Superfund Chemical Taxes, 18446-18471 [2023-06278]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 88, Number 60 (Wednesday, March 29, 2023)]
[Proposed Rules]
[Pages 18446-18471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06278]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 52

[REG-105954-22]
RIN 1545-BQ40


Superfund Chemical Taxes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
excise taxes imposed on certain chemicals and certain imported 
substances, effective July 1, 2022. Such taxes are known as the 
Superfund chemical taxes. The excise tax on taxable chemicals is 
imposed on the sale or use of taxable chemicals by manufacturers, 
producers, and importers of such chemicals. The excise tax on taxable 
substances is imposed on the sale or use of taxable substances by 
importers of such taxable substances. The proposed regulations affect 
manufacturers, producers, and importers that sell or use taxable 
chemicals and importers that sell or use taxable substances.

DATES: Written or electronic comments and requests for a public hearing 
must be received by May 30, 2023. Requests for a public hearing must be 
submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-105954-22) by following the online instructions for submitting 
comments. Comments cannot be edited or withdrawn once submitted to the 
Federal eRulemaking Portal. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically or on paper to its public docket.
    Send paper submissions to: CC:PA:LPD:PR (REG-105954-22), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Stephanie Bland or Amanda Dunlap at (202) 317-6855 (not a toll-free 
number); concerning the submission of comments and/or requests for a 
public hearing, Vivian Hayes by phone at (202) 317-5177 (not a toll-
free number) or by email at [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

I. Overview

    This document contains proposed regulations under sections 4661, 
4662, 4671, and 4672 of the Internal Revenue Code (Code) to amend the 
Environmental Tax Regulations (26 CFR part 52). Section 4661(a) imposes 
an excise tax on the sale or use of ``taxable chemicals'' by 
manufacturers, producers, or importers (section 4661 tax), and section 
4662 provides definitions and special rules for applying the section 
4661 tax. Section 4671(a) imposes an excise tax on the sale or use of 
``taxable substances'' by importers (section 4671 tax), and section 
4672 provides definitions and special rules for applying the section 
4671 tax. The section 4661 tax and the section 4671 tax are 
collectively referred to as the ``Superfund chemical taxes'' because 
these excise taxes fund the Hazardous Substance Response Trust Fund 
established by section 221 of the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (CERCLA), Public Law 96-510, 94 
Stat. 2767 (1980), informally referred to as ``Superfund.''
    The Superfund chemical taxes previously expired on December 31, 
1995, but were reinstated with certain modifications, effective July 1, 
2022, through December 31, 2031, by section 80201 of the Infrastructure 
Investment and Jobs Act (IIJA), Public Law 117-58, 135 Stat. 429 
(November 15, 2021). The proposed regulations provide guidance on the 
application of the reinstated Superfund chemical taxes. As explained 
later in this Background section, the Treasury Department and the IRS 
have issued additional guidance on topics related to the reinstated 
Superfund chemical taxes that are not covered by the proposed 
regulations.

II. Section 4661 Tax on Taxable Chemicals

A. In General
    The section 4661 tax was enacted as part of CERCLA to impose an 
excise tax on the sale or use of any taxable chemical by the 
manufacturer, producer, or importer of the taxable chemical. While 
section 4661(a) imposes tax on the sale of any taxable chemical, 
section 4662(c)(1) treats the use of a taxable chemical as a sale of 
the taxable chemical.
    Section 4661(b) provides a table of 42 chemicals and the per-ton 
tax rate for each chemical. As reinstated by the IIJA, the per-ton tax 
rate for each of the 42 taxable chemicals in the table under section 
4661(b) is double the per-ton tax rate previously imposed by section 
4661 as in effect at the end of 1995.
    The IIJA also amends section 4661(c), effective July 1, 2022, to 
provide that no section 4661 tax will be imposed after December 31, 
2031.
B. Definition of Taxable Chemical and Other Terms
    Under section 4662(a)(1), any chemical listed in the table under 
section 4661(b) is a ``taxable chemical'' if it is manufactured or 
produced in the

[[Page 18447]]

United States or entered into the United States for consumption, use, 
or warehousing. Section 4662(a) also provides definitions of the terms 
``United States,'' ``importer,'' and ``ton,'' as well as a rule that 
clarifies how the per-ton section 4661 tax is imposed on fractional 
parts of a ton.
C. Statutory Exceptions and Special Rules
    Section 4662(b) provides exceptions from the definition of taxable 
chemical and special rules that apply to the section 4661 tax.
    The following exceptions to the section 4661 tax provided by 
section 4662(b)(1) through (b)(4) were first enacted as part of CERCLA. 
Section 4662(b)(1) provides that methane or butane is treated as a 
taxable chemical only if it is used otherwise than as a fuel or in the 
manufacture or production of any motor fuel, diesel fuel, aviation 
fuel, or jet fuel, and that the person so using the fuel is treated as 
the manufacturer. Under section 4662(b)(2), generally no section 4661 
tax is imposed on nitric acid, sulfuric acid, ammonia, or methane used 
to produce ammonia if used as a qualified fertilizer substance. Section 
4662(b)(3) provides that no section 4661 tax is imposed in the case of 
sulfuric acid produced solely as a byproduct of and on the same site as 
air pollution control equipment. Finally, section 4662(b)(4) provides 
that the term taxable chemical does not include any substance to the 
extent derived from coal.
    In addition to modifying the exceptions for methane and butane in 
section 4662(b)(1) and qualified fertilizer substances in section 
4662(b)(2), section 1019 of the Tax Reform Act of 1984, enacted as 
Division A of the Deficit Reduction Act of 1984, Public Law 98-369, 98 
Stat. 494, 1022 (July 18, 1984), added section 4662(b)(5) (providing 
generally that no section 4661 tax is imposed on several specified 
taxable chemicals used as a qualified fuel substance) and section 
4662(b)(6) (providing generally that no section 4661 tax is imposed on 
several specified taxable chemicals by reason of the transitory 
presence of such chemical during any process of smelting, refining, or 
otherwise extracting any substance not subject to the section 4661 
tax).
    The Superfund Revenue Act of 1986 (Superfund Revenue Act), enacted 
as Title V of the Superfund Amendments and Reauthorization Act of 1986, 
Public Law 99-499, 100 Stat. 1613, 1760 (October 17, 1986), added the 
exceptions and special rules in section 4662(b)(7) through (10). 
Section 4662(b)(7) provides that except in the case of a substance 
imported into the United States or exported from the United States, the 
term xylene does not include any separated isomer of xylene. Section 
4662(b)(8) generally provides that no section 4661 tax is imposed on 
any chromium, cobalt, or nickel that is diverted or recovered in the 
United States from any solid waste as part of a recycling process (and 
not as part of the original manufacturing or production process), and 
section 4662(b)(9) provides generally that no tax is imposed on certain 
taxable chemicals used as a qualified animal feed substance. Section 
4662(b)(10) provides an exception from tax for sales of organic taxable 
chemicals while those chemicals are part of an intermediate hydrocarbon 
stream and imposes a registration requirement on both parties to the 
sale.
    The Superfund Revenue Act also added section 4662(c)(2) to the 
Code, which provides a special rule exempting certain inventory 
exchanges of taxable chemicals from the section 4661 tax and imposes a 
registration requirement on both parties to the exchange to qualify for 
the exemption.
D. Credits and Refunds
    Enacted as part of CERCLA, section 4662(d)(1) through (3) provides 
rules authorizing the Secretary of the Treasury or her delegate 
(Secretary) to provide regulations regarding credits and refunds of the 
section 4661 tax for (i) the use of a taxable chemical in the 
manufacture of another substance that is a taxable chemical, (ii) the 
use of certain taxable chemicals in the production of fertilizer, and 
(iii) the use of certain taxable chemicals as qualified fuel. Section 
4662(d)(4), which was added by the Superfund Revenue Act, authorizes 
the Secretary to provide regulations regarding credits and refunds of 
the section 4661 tax for the use of certain taxable chemicals in the 
production of animal feed.
E. Export Exemption
    The Superfund Revenue Act added section 4662(e) to the Code to 
provide an exemption for the exportation of taxable chemicals. Section 
4662(e)(1)(A) allows for the tax-free sale of taxable chemicals for 
export. Section 4662(e)(1)(B) imposes a proof of export requirement and 
provides that rules similar to the rules of section 4221(b) (relating 
to tax-free sales for purposes of the manufacturers excise taxes 
codified in chapter 32 of the Code (chapter 32)) are to apply.
    Section 4662(e)(2)(A) provides a mechanism for a credit or refund 
of the section 4661 tax paid on a taxable chemical, or on a taxable 
chemical that is used in the production of a taxable substance, that is 
exported. Section 4662(e)(2)(B) establishes conditions to allowance for 
a credit or refund under such circumstances.
    Section 2001 of the Technical and Miscellaneous Revenue Act of 1988 
(TAMRA), Public Law 100-647, 102 Stat. 3342, 3593 (November 10, 1988), 
redesignated section 4662(e)(3) as section 4662(e)(4) and added a new 
section 4662(e)(3), which requires the Secretary to provide, by 
regulation, the circumstances under which a credit or refund may be 
allowed or made directly to the party that exported a taxable chemical 
or taxable substance. Section 4662(e)(4), as redesignated by TAMRA, 
requires the Secretary to issue regulations to carry out the purposes 
of section 4662(e).

