Excise Tax 102. Energy & Environmental Taxes. Frank Boland Chief, CC:PSI:7

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1 Excise Tax 102 Energy & Environmental Taxes January 21, 2011 Frank Boland Chief, CC:PSI:7 BA, TCU; JD, SMU IRS since 1977 Branch chief of excise tax branch in IRS Counsel since 2003 Principal author or reviewer of most of fuel tax guidance since 1988 (202)

2 Deborah Karet Gordon Senior Manager, KPMG Washington National Tax (202) Formerly-- IRS Chief Counsel Office Clerk, United States Tax Court J.D. State University of New York; LLM New York University Word of Caution This is the Big Picture overview There are different rules for different taxes Federal excise tax law has a lot of exceptions to the general rules and special rules for special cases on top of that Many terms are terms of art

3 Today s Agenda Overview of Excise Taxes and Procedural Rules Energy Taxes Environmental Taxes Overview Retailers & Mfg Taxes IRC Chapters 31 & 32 Retailers Alternative fuels Inland waterway trans. Tractors, trucks, trailers Manufacturers Gas guzzler cars Tires Taxable fuel Coal Vaccines Sport fishing equip. Bows & arrows Medical devices

4 Overview Retailers & Mfg Taxes (cont d) 26 CFR Definitions and attachment of tax 26 CFR part 40 Procedural rules: time for filing Form 720; deposits IRC 6416(a) & (b) Conditions to allowance Certain uses & resales treated as overpayments Overview Facilities & Services Taxes IRC Chapter 33 Amounts paid for: Local-only telephone service Transportation of persons or property by air Collected tax Taxpayer is person paying for service; tax is collected & paid over by person receiving payment; IRC 6672 penalty applies to the collector 26 CFR part 40; IRC 6415

5 Overview Environmental Taxes IRC Chapter 38 Oil spill IRC 4611 Form 720 and Form 6627 Ozone-depleting chemicals IRC 4681 Form 720 and Form 6627 Overview Certain Other Taxes and Fees Transportation by water IRC 4471 Form 720 Highway use IRC 4481 Form 2290 Wagering IRC 4401, 4411 Forms 730, 11-C Tanning IRC 5000B Form 720 Branded prescription drug fee 9008 of ACA

6 Overview Excise Taxes Outside of PSI:7 Foreign insurance (4371) Obligations not in registered form (4701) Firearms (4181) Harbor Maintenance (4461) Charities, employee plans, REITs Alcohol, tobacco (subtitle E) Overview Where Does the $ Go? Truck and most fuel taxes Highway Trust Fund Air transportation taxes (including av gas and jet fuel) Airport and Airway Trust Fund General fund and other trust funds IRC uses trust fund in 2 different ways Funds held by the U.S. Collected taxes held in trust by the collector

7 Overview General Procedural Rules Rules in subtitle F that refer to this title or internal revenue taxes apply to excise taxes So usual assessment, collection, limitations, & enforcement rules apply But the deficiency procedures don t apply so taxpayers can t petition Tax Court on excise tax assessment Instead, excise tax disputes are generally refund litigation in U.S. District Court or Claims Court Excise taxes are divisible under Flora Overview Special Procedural Rules Retailers & mfg, facilities & services, environmental taxes 26 CFR part 40 Form 720 filed quarterly Semi-monthly deposits by EFT 95% of actual net liability, or 1/6 of look-back quarter Special September rules Alternative method for Chapter 33 taxes

8 Energy Taxes Taxable fuel Alternative fuels Renewable fuel incentives Taxable Fuel IRC 4081 & 4101 Gasoline, diesel fuel, and kerosene Generally, tax on: Removal from a terminal at rack, or Non-bulk entry into U.S. Exemption from those taxable events for dyed diesel fuel & dyed kerosene IRS registration requirements 26 CFR

9 Taxable Fuel Gasoline Gasoline means finished gasoline and gasoline blendstocks Finished gasoline: Products commonly or commercially known or sold as gasoline suitable for use as a fuel in a motor vehicle Gasoline blendstocks are products listed in 26 CFR (c)(3) Taxable Fuel Gasoline Blendstocks Includes butane, natural gasoline, straightrun gasoline, straight-run naphtha, toluene Excludes any product that cannot, w/o further processing, be used in production of finished gasoline Above-the-rack rules that apply to gasoline apply to gasoline blendstocks Special rules below the rack (26 CFR )

10 Taxable Fuel Hot Topics Does entity deal in taxable fuel? Is the taxable fuel in the bulk system? Persons dealing in taxable fuel above-the-rack before removal from the terminal rack may have excise tax responsibilities, including registration and information-reporting requirements, even though they have no excise tax liabilities Who may have excise tax responsibilities? Operator of a butane storage facility Commodities traders such as banks Alternative Fuels IRC 4041 Formerly known as special fuels Liquids (and CNG) sold for use or used as fuel in motor vehicle or motorboat Includes biodiesel (B100) and LPGs such as propane Excludes fuel taxable under 4081

11 Alternative Fuels When and Who 1. Delivery into fuel supply tank of vehicle in connection with sale Seller liable 2. Sale in bulk & buyer gives seller certificate saying it s all for a taxable use - Seller liable 3. Delivery into fuel supply tank by vehicle operator when #1 and #2 didn t apply - Operator liable Alternative Fuels Exemptions Alternative fuel tax doesn t apply to fuel used: In farming By states and nonprofit schools In an off-highway business use CNG tax doesn t apply to fuel used in certain buses

