Chem firms brace for new US Superfund taxes

Author: Al Greenwood

2022/04/28

HOUSTON (ICIS)–Chemical companies are bracing themselves for the return of two Superfund taxes, one of which covers 42 chemicals made or imported in the US and another covering an even wider range of substances imported into the country.

• US will revive two Superfund taxes on 1 July 2022.
• One tax applies to 42 chemicals sold or used by producers or importers.
• Another tax could apply to many more substances that are imported.

The US is reviving the taxes as part of the $1trn Infrastructure Investment and Jobs Act that President Joe Biden signed into law in November.

The proceeds raised by the taxes will help replenish the government’s Superfund programme, which pays for clean-up at waste sites.

TAXABLE CHEMICALS
The tax levied on the 42 chemicals apply to some of the most common building blocks used in the industry.

These taxes are levied on a short-ton basis for the following 42 chemicals sold in the US by manufacturers or importers:

Source: Deloitte

Paraxylene (PX), an isomer of xylene, would be subject to the tax once it is imported into the country, said Jeffery Wright, US oil, gas & chemicals tax leader for Deloitte, a consultancy. For xylene, the tax becomes due upon the first sale or the first use.

The tax does include some exceptions.

Exporters can apply for a refund, according to Deloitte. Companies that use the chemicals to make fuel, fertilizer or animal feed are also exempt.

Based on those exceptions, hydrofluoric acid or propylene used in the alkylation units of refineries could be exempt, since those chemicals would be used to make gasoline. Butane could avoid the tax if it is blended in gasoline.

Ammonia used to make nitrogen fertilizers could also avoid the tax.

Methane could escape taxes if it is burned as a fuel in power plants or used to make hydrogen for feedstock in refineries.

However, if the methane is used to make methanol for downstream chemical production, it could be taxed.

The tax also exempts coal derivatives and sulphuric acid that is a by-product of air-pollution control.

TAXABLE SUBSTANCES
The second tax covers substances sold or used by importers, according to Mayer Brown, a law firm.

The tax will cover imports that contain at least 20% of the 42 taxable chemicals. The tax rate would depend on the percent of the taxable chemicals contained by the substance.

For example, a short ton of a taxable substance that contains 20% propylene would be subject to an excise tax rate that is 20% of that for propylene. Since the propylene tax rate is $9.74/ton, the rate for the taxable substance would be $1.95/ton.

It is up to the importer to determine the rate for a taxable substance and maintain the records that would back their findings. If the company comes short, the IRS will impose a 10% tax based on the substance’s value when it enters the country.

So far, there are 151 taxable substances that could meet this 20% threshold, according to lists from the Internal Revenue Service (IRS).

One of these lists was published when the Superfund tax was last in effect in the 1990s, Wright said. Another list was from historic notices that also date from the 1990s. At the time, the substances in the two lists contained at least 50% of the taxable chemicals.

It is presumed that they still contain at least 20%, Wright said.

The table below shows some of the taxable substances in the lists that are followed by ICIS.

Source: Deloitte

Some of these taxes will be problematic. The US has just one plant that makes melamine. It has no domestic production for methyl ethyl ketone (MEK) and relies solely on imports.

The list could be modified to add taxable substances that meet the 20% threshold or remove them that no longer meet the threshold, said Shawn O’Brien a partner at Mayer Brown. Advances or changes in production methods could cause some of the substances to contain less than 20% of the taxable chemicals.

For example, some of these chemicals can be made with renewable feedstock, such as butanediol (BDO), polyethylene (PE) and monoethylene glycol (MEG). Others could be made from feedstock derived from chemically recycled plastics.

PASSING THE BUCK
If companies choose to pass through the taxes, it will likely appear as line items, O’Brien said. He could see the tax being passed down to end consumers.

In total, the amount could be substantial.

The Superfund taxes could raise $452m in 2022 and $1.17bn in 2023, according to the congressional Joint Committee on Taxation. By the time the tax ends on 31 December 2031, the proceeds could reach $14.5bn.

Wright said that companies could evaluate existing contracts with suppliers and customers to see if they can pass along the taxes. Ultimately, each company will have to determine the pros and cons of absorbing the taxes versus passing them along.

To make things clearer for companies, the American Chemistry Council (ACC), a trade group, has asked that the IRS publish tax rates for the taxable substances.

It also asked the IRS to include the harmonised tariff schedule (HTS) numbers and the chemical abstract service numbers of the taxable substances.

The HTS numbers are used by countries around the world to determine which products are subject to a specific tariff. Such numbers allow governments to impose the tariffs in a consistent and clear way.

The list of 151 taxable substances could certainly use some more clarity. It lists polypropylene and polypropylene resins as separate items. HTS numbers could reveal whether the tax applies to two different grades of polypropylene or if the IRS simply listed the same product twice.

The ACC noted that the 20% threshold could cause a lot of chemicals to fall under the definition of a taxable substance. The ACC would like the government to publish rules under which companies could request the removal of chemicals from the list of taxable substances.

The following table shows the full list of the 151 taxable substances that, if imported, would be subject to the Superfund tax.

Source: Deloitte

Thumbnail shows dollars. Image by Shutterstock

By Al Greenwood

https://www.icis.com/explore/jp/resources/news/2022/04/28/10758808/insight-chem-firms-brace-for-new-us-superfund-taxes