III. Section 4671 Tax on Taxable Substances

A. In General
    The section 4671 tax is imposed on any taxable substance sold or 
used by the importer thereof. The tax was added to the Code by section 
515 of the Superfund Revenue Act. The term ``taxable substance'' is 
defined by section 4672(a), which is described in part III.B. of this 
Background section.
    Section 4671(b) provides rules regarding how the amount of section 
4671 tax is calculated. Section 4671(b)(1) provides that the amount of 
section 4671 tax is the amount of section 4661 tax that would have been 
imposed on the taxable chemicals used as materials in the manufacture 
or production of the taxable substance if such taxable chemicals had 
been sold in the United States for use in the manufacture or production 
of the taxable substance. If the importer does not furnish to the 
Secretary sufficient information to determine under section 4671(b)(1) 
the amount of section 4671 tax imposed on any taxable substance, 
section 4671(b)(2), as reinstated by the IIJA, provides that the amount 
of section 4671 tax imposed is 10 percent (instead of 5 percent as 
originally enacted) of the appraised value of the substance as of the 
time the taxable substance was entered into the United States for 
consumption, use, or warehousing. Section 4671(b)(3) provides that the 
Secretary may prescribe an amount of section 4671 tax for each taxable 
substance that will apply in lieu of the tax specified in section 
4671(b)(2), equal to the amount of section 4671 tax that would be 
imposed with respect to a taxable substance if such substance were 
produced using the predominant

[[Page 18448]]

method of production of such substance.
    Section 4671(c) provides that no section 4671 tax is imposed on the 
sale or use of any substance if tax is imposed on such sale or use 
under section 4611 (imposing an excise tax on crude oil received at a 
United States refinery and on imported petroleum products entered into 
the United States for consumption, use, or warehousing). Section 
4671(c) further provides that no section 4671 tax is imposed on the 
sale or use of any substance if such sale or use was subject to the 
section 4661 tax.
    Section 4671(d) generally provides that rules similar to certain 
rules in section 4662(b) and (d) relating to exemptions for using 
substances as certain fuels or in the production of fertilizer or 
animal feed will apply with respect to taxable substances. Section 
4671(d)(1) provides that rules similar to section 4662(b)(2), (5), and 
(9) (relating to tax-free sales of chemicals used as fuel or in the 
production of fertilizer or animal feed) apply with respect to taxable 
substances. Section 4671(d)(2) provides that rules similar to section 
4662(d)(2), (3), and (4) (relating to credit or refund of tax on 
certain chemicals used as fuel or in the production of fertilizer or 
animal feed) apply with respect to taxable substances.
    Section 4671(e), as amended by the IIJA effective July 1, 2022, 
provides that no section 4671 tax will be imposed after December 31, 
2031.
B. List of Taxable Substances
    For purposes of the section 4671 tax, section 4672(a)(1) provides 
that the term ``taxable substance'' means any substance that, at the 
time of sale or use by the importer, is listed as a taxable substance 
by the Secretary.
    Section 4672(a) provides an initial list of taxable substances and 
mechanisms for adding substances to and removing substances from such 
list. There are two ways that a substance can be listed as a taxable 
substance. The first way a substance can be listed as a taxable 
substance, provided by section 4672(a)(2)(A), is if the substance is 
included in the initial list of taxable substances under section 
4672(a)(3), as enacted by the Superfund Revenue Act. The second way, 
provided by section 4672(a)(2)(B) as amended by the IIJA, effective 
July 1, 2022, is if the Secretary determines, in consultation with the 
Administrator of the Environmental Protection Agency (EPA) and the 
Commissioner of U.S. Customs and Border Protection (CBP), that taxable 
chemicals constitute more than 20 percent of the weight or more than 20 
percent of the value of the materials used to produce such substance, 
determined on the basis of the predominant method of production (more 
than 20-percent weight or value test). The last sentence of section 
4672(a)(2) provides that if an importer or exporter of any substance 
requests that the Secretary determine whether such substance should be 
listed as a taxable substance under section 4672(a)(1) or be removed 
from such listing, the Secretary must make such determination within 
180 days after the date the request was filed. See Rev. Proc. 2022-26 
(2022-29 I.R.B. 90) for the exclusive process for making such requests. 
Further, section 4672(a)(4) provides that the Secretary must add to the 
list of taxable substances under section 4672(a)(3) those substances 
that meet the more than 20-percent weight or value test, and that the 
Secretary may remove from the list only substances that meet neither of 
such tests. The complete list of taxable substances under section 
4672(a) is referred to in this preamble as the ``Taxable Substances 
List.'' The IRS will maintain the Taxable Substances List at https://www.irs.gov/businesses/small-businesses-self-employed/superfund-chemical-excise-taxes.
    Section 4672(b)(1) and (2) provides additional definitions 
applicable to sections 4671 and 4672. Section 4672(b)(1) provides that 
the term ``importer'' means the person entering the taxable substance 
for consumption, use, or warehousing. Section 4672(b)(2) provides that 
the terms ``taxable chemical'' and ``United States'' have the 
respective meanings given such terms by section 4662(a).

