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Environmental excise taxes imposed on chemicals and substances.

The IRS is beginning to step up its efforts to achieve increased revenue from the taxation of specified chemicals sold by a manufacturer, producer or importer, and certain substances sold or used by importers. These items are subject to excise taxes under Secs. 4661 and 4671, computed on a per ton basis. The rates are prescribed by Sec. 4661(b).

Taxable chemicals

Manufacturers, producers and importers of chemicals should be aware that Sec. 4661 imposes an excise tax on some products in their industry. This tax applies only to chemicals listed in Sec. 4661(b) that have been manufactured or produced in the United States or that entered the United States for consumption, use or warehousing. The tax is imposed when the chemical is sold by the manufacturer, producer or importer. For this purpose, use by the manufacturer, producer or importer is treated as a sale (Sec. 4662(c)(1)).

In addition, a proportionate part of the tax is imposed for a fraction of a ton. For a chemical that is a gas, "ton" means the amount of that gas in cubic feet that is the equivalent of 2,000 pounds on a molecular weight basis (Sec. 4662(a)(4) and (5)).

Taxable substances

A tax is also imposed under Sec. 4671 on any taxable substance sold or used by its importer. This tax equals the tax that would have been imposed by Sec. 4661 on the component chemicals used as materials in the substance's manufacture or production if these chemicals had been sold in the United States for use in the substance's manufacture or production.

If the importer does not keep sufficient records to show the amount of tax that should be imposed, the tax is 5% of the substance's appraised value at the time it was imported into the United States for consumption, use or warehousing. The Service may also prescribe an alternate rate based on the predominant method of producing that substance.

Taxable substances are listed in Sec. 4672(a)(3). Various substances have been subsequently added to this list administratively. These additions meet tests prescribed by the IRS based on the weight and value of taxable chemicals used to produce taxable substances. (For example, see Notice 95-12 for the most recent addition.)


Under Secs. 4662(b) and 4671 (d)(1), the following chemicals and substances are not taxable:

* Methane or butane used as, or in the production of, motor, diesel, aviation or jet fuels.

* Chemicals and substances used to produce fertilizer.

* Sulfuric acid produced as a byproduct of, and on the same site as, air pollution control equipment.

* Substances derived from coal.

* Specified chemicals and substances used to produce motor, diesel, aviation or jet fuel.

* Specified chemicals having transitory presence during any process of smelting, refining or otherwise extracting nontaxable chemicals.

* Recycled chromium, cobalt or nickel.

* Chemicals and substances used to produce animal feed.

* Organic chemicals that are part of an intermediate hydrocarbon stream containing one or more taxable organic chemicals.

Required returns

The liability for these taxes is computed on Form 6627, Environmental Taxes, and attached to Form 720, Quarterly Federal Excise Tax Return. However, Regs. Sec. 40.6011(a)-1(b) reads as follows:

Monthly and semimonthly returns. If the district director determines that any person that is required ... to file returns has failed to comply in a timely manner with the requirements ... relating to returns, payments, nd deposits of tax, that person will be required, if so notified in writing by the district director, to make a return for a monthly or semimonthly period .... Each person so notified by the district director must make a return for the calendar month or semimonthly period in which the notice is received and for each calendar month or semimonthly period thereafter until the person has filed a final return or until the person is notified by the district director to resume making quarterly returns.
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Article Details
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Author:Rankin, Jeffrey W.
Publication:The Tax Adviser
Date:May 1, 1995
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