A guide to the excise tax on ozonedepleting chemicals (ODCs)
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
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
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
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
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 $13.90 Ozone depletion factor The factor assigned to each chemical under section 4682(b) Amount Measured in pounds
Calculation of the tax: Important taxable products Number of items ODC weight per item Base tax amount Ozone depletion factor ODC excise tax Types of products (not all-inclusive): - Electronics - Foam - Refrigeration - Fire extinguishing
Calculation of the tax: Floor stock Tentative tax for new year Taxes previously imposed on ODCs ODC excise tax Tax on floor stock is equal to: - The tentative tax for the new year less the amount of taxes that were previously imposed on the ODCs
Imported taxable products: The hidden tax
Imported taxable products Items consist of (not all-inclusive): - Electronic products - Foam products - Refrigerated products - Fire extinguishing products Why does this tax apply to imported products? - To prevent moving your reliance on these chemicals offshore in order to avoid responsibility for the tax 9
Three methods of computing tax Exact method Table method Value method Actual weight of the ODC used Need detailed contemporaneous documentation Listed weight on the imported products table Has not been updated since inception 1 percent of the entry value reported to U.S. Customs Used when exact weight cannot be determined and product is not listed on imported products table
Example of table method Importer of electronics imports the following items: Ozone Units ODC weight ODC used depletion factor Base tax rate 2014 ($) Tax due ($) Calculators 50,000 0.00350 CFC-113 0.8 13.90 1,946 Laptops 100,000 0.03567 CFC-113 0.8 13.90 39,665 Keyboards 75,000 0.07420 CFC-113 0.8 13.90 61,883 Monitors 75,000 0.03860 CFC-113 0.8 13.90 32,192 Printers 100,000 0.15580 CFC-113 0.8 13.90 173,250 Cell phones 1,000,000 0.10000 CFC-113 0.8 13.90 1,112,000 Camcorders 50,000 0.05860 CFC-113 0.8 13.90 32,582 TV's 225,000 0.03860 CFC-113 0.8 13.90 96,577 1,550,095
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
Planning opportunities
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
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
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
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
Questions? Additional resources McGladrey excise tax services Eric Perez Partner Credits, Incentives and Methods New Haven, Conn. eric.perez@mcgladrey.com 203.773.6618 Planning opportunities for ozone depleting chemicals 18
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