IV. Procedural Rules

    The Superfund chemical taxes are codified in chapter 38 of the Code 
(chapter 38), which pertains to environmental excise taxes.
    The procedural regulations governing chapter 38 taxes are contained 
in 26 CFR part 40 (Excise Tax Procedural Regulations). See 26 CFR 52.0-
1 and 40.0-1(a). Chapter 38 taxes are reported on Form 6627, 
Environmental Taxes, which is required to be attached to Form 720, 
Quarterly Federal Excise Tax Return (Form 720 return). See Sec. Sec.  
40.0-1(a) and 40.6011(a)-1(a)(1) of the Excise Tax Procedural 
Regulations.
    The procedural regulations in part 40 also provide that each 
business unit that has, or is required to have, a separate employer 
identification number (EIN) is treated as a separate person. See Sec.  
40.0-1(d). Therefore, business units (for example, a parent corporation 
and a subsidiary corporation, a partner and the partner's partnership, 
or the various members of a consolidated group), each of which has, or 
is required to have, a different EIN, are separate persons for purposes 
of filing quarterly Form 720 returns, quarterly payments of excise tax, 
semimonthly deposits of excise tax, and registration for certain excise 
tax activities.

V. Recent Published Guidance Related to the Superfund Chemical Taxes

A. Notice 2021-66 (Preliminary Guidance and Request for Comments)
    Notice 2021-66 (2021-52 I.R.B. 901) provided guidance related to 
the Superfund chemical taxes, including the initial list of taxable 
substances as required by section 80201(c)(3) of the IIJA, guidance on 
registration requirements, and guidance on the procedural rules that 
apply to the Superfund chemical taxes. Notice 2021-66 also requested 
comments on whether any issues related to the reinstated Superfund 
chemical taxes require clarification or additional guidance.
    The comments can be accessed via the Federal Rulemaking Portal at 
https://www.regulations.gov (type IRS-2021-0018 or Notice 2021-66 in 
the search field on the regulations.gov homepage to find the comments).
B. Notice 2022-15 (Deposit Penalty Relief)
    Under Sec.  40.6302(c)-1, taxpayers must make semimonthly deposits 
of the Superfund chemical excise taxes. Section 40.0-1(c) provides that 
a semimonthly period is the first fifteen (15) days of a calendar month 
or the portion of a calendar month following the 15th day of the month.
    One commenter to Notice 2021-66 (commenter) requested deposit 
penalty relief. After considering the comment, the Treasury Department 
and the IRS issued Notice 2022-15 (2022-18 I.R.B. 1043) to provide 
transitional relief for the third and fourth calendar quarters of 2022, 
and the first calendar quarter of 2023, regarding the failure to 
deposit penalty imposed by section 6656 of the Code for failures to 
deposit Superfund chemical taxes through March 31, 2023, provided 
certain requirements are met.
C. Revenue Procedure 2022-26 (Exclusive Process for Requesting 
Modifications to the Taxable Substances List)
    Notice 89-61 (1989-1 C.B. 717), as modified by Notice 95-39 (1995-1 
C.B. 312), provided the previous process by which importers and 
exporters could request to add a substance to or remove a substance 
from the Taxable Substances List. Several commenters

[[Page 18449]]

requested that the Treasury Department and the IRS provide an updated 
procedure by which importers and exporters may petition to add a 
substance to or remove a substance from the Taxable Substances List. 
Those commenters also requested that any new guidance provide notice of 
requests for modifications to the Taxable Substances List and an 
opportunity for public comment.
    Rev. Proc. 2022-26 sets forth the exclusive process by which 
importers, exporters, and interested persons may petition to add a 
substance to or remove a substance from the Taxable Substances List. 
The process set forth in Rev Proc. 2022-26 provides for public notice 
of any petition and the opportunity for public comment.

Explanation of Provisions

I. General Rules Regarding the Section 4661 Tax

    Proposed Sec.  52.4661-1 sets forth general rules regarding the 
section 4661 tax, including rules regarding the imposition of tax, the 
attachment of tax, the persons liable for tax, the amount of tax, and 
the calculation of the amount of tax.
A. Attachment of Tax
1. General Rule; Foreign Manufacturers
    Proposed Sec.  52.4661-1(c)(1) clarifies that the section 4661 tax 
attaches to the first sale or use of a taxable chemical by the 
manufacturer, producer, or importer. This is consistent with 
Congressional intent that the tax apply only once to a given quantity 
of a taxable chemical. See S. Rep. No. 96-848, 96th Cong., 2d Sess. 21 
(1980) (``A number of provisions are included in the fee system to 
assure an equitable fee which avoids unintended economic impacts, 
including: a provision which allows only one fee collection on any 
given quantity.'').
    Proposed Sec.  52.4661-1(c)(2) clarifies that in situations 
involving a foreign manufacturer, the section 4661 tax does not attach 
to the foreign manufacturer's sale of a substance listed in the table 
under section 4661(b) to the importer because the substance is not a 
taxable chemical at the time of such sale; rather, tax attaches to the 
importer's first sale or use of the taxable chemical. This rule is 
consistent with section 4661(a) and the definition of the term 
``taxable chemical'' in section 4662(a)(1). It is also consistent with 
the overall statutory scheme of excise taxes and relevant case law. 
See, e.g., Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931) 
(excise tax is not imposed on the importation of a taxable motorcycle, 
but rather on the first sale by the importer).
2. Dilution of Chemical Mixtures
    Proposed Sec.  52.4661-1(c)(1) clarifies that in the case of 
chemical mixtures containing one or more chemicals with respect to 
which tax was paid (tax-paid chemicals), no section 4661 tax attaches 
when the chemical mixture is diluted with a solvent to change the 
concentration of the chemical mixture, provided the solvent is not a 
taxable chemical. The proposed regulations take this approach because 
the section 4661 tax has already been paid on the taxable chemicals in 
the chemical mixture, and the taxable chemicals in the chemical mixture 
do not lose their identity during the dilution process.
3. Chemical Mixtures and Chemical Compounds
    A chemical mixture is generally any substance composed of two or 
more physically-combined components that are not chemically bonded. 
Chemical mixtures include solutions, suspensions, and alloys. If a 
taxable chemical is a component of a chemical mixture, the taxable 
chemical remains a taxable chemical while it is part of the chemical 
mixture.
    In contrast, a chemical compound is generally any substance 
composed of identical molecules, each of which consists of two or more 
atoms of the same or different elements held together by chemical 
bonds. A taxable chemical used to produce a chemical compound does not 
retain its individual properties.
    With regard to domestically-produced chemical mixtures, the 
manufacture or production of a chemical mixture is a ``use'' of the 
taxable chemicals in the chemical mixture under proposed Sec.  52.4662-
1(c)(15), and the section 4661 tax attaches at the time of such use. 
However, the ``use'' definition does not capture any taxable chemicals 
found in imported chemical mixtures. Therefore, the taxable chemicals 
found in an imported chemical mixture could completely escape the 
section 4661 tax unless the importer engages in a manufacturing process 
of separating the taxable chemicals in the mixture (such a process 
would make the importer the manufacturer of the taxable chemicals in 
the mixture) and then sells or uses those taxable chemicals. This would 
give foreign manufacturers of chemical mixtures a competitive advantage 
over domestic manufacturers of the same chemical mixtures.
    To address this disparity, proposed Sec.  52.4661-1(c)(3) provides 
that when a taxable chemical is part of an imported chemical mixture 
that is not a taxable substance (as defined in section 4672(a)(1) and 
proposed Sec.  52.4672-1(b)(8)), tax attaches to the first sale or use 
of the chemical mixture by the importer. Further, proposed Sec.  
52.4661-1(f)(2) includes a rule regarding the calculation of the amount 
of tax with regard to chemical mixtures. More specifically, under 
proposed Sec.  52.4661-1(f)(2)(ii), when a taxable chemical is part of 
an imported chemical mixture that is not a taxable substance, as 
defined in section 4672(a)(1) and proposed Sec.  52.4672-1(b)(8), tax 
is imposed on the actual weight of any taxable chemicals in the 
chemical mixture at the time the importer first sells or uses the 
chemical mixture. These rules ensure that foreign and domestic 
manufacturers of chemical mixtures are treated the same for purposes of 
the section 4661 tax. The approach is supported by the fact that a 
taxable chemical in a chemical mixture is assumed to retain its 
chemical identity while part of the chemical mixture. There is also 
support for this position in case law. See Murphy Oil USA, Inc. v. 
United States, 81 F. Supp. 2d 942 (W.D. Ark. 1999) (section 4661 tax is 
imposed on the taxable chemicals in a chemical mixture).
    As with chemical mixtures, the domestic manufacture or production 
of a chemical compound with one or more taxable chemicals is a taxable 
use of the taxable chemicals. Therefore, the domestic manufacturer or 
producer of the chemical compound is liable for the section 4661 tax. 
However, because a taxable chemical used to produce a chemical compound 
does not retain its chemical identity, the Treasury Department and the 
IRS lack the authority under sections 4661 and 4662 to tax the taxable 
chemicals used in the production of imported chemical compounds. This 
creates an advantage for foreign manufacturers of chemical compounds 
that are produced with taxable chemicals but that are not taxable 
substances, as defined in section 4672(a) and proposed Sec.  52.4672-
1(b)(8). The Treasury Department and the IRS request comments on 
possible ways to mitigate the disadvantage to domestic manufacturers 
within the constraints of the statutory scheme.
4. Ores and Metals
    Several taxable chemicals, including nickel, cobalt, chromium, and 
phosphorus, are produced from ores. In addition, one taxable chemical, 
chromite, is an ore. The production of a taxable chemical from ore 
requires mining the ore to extract the ore from the earth, and an 
extraction, smelting, or

