Understanding the excise tax on ozone-depleting chemicals.

• Author: Orlando, Gregory A.

Understanding the Excise Tax on Ozone-Depleting Chemicals

Background

There has been mounting international concern over the depletion of the ozone layer caused by increasing concentration of chlorofluorocarbons (CFCs) and brominated compound (halons) gases in the upper atmosphere. On April 21, 1988, the United States ratified and implemented the "Montreal Protocol on Substances that Deplete the Ozone Layer." The Protocol, which went into effect on July 1, 1989, requires the United States to control the production and consumption of ozone-depleting chemicals (ODCs), and represents the first coordinated attempt to control and progressively reduce the use of CFCs by the mid-1990s. The initial phase of the Protocol requires the signatory countries to achieve a near-term reduction in total CFC production and consumption down to the 1986 level. This is to be followed by a phased reduction to 80 percent and 50 percent of 1986 levels beginning in mid-1993 and mid-1998, respectively. It also limits production and consumption of halons to 1986 levels beginning in 1992.

As part of its efforts to ensure that the United States meets its obligation under the Protocol, Congress in 1989 enacted an excise tax on ODCs. The tax was viewed as providing an easily administered, economically efficient mechanism for encouraging the development and use by the private sector of compounds that do not dissipate the stratospheric ozone layer shielding the earth's surface from dangerous ultraviolet radiation. The excise tax will cause the price of the ODC to increase, thereby stimulating the private sector to reduce its dependency on ODCs by reducing use, increasing reclamation, and providing incentives to the development of alternative chemicals.

Enacted as section 7506 of the Revenue Reconciliation Act of 1989, new sections 4681 and 4682 of the Internal Revenue Code require that most manufacturers, producers, and importers pay an excise tax for the sale or use of ODCs in the production process. The new tax is imposed not only on the sale or use by a manufacturer, producer, or importer of any ODC, but also on any product imported into the United States in which an ODC was used as a material in its manufacture or production. On August 31, 1990, the Internal Revenue Service issued final and temporary regulations (T.D. 8311) relating to the ODC excise tax. (*1)(1) This article summarizes the new excise tax, which applies to a wide range of industries and transactions not previously covered by the Code's environmental taxes.

Computation of Tax

Under section 4682(a)(2) of the Code, the specific chemicals subject to the excise tax are CFC-11 (trichlorofluoromethane), CFC-12 (dichlorodifluoromethane), CFC-113 (trichlorotrifluoroethane), CFC-114 (1,2-dichloro-1,1,2,2,-tetrafluoroethane), CFC-115 (chloropentaflouroethane), Halon-1211 (bromochlorodifluoromethane), Halon-1301 (bromotrifluoromethane), and Halon-24-2 (dibromotetrafluoroethane). (2) The tax, which will be phased-in over a four-year period, is determined by multiplying a base tax amount (per ODC weight) by an "ozone-depleting factor." Ozone-depleting factors have been calculated through a comparison of the ozone depletion that occurs from the dispersion of one kilogram of the given ODC when compared to CFC-11 (trichlorofluoromethane). There is no tax on ODCs that are recovered in the United States as part of a recycling process (and not part of the original manufacturing process), nor is the tax imposed on ODCs used or sold for use as a feedstock. To qualify for the feedstock exemption, the ODC must be consumed entirely in the manufacture of another chemical, and the buyer of the ODC must certify to the supplier that the ODCs will be used as feedstock.

Base Tax Amount(3)

Year Amount of Tax 1990 & 1991 $1.37 1992 $1.67 1993 & 1994 $2.65

Ozone-Depleting Factor(4)

Chemical Factor CFC-11 1.0 CFC-12 1.0 CFC-113 0.8 CFC-114 1.0 CFC-115 0.6 Halon-1211 3.0 Halon-1301 10.0 Halon-2402 6.0

According to Temp. Reg. [section] 52.4682-4T(d)(1)(ii), the amount of tax imposed during 1990 is, as follows:

ODC Tax Per Pound CFC-11 $1.37 (1.0 X $1.37) CFC-12 1.37 (1.0 X $1.37) CFC-113 1.096 (0.8 X $1.37) CFC-114 1.37 (1.0 X $1.37) CFC-115) .822 (0.6 X $1.37)

The tax on certain substances -- Halons-1211, -1301, - 2402, and chemicals used in rigid foam insulation -- is reduced for the years 1990-1994. Qualifying sales of chemicals used in manufacture of rigid foam insulation are not taxable in 1990 and are taxed at reduced rates for 1991, 1992, and 1993. A qualifying sale is one where registration certificate requirements are met. Temp. Reg. [subsection] 52.4682-2T(a) and (d) set forth the certificate requirements for tax-free and tax-reduced sales, and the recommended IRS Registration Certificates are reproduced in Temp. Reg. [section] 52.4682-2T(d)(2).

The term "rigid foam insulation" is defined in Temp. Reg. [section] 52.4682-1T(d)(3) as any rigid foam designed for use as thermal insulation...