A guide to the excise tax on ozonedepleting McGladrey LLP. All Rights Reserved.

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1 A guide to the excise tax on ozonedepleting chemicals (ODCs)

2 Introduction and objectives Better understand the excise tax on ODCs - How and why it came to be - How it is calculated Provide focus and clarity on imported taxable products Highlight excise tax management tips and related planning opportunities 1

3 History How did this start? - Vienna Convention for the Protection of the Ozone Layer (1985) - Montreal Protocol on Substances that Deplete the Ozone Layer (1987) - Omnibus Budget Reconciliation Act of 1989 Imposed an excise tax on chemicals that deplete the ozone layer Went into effect in 1990 Created a tax that increases every year, driving up the cost of the chemicals

4 What chemicals are included in this tax? Types Chlorofluorocarbons (CFCs) Halons Carbon tetrachloride Methyl chloroform Hydro chlorofluorocarbon (HCFC) or hydro fluorocarbon (HFC) substitutes Commonly used in manufacturing Refrigeration Cleaning Solvents Sterilizing Propellants

5 How are excise taxes assessed on ODCs? Tax on the sale or use of the chemicals by the manufacturer, producer or importer of the ODC Tax on an importer s sale or use of any imported taxable products - Imported taxable product = a product that was manufactured using an ODC - Commonly overlooked Floor stock tax - ODCs in inventory on January 1 each year

6 Calculation of the tax: Chemicals Base rate Ozone depletion factor Amount ODC excise tax Base rate $5.35/pound plus $0.45 for each year since 1995 The rate for 2014 is $13.90 Ozone depletion factor The factor assigned to each chemical under section 4682(b) Amount Measured in pounds

7 Calculation of the tax: Important taxable products Number of items ODC weight per item Base tax amount Ozone depletion factor ODC excise tax Types of products (not all-inclusive): - Electronics - Foam - Refrigeration - Fire extinguishing

8 Calculation of the tax: Floor stock Tentative tax for new year Taxes previously imposed on ODCs ODC excise tax Tax on floor stock is equal to: - The tentative tax for the new year less the amount of taxes that were previously imposed on the ODCs

9 Imported taxable products: The hidden tax

10 Imported taxable products Items consist of (not all-inclusive): - Electronic products - Foam products - Refrigerated products - Fire extinguishing products Why does this tax apply to imported products? - To prevent moving your reliance on these chemicals offshore in order to avoid responsibility for the tax 9

11 Three methods of computing tax Exact method Table method Value method Actual weight of the ODC used Need detailed contemporaneous documentation Listed weight on the imported products table Has not been updated since inception 1 percent of the entry value reported to U.S. Customs Used when exact weight cannot be determined and product is not listed on imported products table

12 Example of table method Importer of electronics imports the following items: Ozone Units ODC weight ODC used depletion factor Base tax rate 2014 ($) Tax due ($) Calculators 50, CFC ,946 Laptops 100, CFC ,665 Keyboards 75, CFC ,883 Monitors 75, CFC ,192 Printers 100, CFC ,250 Cell phones 1,000, CFC ,112,000 Camcorders 50, CFC ,582 TV's 225, CFC ,577 1,550,095

13 Entities cooperating with the IRS U.S. Customs and Border Protection - Form CBP7501 and the Harmonized Tariff Schedule (HTS) number HTS numbers align with product imports IRS can match HTS numbers with products historically manufactured using ODCs Field agents have access to customs database Pacific Northwest National Laboratory - Heating, capturing, testing Presence, not quantity - 76-page scientific report (2007) Published in scientific journals and widely accepted U.S. Environmental Protection Agency

14 Planning opportunities

15 How does this impact your business? The excise tax on ODCs is not new, but it is currently a hot topic with the IRS audits are increasing Know what is taxed - More than just the chemicals - Products historically manufactured using these chemicals Especially electronic products Understand why - Curtails moving the manufacturing overseas and avoiding the tax Know your options

16 Manage and control excise tax liabilities Credits Exemptions Multiple methods to compute tax Proper HTS classification Multiple appropriate HTS categories Before we even get there proper documentation may avoid the tax

17 Audit defense Limited time to comply Information needed from prior suppliers may be difficult to obtain if the relationship has deteriorated Documentation needed from all component part manufacturers Self-testing of products

18 Keys to successful ODC excise tax management Educate yourself and your team Determine if tax applies Properly document to claim credits and exemptions Secure compliance assistance, if needed Prepare for audit defense Quantify look-backs

19 Questions? Additional resources McGladrey excise tax services Eric Perez Partner Credits, Incentives and Methods New Haven, Conn Planning opportunities for ozone depleting chemicals 18

20 This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. McGladrey LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. McGladrey LLP is an Iowa limited liability partnership and the U.S. member firm of RSM International, a global network of independent accounting, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. McGladrey LLP McGladrey, the McGladrey logo, the McGladrey Classic logo, The power of being understood, Power comes from being understood, and Experience the power of being understood are registered trademarks of McGladrey LLP McGladrey LLP. All Rights Reserved.