[[Page 18450]]

other process to remove or refine the taxable chemical from the ore.
    Proposed Sec.  52.4661-1(c)(4)(i) provides, generally, that in the 
case of ores, the section 4661 tax attaches to the first sale or use of 
the taxable chemical by the manufacturer, producer, or importer after 
extraction of the taxable chemical from the ore, and the person that 
extracts the taxable chemical from the ore is the manufacturer of the 
taxable chemical. Proposed Sec.  52.4661-1(c)(4)(i) further provides 
that the term ``extraction of a taxable chemical from the ore'' means 
the first process in the United States that a person uses to separate 
the taxable chemical from the ore.
    As noted earlier, chromite is both a taxable chemical and an ore; 
therefore, it is treated differently from taxable chemicals that are 
produced from ores. Proposed Sec.  52.4661-1(c)(4)(ii) provides that in 
the case of chromite, the section 4661 tax attaches to the first sale 
or use of chromite by the manufacturer, producer, or importer after the 
chromite is mined. Under the proposed regulations, the tax treatment of 
taxable chemicals that are metals under section 4661 is generally 
addressed by the rule regarding ores. The Treasury Department and the 
IRS request comments on whether an additional or alternative rule for 
metals would be appropriate or warranted.
B. Procedural Rules; Definition of Person
    Proposed Sec.  52.4661-1(d) notes that the procedural rules in 26 
CFR part 40 apply to the section 4661 tax. Proposed Sec.  52.4661-1(d) 
further notes that each business unit that has, or is required to have, 
a separate EIN is treated as a separate person for purposes of filing 
excise tax returns, making semimonthly deposits of excise tax, making 
payments of excise tax, and applying for the registration required 
under section 4662(b)(10)(C) and (c)(2)(B). See Sec.  40.0-1(d). 
Proposed Sec.  52.4671-1(d) is a similar provision related to the 
section 4671 tax.
C. Calculation of the Amount of Tax
1. Measurement and Documentation Regarding Tonnage
    Proposed Sec.  52.4661-1(f) provides rules regarding how to 
calculate the amount of section 4661 tax. As noted earlier, the section 
4661 tax applies at a specified rate per ton.
    One commenter requested flexibility in how to measure and document 
tonnage, but did not elaborate on what type of information is generally 
available in the industry that could potentially be used as a metric 
for measuring tonnage, on whether different sectors of the industry 
might require different options for measuring tonnage, or on the degree 
of specificity that could be attained by using a metric other than the 
actual weight. The Treasury Department and the IRS lack sufficient 
information about possible ways to measure tonnage, other than by using 
the actual weight of the taxable chemical. The Treasury Department and 
the IRS are also concerned that a broad rule, such as one that would 
allow any reasonable method of measurement, could artificially reduce 
the tax base. For these reasons, proposed Sec.  52.4661-1(f)(2)(i) 
provides that for purposes of calculating the amount of section 4661 
tax, the weight of a taxable chemical, measured in tons, is the actual 
weight of the taxable chemical at the time of sale or use by the 
manufacturer, producer, or importer.
    The Treasury Department and the IRS request comments on any other 
appropriate methods that could be used to measure tonnage, with 
specificity and without artificially reducing the tax base. The 
Treasury Department and the IRS also request comments on the types of 
documentation available in the industry that could be used as records 
to support a weight measurement.
2. Conversion Required for Volumetric Measurements
    A taxable chemical may be measured in volumetric units. Because the 
section 4661 tax is imposed at a rate per ton, any volumetric units 
must be converted to weight units in order to calculate the amount of 
section 4661 tax. Proposed Sec.  52.4661-1(f)(2)(iii) requires that any 
volumetric measurement of a taxable chemical be converted to a weight 
measurement and provides a formula for volume-to-weight conversions.

