One of the responses of the Federal government to the ongoing fiscal crisis is to search for increased revenue from existing taxes. At True Partners Consulting, we have noticed that the IRS has increased its activity with regard to various excise taxes—in particular, the tax on ozone depleting chemicals (“ODCs”). Many companies have been unpleasantly surprised to discover that they are subject to this tax.
The ODC Tax
Congress enacted the excise tax on ODCs in 1989, after the U.S. signed the Montreal Protocol on Substances that Deplete the Ozone Layer. The tax is imposed on the sale or use by a producer,manufacturer, or importer of certain ozone-depleting chemicals. ODCs include chlorofluorocarbons (CFCs) and halons, and are found in products such as refrigerants, cleansers, solvents, insulation, fire extinguishers, and electronic items and their components. Importers may treat the entry of products into the United States as the use of such products, in which case the tax is imposed on the date of entry.
Example 1: ForCo manufactures printed circuits in its factory in country X. It uses ODCs in the manufacturing process as a solvent to clean the circuits and also as a coolant in the air-conditioning system of the factory. ForCo sells the circuits to USCo, with ForCo as the importer of record. ForCo is subject to the excise tax on the ODCs and must file quarterly excise tax returns with the IRS.
Example 2: The facts are the same as in Example 1 except that USCo is the importer of record. USCo is subject to the excise tax on the ODCs and must file quarterly excise tax returns.
Taxpayers have three alternative methods to calculate the tax: a Table Method, an Exact Method, and a Value Method. Under the Table Method, taxpayers consult a schedule of taxable imported goods published by the IRS. The tax is computed by multiplying three factors: the weight of the ODCs in the product, an ozone depletion factor unique to each ODC, and the applicable tax rate. The ODC’s weight is determined by reference to a table published by the IRS that identifies products primarily by their Harmonized Tariff Schedule (“HTS”) number.
Under the Exact Method, the taxpayer must determine the weight of each ODC used and support that determination with sufficient and reliable information. This information may be obtained by means of letters from manufacturers of each component of the product that identify the component and state the weight of each ODC used as a material in the product’s manufacture. Given the complexities of today’s supply chains, we have found it to be extremely onerous to obtain these letters.
The Value Method should be used only where the taxpayer cannot determine the ODC weight of a product under either of the other two methods. This method imposes a tax of 1% of the value of the product, which typically results in a higher tax than using either of the other two methods.
An additional tax on ODCs is imposed on any person other than the manufacturer or importer of the ODC who holds an ODC for sale or use in further manufacture on January 1 of each year. This “floor stocks tax” is equal to the difference between the regular ODC excise tax and the taxes previously imposed on the ODC.
Are You At Risk For This Tax?
U.S. companies using or selling imported products risk liability for this tax. Many times, a company becomes aware of the tax on ODCs only when an IRS auditor presents them with a hefty tax bill. It should be no surprise that the IRS typically uses the calculation method that results in the highest tax liability. It is, therefore, critically important to review how the IRS calculated the tax: for example, we have found that even when the IRS uses the Table Method, they may tax products imported under HTS codes which are actually exempt, or they may include non-taxable, non-electronic components under a heading that includes other electronic components.
True Partners Consulting has helped clients challenge initial tax assessments by the IRS. Our professionals have successfully reduced our clients’ liability by as much as 80% by reviewing the examiner’s schedules and calculations and determining simpler, more accurate calculation methods. We have also successfully negotiated abatement of penalties.
If your company is or may be manufacturing or importing electronic goods, component parts of electronic goods, or other products containing ODCs, True Partners Consulting can assist with audit defense, analysis of current processes for assessing and managing exposure, or quarterly tax compliance.
Robert M. Gordon
William H. Seitz
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