IRS taking firm approach to ozone-depleting chemical excise tax compliance.

• Author: Spitzer, Jason

PRACTICAL ADVICE ON CURRENT ISSUES

Under Sec. 4681, federal excise tax is imposed on certain imported products that contain or use in their manufacture ozone-depleting chemicals (ODCs). This tax may apply not only to goods containing electronic components but also to goods such as furniture, medical devices, automobiles, and appliances if ODCs were used in their manufacture. Companies importing products potentially containing ODCs may be caught unaware or unprepared by this taxing regime.

The IRS has recently reinvigorated its examination of the Sec. 4681 tax, adopted a strict interpretation of the regulations, and instituted a laboratory testing program to detect ODCs in printed circuit boards. The challenges posed by the current IRS approach call for diligent preparation and documentation by taxpayers. An item in the June Tax Clinic reviewed the current IRS approach to ODC compliance (see Karet and Hoffman, "Are You Properly Paying the Ozone-Depleting Chemicals Excise Tax?" 41 The Tax Adviser 377 (June 2010)). This item looks at the IRS's ODC testing protocol and suggests strategies for taxpayers.

Background

The Sec. 4681 tax falls on any "imported taxable product" containing ODCs or manufactured using ODCs. To determine which imported products are taxable, businesses should follow the table of products found in Regs. Sec. 52.4682-3, which is organized according to U.S. International Trade Commission Harmonized Tariff Schedule (HTS) number.

An imported taxable product containing or manufactured using ODCs listed in Sec. 4682(a)(2) is subject to excise tax if it enters the United States for consumption, use, or warehousing. The tax is based on the weight of the ODCs used in manufacturing the product, including ODCs (1) incorporated into the product, (2) released into the atmosphere in the process of manufacturing, or (3) otherwise used in the manufacture of the product.

This provision was enacted in 1990, partly in response to international concern over depletion of the atmospheric ozone layer. Sec. 4681 forms part of the compliance regime of the United States, which was a 1990 signatory of the Montreal Protocol on Substances That Deplete the Ozone Layer, September 16, 1987, Treaty Doc. 100-10, 1987 1522 U.N.T.S. 2 (Montreal Protocol). That international compact seeks to protect the ozone layer by phasing out the production of substances believed to be responsible for ozone depletion, in order to reduce ODCs with the goal of eventual...