II. Definitions Relating to Sections 4661 and 4662

    As noted earlier, sections 4661 and 4662(c)(1) impose a tax on the 
sale or use of a taxable chemical by the manufacturer, producer, or 
importer. Several commenters requested that the Treasury Department and 
the IRS provide definitions of the terms ``manufacturer,'' 
``importer,'' ``sale,'' and ``use.'' The definitions in proposed Sec.  
52.4662-1 include those definitions requested by commenters, as well as 
others that are necessary to provide clarity with regard to the 
application of sections 4661 and 4662.
A. Taxable Chemical
    As discussed in section II of the Background section, section 
4662(a)(1) generally defines the term ``taxable chemical'' as any 
substance (A) that is listed in the table under section 4661(b), and 
(B) that is manufactured or produced in the United States or entered 
into the United States for consumption, use, or warehousing. The table 
under section 4661(b) includes only the name of each taxable chemical. 
The taxable chemicals listed in the table under section 4661(b) include 
metals, metalloids, minerals, and an ore (chromite).
    The proposed regulations clarify that a substance is a taxable 
chemical only if it satisfies both prongs of the definition of 
``taxable chemical'' in section 4662(a)(1). In addition, the proposed 
regulations provide that, except as provided in section 4662(b), a 
substance is listed in the table under section 4661(b) if it has the 
same name and molecular formula as a substance listed in the table 
under section 4661(b). The proposed regulations further provide that 
all isomeric forms of a substance listed in the table under section 
4661(b) are treated as having the same name and molecular formula of 
the substance. Therefore, except as provided in section 4662(b)(7) with 
respect to xylene, an isomer of a substance listed in the table under 
section 4661(b) is a substance listed in the table under section 
4661(b).
B. Importer
    Section 4662(a)(3) defines the term ``importer'' as the person 
entering the taxable chemical for consumption, use, or warehousing. The 
proposed regulations clarify that if the person entering the taxable 
chemical for consumption, use, or warehousing is merely acting as an 
agent or a customs broker for another person, then the agent or customs 
broker is not the importer, and the importer is the first person in the 
United States to sell or use the taxable chemical after entry of the 
taxable chemical for consumption, use, or warehousing. The proposed 
regulations also address how to identify the importer with regard to 
sales that involve drop shipping a taxable chemical when the party 
shipping the taxable chemical is outside the United States.
C. Manufacturer
    Neither section 4661 nor section 4662 defines the term 
``manufacturer.'' Proposed Sec.  52.4662-1(c)(6)(i) defines the term 
``manufacturer'' as any person that produces a taxable chemical from 
new or raw material, feedstocks, or other substances, or from scrap, 
salvage, waste, or recycled substances. Further, under the proposed 
regulations, a

[[Page 18451]]

manufacturer includes any person that produces a taxable chemical from 
the mining process, or extracts, isolates, separates, or otherwise 
removes a taxable chemical from an ore or from another substance. A 
manufacturer also includes any person that produces a taxable chemical 
by processing or manipulating a substance, such as through the 
oxidation process. The term manufacturer does not include a person that 
dilutes a chemical mixture comprised of one or more tax-paid chemicals 
with a solvent that is not a taxable chemical.
    One commenter requested that recyclers be excluded from the 
definition of the term ``manufacturer.'' Section 4662(b)(8)(A) provides 
that no section 4661 tax is imposed on any chromium, cobalt, or nickel 
which is diverted or recovered in the United States from any solid 
waste as part of a recycling process (and not as part of the original 
manufacturing or production process). The explicit reference to 
recycling activities in section 4662(b)(8)(A), combined with the 
absence of a general exception for recycling activities in sections 
4661 and 4662, suggest that Congress did not intend to exclude persons 
engaged in recycling activities from the definition of the term 
``manufacturer.'' Accordingly, the proposed regulations do not adopt 
this suggestion.
    Proposed Sec.  52.4662-1(c)(6)(ii) addresses contract 
manufacturing. More specifically, proposed Sec.  52.4662-1(c)(6)(ii) 
provides that if a person manufactures or produces a taxable chemical 
for a second person, pursuant to a contract, order, or agreement and in 
accordance with the second person's specifications, or if a person 
manufactures or produces a taxable chemical for a second person from 
materials owned by the second person, the second person (and not the 
first person) is treated as the manufacturer of the taxable chemical 
manufactured or produced by the first person.
D. Sale
    Neither section 4661 nor section 4662 defines the term ``sale.'' 
Proposed Sec.  52.4662-1(c)(8) defines the term ``sale'' as the 
transfer of title or substantial incidents of ownership (whether or not 
delivery to, or payment by, the purchaser has been made) in a taxable 
chemical for a consideration, which may include, but is not limited to, 
money, services, or property.
    One commenter requested an exclusion from the definition of the 
term ``sale'' for sales of intermediate hydrocarbon streams and 
inventory exchanges if both parties to the sale or exchange are taxable 
chemical registrants. Section 4662(b)(10) and (c)(2) provide exceptions 
to the section 4661 tax in the scenarios described by the commenter 
when both parties are registered; therefore, there is no need for a 
carve out from the definition of the term ``sale.''
E. Ton
    Section 4662(a)(4) defines the term ``ton'' to mean 2,000 pounds, 
which is a short ton. Proposed Sec.  52.4662-1(c)(13) follows the 
statutory definition.
F. Use
    Neither section 4661 nor section 4662 defines the term ``use.'' 
Proposed Sec.  52.4662-1(c)(15) defines the term ``use'' broadly. More 
specifically, proposed Sec.  52.4662-1(c)(15) provides that a taxable 
chemical is used when it is consumed, when it functions as a catalyst, 
when its chemical composition changes, when it is used in the 
manufacture or production of a chemical mixture or other substance 
(including by mixing or combining the taxable chemical with other 
substances), or when it is put into service in a trade or business for 
the production of income. The loss or destruction of a taxable chemical 
through spillage, fire, natural degradation, or other casualty is not a 
use. The mere manufacture or production of a taxable chemical is not a 
use of that chemical.
    The legislative history of CERCLA notes that in determining how 
industrial fees should be levied, Congress ``moved away from imposing 
fees on wastes and hazardous end-products, and instead approved a 
system which imposes fees on the relatively few basic building blocks 
used to make all hazardous products and wastes.'' S. Rep. No. 96-848, 
96th Cong., 2d Sess. 19 (1980) (quoted language from the Committee 
Report by the Senate Environment and Public Works Committee on an early 
draft of S.1480). The legislative history further notes that tax is to 
be imposed ``at an early step in the industrial chain of production, 
distribution, consumption, and disposal.'' Id. at 20. The definition of 
``use'' in the proposed regulations is consistent with the legislative 
history.

III. Special Rules and Exceptions Relating to the Section 4661 Tax

    Section 4662(b) provides a number of exceptions and special rules 
that apply to the section 4661 tax. Some of the provisions in section 
4662(b) provide exceptions to the definition of ``taxable chemical''; 
other provisions provide general exceptions to the section 4661 tax.
A. Methane or Butane Used as Fuel
    Methane and butane are included in the list of taxable chemicals in 
section 4661(b). Section 4662(b)(1) provides that methane or butane is 
treated as a taxable chemical only if it is used otherwise than as a 
fuel or otherwise than in the manufacture or production of any motor 
fuel, diesel fuel, aviation fuel, or jet fuel. In such cases, the 
person so using the methane or butane is treated as the manufacturer.
    The section 4662(b)(1) rule impacts the timing of the imposition of 
the section 4661 tax. Unlike other chemicals included in the list of 
taxable chemicals in section 4661(b) that are taxable chemicals at the 
time of manufacture, production, or importation, the status of methane 
or butane as a taxable chemical cannot be determined until the time of 
use. As a result, it is possible that methane or butane will never 
become a taxable chemical and no section 4661 tax will attach. It is 
also possible that there will be intervening sales of methane or butane 
before the section 4661 tax is imposed.
    Proposed Sec.  52.4662-2(a)(2) provides that methane or butane is 
used otherwise than as a fuel when it is used other than in the 
production of energy. Proposed Sec.  52.4662-2(a)(2) further provides 
that methane or butane is used as a fuel when it is used in the 
production of energy. It also provides examples of when methane or 
butane is used as a fuel. The rule in the proposed regulations 
regarding use as a fuel is consistent with existing guidance in other 
areas of excise tax. See section 2(f) of Notice 2006-92 (2006-43 I.R.B. 
774) (providing guidance on use as a fuel relating to excise tax on 
alternative fuel mixtures).
B. Qualified Fertilizer, Fuel, and Animal Feed Substances
    Section 4662(b)(2), (5), and (9) provide exceptions to the section 
4661 tax for certain taxable chemicals that are qualified fertilizer, 
fuel, or animal feed substances. Proposed Sec.  52.4662-2(b) provides 
rules regarding the exception for qualified fertilizer substances. 
Proposed Sec.  52.4662-2(e) provides rules regarding the exception for 
qualified fuel substances. Proposed Sec.  52.4662-2(f) provides rules 
regarding the exception for qualified animal feed substances.
    One commenter highlighted the need for guidance on tax-free sales 
under the fertilizer exception and requested clarification on whether 
tax-free sales are limited to one intervening sale. That commenter also 
requested guidance on how to make claims for credit and refund. Another 
commenter requested

