The Infrastructure Investment and Jobs Act (the IIJA), signed into law on November 15, 2021, reinstated two environmental excise taxes that had been terminated over twenty-five years ago. The Chemicals Superfund Tax and the Hazardous Substances Tax took effect on July 1, 2022 with a ten-year effective period until January 1, 2032. A third excise tax on crude oil and petroleum products was reinstated in the Inflation Reduction Act (the IRA), effective January 1, 2023. The Joint Committee estimated that these taxes would increase revenues by approximately $52 billion over a 10-year period.
These excise taxes take place in a context of higher global oil and gas prices and worldwide supply chain issues that have affected chemicals and consumer goods. They will have an impact on the oil and gas industry, the petrochemicals industry, and the chemicals industry, as well as the prices that consumers pay for gasoline at the pump, natural gas to heat their homes, and a wide variety of other consumer goods that depend on petroleum products. There are, however, several special rules and exemptions that apply specifically to fuel applications, including fuel production activities, and that may limit any negative impact.
This article provides an illustration of the challenges faced by the oil and gas industry in applying one of these special rules related to two products derived from natural gas: methane and butane. Methane, butane, and other natural gas liquids are used by refineries to produce motor fuels, by the petrochemical industry as feedstock to produce consumer goods after further processing, and in industrial and home heating uses.
The Comprehensive Environmental Response, Compensation, and Liabilitycommonly known as Superfund, was historically funded by three separate, interrelated excise taxes applicable to crude oil and petroleum products, chemicals, and hazardous substances (collectively referred to as Superfund excise taxes). The Superfund excise taxes funded the Hazardous Substance Superfund, which funds the cleanup of hazardous waste sites. The following sections describe the reinstatement of these taxes.
A. Superfund Excise Tax on Chemicals
The IIJA reinstated the Chemicals Superfund Tax, an excise tax imposed on the sale or use by a manufacturer, producer, or importer of 42 specified feedstock chemicals (taxable chemicals). The tax applies to both feedstock chemicals manufactured or produced in the United States, and those imported into the United States for consumption, use, orThe tax rate varies by chemical from $0.44 to $9.74 per ton, which is twice the previously enacted The highest tax rate applies to the following petrochemicals to the extent they are not used or sold for a qualified fuel use: acetylene, benzene, butane, butylene, butadiene, ethylene, naphthalene, propylene, toluene and xylene.
Numerous exceptions and special rules apply to the Chemicals Superfund Tax, including those for methane or butane used as a fuel, certain chemicals used in the production of fertilizer or animal feed, chemicals used in the production of motor fuel, chemicals having a transitory presence during refining, and intermediate hydrocarbon streams, among
B. Superfund Excise Tax on Hazardous Substances
In addition, the IIJA enacted the Hazardous Substances Tax, an excise tax imposed on certain hazardous substances sold or used by an importer. Hazardous substances are substances produced using one or more of the precursor chemicals that are taxed by the Chemicals Superfund tax. The importer is the party entering a taxable substance into the United States for consumption, use, orThe Hazardous Substances Tax ensures that importers of substances containing chemicals covered by the Chemicals Superfund Tax also pay an excise tax.
The Hazardous Substances Tax is imposed at the rate that would have been applicable to the taxable chemicals used to produce the taxable substances, as if the taxable substance had been produced in the United States. Taxpayers have the option to use an Internal Revenue Service (IRS) prescribed rate or derive a rate based on the unique chemical composition of the taxpayer’s specific imported hazardousIf the IRS has not yet provided a rate, and the importer does not have sufficient information to calculate its own rate, then the tax is imposed at a rate of 10 percent of the appraised value of the substance on This rate is also twice the previously enacted rate.
The Hazardous Substances Tax, as in effect from 1987 to 1995, applied to a statutory list of 50 taxable substances. It was administratively extended to approximately 100 additional substances in guidance published by the IRS. The additional substances (the IRS-determined list) were determined by the IRS and the Treasury Department, in consultation with the Administrator of the Environmental Protection Agency and the Commissioner of Customs, to have been produced with taxable chemicals that constituted more than 50 percent of the weight (or value) of the materials used to produce such substance.
Upon reenactment, the IIJA directed the IRS and Treasury to publish a new initial list of taxable substances, which the IRS did on December 14,This list included each substance that was on the IRS-determined list when the Superfund excise taxes were first in effect. The IIJA lowered the threshold of taxable chemicals necessary to add a substance to the IRS-determined list from 50 percent to 20 Therefore, it is expected that additional substances will be added to the list over time.
Exemptions apply for hazardous substances sold for use or used as fuel, in the production of fertilizer, or in the production of animal
C. Superfund Excise Tax on Petroleum Products
On August 16, 2022, the IRA reinstated a third excise tax, the Petroleum Superfund Tax, at a rate of 16.4 cents per barrel on (1) crude oil received at a U.S. refinery; (2) imported petroleum products entered into the United States for consumption, use, or warehousing; and (3) any domestically produced crude oil that is used in (other than on the premises where produced for extracting oil or natural gas) or exported from the United States if, before such use or exportation, no taxes were imposed on the crude oil. This rate is almost twice the previously enacted
The Petroleum Superfund Tax will apply to an operator of a U.S. refinery, a person importing the product for consumption, use, or warehousing, or a person using or exporting the
Notably, the statutory definition of crude oil includes crude oil condensates and natural gasoline. The definition of petroleum product includes crude oil but is silent with respect to other
The Petroleum Superfund Tax takes effect on January 1, 2023. It is indexed for inflation beginning after 2023.
D. Existing Oil Spill Tax on Domestic Crude and Imported Petroleum Products
The Oil Spill Tax is imposed on crude oil and imported petroleum products. The Oil Spill Tax currently applies at a rate of 9 cents perGenerally, the rules applicable to the Petroleum Superfund Tax currently apply with respect to the Oil Spill Tax.
Tax is already imposed by the Oil Spill Tax on domestic crude and imported petroleum products at a rate of 9 cents per barrel. The new Petroleum Superfund Tax adds to this burden by imposing an additional tax of 16.4 cents per barrel of domestic crude and imported petroleum products, for a total tax burden of 25.4 cents per barrel.
II. Complexity Under the Reinstated Regime
The reinstated Superfund excises taxes generally present the oil and gas industry with an additional compliance burden, such as the higher taxes per barrel of domestic crude and imported petroleum products. Special rules and exemptions under the Chemical Superfund Tax and the Hazardous Substances Tax apply directly to fuel applications, including fuel production activities. These special rules and exemptions apply to methane and butane, certain hydrocarbons used in the production of motor fuel, chemicals having a transitory presence during refining, and intermediate hydrocarbonIf correctly identified and applied, the special rules mitigate tax exposure.
This section sets forth an illustration that specifically addresses a special rule related to methane and butane. The illustration raises questions that are not addressed by the IRS in current guidance, resulting in a lack of clarity around when the special rule applies or what documentation the IRS may require to successfully apply the special rule.