested taxpayer comments. A number of taxpayers have submitted comments, including my firm on behalf of the Association of Battery Recyclers and Battery Council International.

The second piece of guidance that’s been issued is Notice 2022-15. That was released in April. It really relates to relief for penalties and issues associated with calculating and depositing the tax.

From a tax compliance perspective, I think that’ll really help. It sort of gives taxpayers guidance on how they can achieve the safe harbor and how they can avoid getting penalties or interest imposed on them for making good faith efforts to comply with the taxes.

The third piece of guidance came out in the end of June. It’s an FAQ of 15 questions. It’s also a list of excise tax rates for 121 of the 151 taxable substances. Again, those rates, taxpayers can diverge from them, but they also can rely on them.

There’s been three pieces of guidance so far in total. What hasn’t been issued is regulations or a Notice of Proposed Rulemaking, which I think would be a significant tool and an aid to taxpayers in figuring out these rules.

Nana Ama Sarfo: Absolutely. From what you have heard and observed, what are some outstanding guidance issues that are important to taxpayers? What are some uncertainties that they are concerned about as they wait for regulations?

Nicholas Mowbray: The first I’d say is guidance on how taxpayers should document exceptions to the tax. This is probably what I get asked the most about. These taxes attach to the first sale or use of a taxable chemical, but there’s several exceptions.

To discuss one of them and my point around documentation is one of these exceptions is for butane or methane that’s sold for use in the production of fuel. If you sell butane or methane and it’s going to be used in the production of fuel, this excise tax doesn’t apply.

But it assumes that a seller obtains some type of documentation from a buyer, that that’s how the buyer will actually use the butane or methane, basically documenting that they’re going to use it in the manufacture, production of a fuel. But there’s no guidance of what type of documentation will suffice.

Is it enough for taxpayers that have contractual provisions, such as representations about how the chemical will be used? Or is there something more they need to do, like have statements in an invoice regarding the same?

In addition, taxpayers may sell a taxable chemical to a buyer and a buyer may warehouse it for months and months and months and then resell it. If the original purchase by the buyer was for one of these exemptions, like it’s methane or butane that’s going to be used in a fuel, what documentation does the original seller have regarding the second or third sale of this? What do they need to have if they are audited to show that down the chain the original sale, and the exemption from the original sale, that’s how the taxable chemical was actually used for?

I’m talking about butane or methane, but the same issues apply to nitric acid, sulfuric acid, ammonia, methane that’s used to produce ammonia, for things that are in qualified fertilizer substances.

This is a big area. I get a lot of questions about it. What should we be inserting in our contracts? What types of clauses should we be having there? What types of things should our logistics and billing departments be doing to make sure we’re documenting how these are going to be sold?

The second is a piece of guidance that I think they really could issue, and it would be helpful to cover in regulations, would be providing some type of definitions not addressed by the statute, such as what constitutes manufacturing or producing? Do the Treasury and the IRS consider things like recycling to be the same as manufacturing, producing an original used taxable chemical?

When the statute came in place in the 1980s, the abilities for companies to reuse and recycle taxable chemicals, it’s come a long, long, long way since then.

I think it would be worthwhile to revisit and possibly reward taxpayers that are able to document and are able to recycle and reuse taxable chemicals in very high percentages to possibly give them some type of exception to say, “That’s not manufacturing,” or “That’s not producing.”

In the third point, which kind of dovetails from that, is that I think the IRS and the Treasury could help taxpayers understand the way credits work in this space. For example, do taxpayers have the ability to receive a credit for taxable chemicals that are reused or recycled? If they do, what would a taxpayer need to do to establish that a tax was previously paid on an original use taxable chemical that’s being recycled?

Nana Ama Sarfo: To wrap up everything that you have shared with us today, in your opinion how do you think that the IRS can perhaps try and make this new iteration of the excise taxes less burdensome on taxpayers?

Nicholas Mowbray: I think they really need to issue a Notice of Proposed Rulemaking and go through the process of issuing proposed regulations, collecting comments, and then adopting final regulations. I think there’s a lot of gaps left by the statute.

There’s a lot of questions here that taxpayers just don’t know the answer to. It’s great that they issue notices. It’s great that they issue FAQs. But at the end of the day, I think they need something more substantive.

Nana Ama Sarfo: Well, Nick, thank you again for that extremely thorough overview and breaking down the major issues on this very complex topic. This is something that we will be watching for quite some time. We really appreciate you lending your expertise to the podcast.

Nicholas Mowbray: It was my pleasure and thank you for having me.