[[Page 18452]]

that the Treasury Department and the IRS provide model certificates for 
tax-free sales. The proposed regulations address those issues. Proposed 
Sec.  52.4662-2(h) provides rules regarding tax-free sales under 
section 4662(b)(2), (5), and (9) and clarifies that the exception is 
available for multiple intervening sales. The provisions in proposed 
Sec.  52.4662-2(h) are similar to tax-free sale rules in other areas of 
excise tax and include a model exemption certificate. To lessen the 
burden on taxpayers, proposed Sec.  52.4662-2(h) allows for a 
``blanket'' exemption certificate that may be used for a period of up 
to one (1) year.
C. Sulfuric Acid Produced as a Byproduct of Air Pollution Control 
Equipment
    Section 4662(b)(3) provides that no section 4661 tax is imposed on 
sulfuric acid produced solely as a byproduct of and on the same site as 
air pollution control equipment. The statute does not define the term 
``air pollution control equipment'' for purposes of this exception. 
Further, the statute is silent with regard to whether the exception 
applies to sulfuric acid produced solely as a byproduct of and on the 
same site as air pollution control equipment located outside the United 
States.
    Proposed Sec.  52.4662-2(c) defines the term ``air pollution 
control equipment'' as any equipment used to comply with the Clean Air 
Act, including any amendments thereto, as codified in 42 U.S.C. chapter 
85, or any similar provision under state law. This definition 
effectively limits the exception to domestically-produced sulfuric 
acid. The Treasury Department and the IRS request comments on the 
definition of ``air pollution control equipment'' in proposed Sec.  
52.4662-2(c). To the extent commenters believe the definition should be 
modified, the Treasury Department and the IRS request comments on the 
type of documentation that is available to demonstrate to the IRS that 
sulfuric acid produced outside the United States was, in fact, produced 
solely as a byproduct of and on the same site as air pollution control 
equipment.
D. Taxable Chemicals Produced From Coal
    Section 4662(b)(4) provides that the term ``taxable chemical'' does 
not include any substance derived from coal. Proposed Sec.  52.4662-
2(d) defines the term ``coal'' as bituminous coal, subbituminous coal, 
anthracite, and lignite.
E. Intermediate Hydrocarbon Streams
    Section 4662(b)(10)(A) provides that no section 4661 tax is imposed 
on any organic taxable chemical while such chemical is part of an 
intermediate hydrocarbon stream containing one or more organic taxable 
chemicals. Section 4662(b)(10)(B) provides that if any organic taxable 
chemical on which no section 4661 tax was previously imposed by reason 
of section 4662(b)(10)(A) is isolated, extracted, or otherwise removed 
from, or ceases to be part of (collectively, isolation), an 
intermediate hydrocarbon stream, such isolation is treated as a use by 
the person causing the isolation, and such person is treated as the 
manufacturer of the organic taxable chemical so isolated.
1. Definition of ``Organic Taxable Chemical''
    Section 4662(b)(10)(D) defines ``organic taxable chemical'' as any 
taxable chemical that is an organic substance. At the most basic level, 
an organic substance is a substance that contains carbon and hydrogen 
atoms.
    The organic substances that are listed in the table under section 
4661(b) are acetylene, benzene, butane, butylene, butadiene, ethylene, 
methane, naphthalene, propylene, toluene, and xylene. See H.R. Rep. No. 
99-962, 99th Cong., 2d Sess., at 328 n. 6 (1986). However, neither the 
statute nor the legislative history addresses the interplay between 
section 4662(b)(1) and (10) with regard to methane and butane. Although 
methane and butane are organic substances that are listed in the table 
in section 4661(b), they are treated as taxable chemicals only when 
used otherwise than as a fuel or otherwise than in the production of 
any motor fuel, diesel fuel, aviation fuel, or jet fuel. See section 
4662(b)(1) and proposed Sec.  52.4662-2(a). Therefore, methane and 
butane are not organic taxable chemicals at the time of isolation from 
an intermediate hydrocarbon stream. See section 4662(b)(1) and proposed 
Sec.  52.4662-2(a) and (g). Proposed Sec.  52.4662-2(g)(2)(i) clarifies 
that no section 4661 tax is imposed on methane or butane at the time 
the methane or butane is isolated from an intermediate hydrocarbon 
stream and includes an example to illustrate this rule.
2. Multi-Step Isolation Process
    The rule in section 4661(b)(10) is clear with regard to organic 
taxable chemicals isolated from an intermediate hydrocarbon stream as 
part of a single-step isolation process. However, neither the statute 
nor the legislative history addresses what happens when isolation is a 
multi-step process.
    In Murphy Oil USA, Inc. v. United States, 81 F. Supp. 2d 942 (W.D. 
Ark. 1999), the court considered the applicability of section 
4662(b)(10) to a multi-step process of isolating propylene from a C3/C4 
hydrocarbon stream. The court held that the splitting process designed 
to isolate and extract the propylene content from the C3/C4 stream as 
refinery-grade propylene was the point of isolation, even though the 
resulting refinery-grade propylene was a mixture of propylene and 
propane that could have been further processed into a purer grade of 
propylene. The court further held that because the weight of the 
propylene in the refinery-grade propylene could be determined with 
specificity, the section 4661 tax was imposed only on the weight of the 
propylene in the refinery-grade propylene.
    Proposed Sec.  52.4662-2(g)(3)(ii) follows the holding in the 
Murphy Oil case and clarifies that when the isolation of an organic 
taxable chemical from an intermediate hydrocarbon stream is a multi-
step process, the first process that a person uses to isolate, extract, 
or otherwise remove the organic taxable chemical from the intermediate 
hydrocarbon stream (even if the organic taxable chemical is, at that 
time, still mixed with other substances and further processing is 
possible, but not required) is treated as a use by the person causing 
the isolation, and such person is treated as the manufacturer of the 
organic taxable chemical so isolated. Proposed Sec.  52.4662-
2(g)(3)(ii) further clarifies that if the organic taxable chemical is 
part of a chemical mixture at the time of isolation, the section 4661 
tax is imposed on the weight of the entire chemical mixture, unless the 
person causing the isolation can establish, with specificity, the 
weight of the organic taxable chemical or chemicals contained in the 
chemical mixture.