12 Alternative Fuels Hot Topics Does taxpayer deliver alternative fuel into the fuel supply tank of a motor vehicle? Are sales made to exempt users? Renewable Fuel Incentives IRC 40, 40A, 6426, 6427 Alcohol fuels Biodiesel and renewable diesel Small ethanol and small agri-biodiesel producers Cellulosic biofuel producers Alcohol fuel mixtures Biodiesel and renewable diesel mixtures Alternative fuels Alternative fuel mixtures

13 Renewable Fuel Incentives (cont d) IRC 40, 40A, 6426, 6427 All the renewable fuel incentives have been extended through 2011 The incentive amounts vary Each incentive has different claim rules Some are nonrefundable income tax credits Some are excise tax credits Some may be excise tax payments Some may be refundable income tax credits Renewable Fuel Incentives Hot Topics Is taxpayer the proper claimant for the renewable fuel incentives? Has taxpayer complied with IRS registration rules? Required registration for producers of alcohol, biodiesel, and cellulosic biofuel to avoid failure to register penalty Alternative fuel claimants must be registered before claim may be allowed IRS to issue guidance on claims covering periods during 2010

14 Environmental Taxes Ozone-depleting chemicals (ODCs) Oil spill Expired Superfund ODCs Montreal Protocol Montreal Protocol is a series of international agreements relating to stratospheric ozone Intent is to eliminate production and use of specified ODCs worldwide Initial agreement effective January 1, 1989 Under current Montreal Protocol Developed countries would not produce or use specified ODCs after 1995 Developing countries would not produce or use those chemicals after 2009 Congress implemented Montreal Protocol by imposing excise tax on certain ODCs and imported products manufactured using those ODCs, effective January 1, 1990 IRC 4681

15 ODCs IRC Imposes tax on importer s sale or use of imported taxable products Imported taxable product is any product entered into United States for consumption, use, or warehousing if any listed ODC was used in the manufacture of the product Amount of tax based on weight of ODCs used in manufacture of product Who is liable for tax? The importer; that is, the person that entered the product into the United States for consumption, use, or warehousing ODCs IRC (cont d) Lists taxable ODCs Includes CFC-11 (foams), CFC-12 (air conditioners and refrigerators), and CFC-113 (electronics) Assigns an ozone-depletion factor to each listed ODC Congress set ozone-depletion factor for each ODC in accordance with each ODC s risk of depleting the ozone layer The ozone-depletion factor for CFC-11 and CFC-12 is 1.0; the ozone-depletion factor for CFC-113 is 0.8 Sets base tax amount for each year In 1990, the base tax amount was $1.37 per pound In 2011, the base tax amount is $12.55 per pound For each year, the rate of tax for each ODC (per pound) is the product of the base tax amount and the ozonedepletion factor for that ODC

16 ODCs 26 CFR part 52 Regulations under 26 CFR part 52, Environmental Taxes Imported products rules have not been updated since 1993 What is an imported taxable product? Any product entered into the United States for consumption, use, or warehousing, AND Listed in the Imported Products Table (Table) in the regulations Products listed in the Table include: Electronics Refrigerators and freezers Foam sofas and chairs Cars and trucks ODCs 26 CFR part 52 (cont d) Generally, how is ODC weight determined for imported taxable products? Exact method: the actual weight of each ODC used in manufacturing the product Table method: the ODC weight listed in the Table for the product, if exact method is not used Under the Exact Method how does importer determine whether ODCs were used in manufacture of product? Exact method must be supported by sufficient and reliable information, such as a letter to the importer signed by the manufacturer that adequately identifies the product and states the weight of each ODC used in the product s manufacture

17 ODCs Hot Topics Does taxpayer import articles that may be subject to the ODC tax? Electronics Refrigerators and freezers Foam sofas and chairs Cars and trucks Recent IRS examination focus on ODC tax IRS agreement with the U.S. Customs and Border Protection agency to receive import information on potentially taxable articles, by Harmonized Tariff Schedule (HTS) number Issuance of IRS ODC Excise Tax Audit Techniques Guide in September 2008 Oil Spill IRC 4611 Tax on crude oil and imported petroleum products (IRC 4611) Crude oil received at a U.S. refinery Petroleum products entered into the U.S. for consumption, use, or warehousing Oil spill rate of tax is $.08 per barrel IRC 4611(c)(1)(B) Person liable for tax is: Operator of refinery for crude oil received Enterer of petroleum products

18 Oil Spill Hot Topics Legislative proposals could increase oil spill tax to as much as $.78 per barrel No published guidance on scope of petroleum products Superfund Hot Topics Legislative proposals could reinstate the superfund taxes: Tax on crude oil and imported petroleum products (IRC 4611) Tax on certain chemicals (IRC 4661) Lists the chemicals subject to tax Tax on certain imported substances (IRC 4671) Imported substances made using the chemicals listed in IRC 4661 Corporate environmental tax (IRC 59A) Taxes would fund the Hazardous Substance Superfund Trust Fund

19 Questions?