IV. Credits and Refunds of the Section 4661 Tax

    Section 4662(d) provides a mechanism for a credit or refund of the 
section 4661 tax with regard to certain specified uses of taxable 
chemicals. Multiple commenters requested that the Treasury Department 
and the IRS provide guidance on claims for credit and refund. One 
commenter requested specific guidance on the use of invoices to support 
credit and refund claims.
    Proposed Sec.  52.4662-4 provides rules regarding claims for credit 
and refund under section 4662(d). The provisions in proposed Sec.  
52.4662-4 explain the general rules, conditions to allowance,

[[Page 18453]]

and supporting information required for claims for credit and refund. 
Proposed Sec.  52.4662-4 also includes a model certificate to support a 
claim for credit or refund. The approach taken in the proposed 
regulations is consistent with other areas of excise tax law.

V. Exports

    Section 4662(e)(1)(A) provides that no section 4661 tax is imposed 
on the sale by the manufacturer or producer of any taxable chemical for 
export or for resale by the purchaser to a second purchaser for export. 
Section 4662(e)(1)(B) provides that rules similar to section 4221(b) 
(relating to exports exempt from manufacturers excise taxes codified in 
chapter 32) apply. Proposed Sec.  52.4662-5(b) provides rules regarding 
how to effectuate tax-free sales for export under section 4662(e)(1). 
The rules in proposed Sec.  52.4662-5(b) are based on the rules in 
Sec.  48.4221-3 of the Manufacturers and Retailers Excise Tax 
Regulations, and include a model exemption certificate and a model 
statement of export.
    Section 4662(e)(2) provides the general rule for claims for credit 
or refund of the section 4661 tax in the case of taxable chemicals that 
are exported, and taxable chemicals used as materials in the 
manufacture or production of a substance that is a taxable substance 
(that is, it is listed on the Taxable Substances List) at the time of 
export. Proposed Sec.  52.4662-5(c) provides rules regarding claims for 
credit or refund under section 4662(e)(2).
    Several commenters expressed concern about not being able to make 
credit or refund claims for taxable chemicals used in the manufacture 
of substances that meet the more than 20-percent weight or value test 
but have not yet been added to the Taxable Substances List. The 
requirement that a substance be on the Taxable Substance List at the 
time of export in order to make a claim for credit or refund is 
statutory. See section 4662(e)(2). The Treasury Department and the IRS 
request comments on possible ways to mitigate the impact of the express 
statutory language in section 4662(e)(2).
    Section 4662(e)(3) provides a mechanism for an exporter to make 
claims for credit or refund. Proposed Sec.  52.4662-5(d) provides rules 
regarding claims for credit or refund under section 4662(e)(3).

VI. General Rules Regarding the Section 4671 Tax

    General rules regarding the section 4671 tax are set forth in 
proposed Sec.  52.4671-1, including rules regarding the imposition of 
tax, the persons liable for tax, the attachment of tax, the amount of 
tax, and the calculation of the amount of tax. Proposed Sec.  52.4671-2 
provides rules regarding tax-free sales under section 4671(d)(1) and 
claims for credit and refund under section 4671(d)(2).

VII. Definitions Relating to Sections 4671

    Proposed Sec.  52.4672-1 provides definitions applicable to 
sections 4671 and 4672. To the extent there is overlap, the definitions 
in proposed Sec.  52.4672-1 with respect to the section 4671 tax track 
the definitions in section Sec.  52.4662-1 with respect to the section 
4661 tax.

VIII. Predominant Method of Production

    Sections 4671(b)(3) and 4672(a)(2) use the term ``predominant 
method of production.'' However, the term is undefined by statute. The 
legislative history is limited and provides only that with regard to 
the determination of substances on the Taxable Substances List, the 
determination is to be made ``on the basis of the predominant method of 
production (with respect to imported derivatives) using stoichiometric 
material consumption assuming a 100-percent yield.'' Conf. Rep. 962, 
99th Cong., 2d Sess. (1987), 1987-1 C.B. 383, 386-7.
    Proposed Sec.  52.4672-1(b)(4) defines the term ``predominant 
method of production'' to mean the method used to produce the greatest 
number of tons of a particular substance worldwide, relative to the 
total number of tons of the substance produced worldwide. The 
definition uses worldwide production as the metric because the term 
``predominant method of production'' applies only in the context of the 
section 4671 tax, which is imposed on imported substances.
    The Treasury Department and the IRS request comments on the 
predominant method of production, or any other relevant information 
(such as the weight or value of the taxable chemicals used in the 
manufacture or production of the taxable substance), for the following 
taxable substances that are included in the statutory list in section 
4672(a)(3): ferronickel; formaldehyde; hydrogen peroxide; methanol; 
nickel powders; nickel waste and scrap; polystyrene resins and 
copolymers; styrene-butadiene, snpf; synthetic rubber, not containing 
fillers; unwrought nickel; vinyl resins; vinyl resins, nspf; and 
wrought nickel rods and wires.

IX. Tax-Free Sales Under Section 4671(d)(1)

    Section 4671(d)(1) provides that rules similar to those in section 
4662(b)(2), (5), and (9) apply with respect to taxable substances used 
or sold for use as described in such rules. Proposed Sec.  52.4671-2(b) 
provides rules regarding how to effectuate tax-free sales under section 
4671(d)(1); the rules are similar to those in proposed Sec.  52.4662-
2(h).

X. Credits and Refunds Under Section 4671(d)(2)

    Section 4671(d)(2) provides that rules similar to section 
4662(d)(2), (3), and (4) apply with respect to taxable substances used 
or sold for use as described in such rules. Proposed Sec.  52.4671-2(c) 
provides rules regarding claims for credit or refund under section 
4671(d)(2); the rules are similar to those in proposed Sec.  52.4662-4.

XI. Types of Substances Eligible for Addition to the Taxable Substances 
List

    When the Superfund chemical taxes were previously in effect, Notice 
89-61 provided a determination process by which importers and exporters 
of substances could request modifications to the Taxable Substances 
List pursuant to the flush language of section 4672(a)(2). Notice 89-61 
provided that textile fibers, yarns, and staple, and fabricated 
products that are molded, formed, woven, or otherwise finished into 
end-use products were ineligible for addition to the Taxable Substances 
List. Notice 95-39 modified Notice 89-61 to allow polymers extruded in 
fiber form to be added to the Taxable Substances List.
    Proposed Sec.  52.4672-1(b) incorporates the rules from Notice 89-
61 and Notice 95-39 regarding the types of substances that may be added 
to the Taxable Substances List if they otherwise meet the more than 20-
percent weight or value test. These rules were also incorporated into 
the definition of the term ``substance'' in section 3.10 of Rev. Proc. 
2022-26.

XII. Other Issues

A. Sales Between Certain Registrants
    Two commenters requested that the Treasury Department and the IRS 
adopt a practice with respect to sales of taxable chemicals that is 
similar to what is in place for ``S'' registrants for fuel 
transactions. One commenter suggested an expansion of ``G'' 
registration and an allowance of tax-free sales among all ``G'' 
registrants.
    In the fuel excise tax area, section 4081 of the Code establishes 
the bulk transfer system and the ability for ``S''

[[Page 18454]]

registrants to make tax-free sales of taxable fuel. More specifically, 
section 4081(a)(1)(B)(i) expressly exempts certain removals and entries 
of taxable fuel within the bulk transfer system and imposes 
registration requirements. There is no such statutory directive with 
regard to the Superfund chemical taxes, and such an approach would be 
inconsistent with the statutory text and legislative history of the 
section 4661 tax. Therefore, the proposed regulations do not adopt this 
suggestion.
B. Modifications to the Taxable Substances List
    Several commenters requested the addition of substances to or the 
removal of substances from the Taxable Substances List. Such comments 
are not considered requests to add to or remove from the Taxable 
Substances List and will not be processed. All requests to add 
substances to or remove substances from the Taxable Substances List 
must be submitted in accordance with the procedures set forth in Rev. 
Proc. 2022-26, which provides the exclusive process by which importers, 
exporters, and other interested persons may petition to add a substance 
to or remove a substance from the Taxable Substances List.
C. Delayed Implementation of Superfund Chemical Taxes
    Multiple commenters requested that the Treasury Department and the 
IRS delay implementation of the Superfund chemical taxes until January 
1, 2023. The IIJA reinstates the Superfund chemical taxes as of July 1, 
2022. The Treasury Department and the IRS do not have the authority to 
modify the effective date of the Superfund chemical taxes, which is 
statutory. Accordingly, the Superfund chemical taxes are effective July 
1, 2022, as required by law.
D. Harmonized Tariff Schedule (HTS) and Chemical Abstract Service (CAS) 
Numbers
    Several commenters requested that the Treasury Department and the 
IRS provide HTS and CAS numbers for all taxable chemicals and taxable 
substances to ensure uniform identification by stakeholders and the 
IRS.
    The U.S. International Trade Commission maintains and publishes HTS 
numbers. The Chemical Abstract Service maintains CAS numbers. CAS is a 
division of the American Chemical Society, a non-profit organization 
that holds a congressional charter under title 36, United States Code. 
The Treasury Department and the IRS are considering the request to 
provide HTS and CAS numbers and how those numbers can be verified with 
the appropriate experts. The Treasury Department and the IRS request 
comments on the degree of specificity that would be required for HTS 
and CAS numbers. Specifically, the Treasury Department and the IRS 
request comments on the appropriate number of decimal places for the 
HTS and CAS numbers that would be used to identify taxable chemicals 
and taxable substances.

Effect on Other Documents

    The following notices of determination that were issued pursuant to 
Notice 89-61 are revoked: 55 FR 24023-01 (June 13, 1990); 55 FR 24023-
02 (June 13, 1990); 55 FR 25768-02 (June 22, 1990); 55 FR 25770-01 
(June 22, 1990); 56 FR 47985-01 (Sept. 23, 1991); 56 FR 47986-01 (Sept. 
23, 1991); 56 FR 47986-02 (Sept. 23, 1991); 56 FR 47987-01 (Sept. 23, 
1991); 57 FR 10947-03 (Mar. 31, 1992); 58 FR 66068-01, (Dec. 17, 1993); 
58 FR 66069-01 (Dec. 17, 1993); 58 FR 66069-02 (Dec. 17, 1993); 58 FR 
66071-01 (Dec. 17, 1993); 58 FR 67439-01 (Dec. 21, 1993); 59 FR 11827-
01 (Mar. 14, 1994; 59 FR 11828-01 (Mar. 14, 1994); 59 FR 11831-01 (Mar. 
14, 1994); 59 FR 13036-02 (Mar. 18, 1994); 59 FR 13037-01 (Mar. 18, 
1994); 59 FR 13038-01 (Mar. 18, 1994); 59 FR 13039-01 (Mar. 18, 1994); 
59 FR 14446-01 (Mar. 28, 1994); 59 FR 14447-01, (Mar. 28, 1994); 59 FR 
27652-02 (May 27, 1994); 59 FR 27653-01 (May 27, 1994);, 59 FR 27653-02 
(May 27, 1994); 59 FR 31297-03 (June 17, 1994); 59 FR 31298-01 (June 
17, 1994); 59 FR 31299-01 (June 17, 1994); 59 FR 35170-02 (July 8, 
1994); 59 FR 35171-01 (July 8, 1994); 59 FR 35171-02 (July 8, 1994); 59 
FR 37131-01 (July 20, 1994); 59 FR 45322-01 (Sept. 1, 1994); 59 FR 
51663-03, (Oct. 12, 1994); 59 FR 52028-01 (Oct. 13, 1994); 60 FR 10142-
03 (Feb. 23, 1995); 60 FR 19112-02 (Apr. 14, 1995); 60 FR 19113-01 
(Apr. 14, 1995); 60 FR 26478-02 (May 17, 1995); 60 FR 27594-01 (May 24, 
1995); 60 FR 36458-01 (July 17, 1995); 60 FR 36459-01 (July 17, 1995); 
60 FR 54100-01 (Oct. 19, 1995); 60 FR 54101-01 (Oct. 19, 1995); 61 FR 
13919-03 (Mar. 28, 1996); 62 FR 10310-01 (Mar. 6, 1997); 65 FR 46046-01 
(July 26, 2000); 72 FR 62730-01 (Nov. 6, 2007).

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits, 
including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity. Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, 
reducing costs, harmonizing rules, and promoting flexibility.
    The proposed regulations have been designated by the Office of 
Information and Regulatory Affairs (OIRA) as subject to review under 
Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, 
April 11, 2018) between the Treasury Department and the Office of 
Management and Budget (OMB) regarding review of tax regulations. OIRA 
has determined that the proposed rulemaking is significant and subject 
to review under Executive Order 12866 and section 1(b) of the 
Memorandum of Agreement. Accordingly, the proposed regulations have 
been reviewed by OMB.
A. Background
    As noted earlier, CERCLA, known colloquially as ``Superfund,'' was 
enacted, in part, to create a hazardous substance cleanup program. 
Section 221 of CERCLA established the ``Hazardous Substance Response 
Trust Fund,'' which was funded, in part, by the Superfund chemical 
taxes. The Superfund chemical taxes expired on December 31, 1995.
    Effective July 1, 2022, section 80201 of the IIJA reinstates the 
Superfund chemical taxes with certain modifications. Pursuant to 
section 80201(c)(3) of the IIJA, Notice 2021-66 provided initial 
guidance related to the Superfund chemical taxes.
B. Need for Proposed Regulations
    The proposed regulations generally provide structure and clarity 
for the implementation of the Superfund chemical taxes as reinstated by 
IIJA. However, the Treasury Department and the IRS determined that 
there remained outstanding issues requiring clarification that should 
be subject to notice and comment. In addition to clarifying statutory 
rules in sections 4661 and 4671 regarding the Superfund chemical tax 
procedural rules and computation of tax, these proposed regulations 
provide definitions that track the statutory language and otherwise 
borrow from existing excise tax rules, including regulations relating 
to ozone-depleting chemicals and manufacturers excise taxes. The 
proposed regulations provide procedural guidance regarding tax-free 
sales of certain taxable chemicals and

[[Page 18455]]

taxable substances. Finally, the proposed regulations provide 
procedures for taxpayers to claim credits and refunds of Superfund 
chemical taxes paid with respect to taxable chemicals or taxable 
substances sold for use or used for certain purposes.
C. Baseline
    The Treasury Department and the IRS have assessed the benefits and 
costs of the proposed regulation relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of this regulation.
D. Affected Entities
    The Superfund chemical taxes are excise taxes imposed on any 
manufacturer, producer, or importer that sells or uses taxable 
chemicals or taxable substances. The taxes are reported on excise tax 
forms, separate from corporate or individual income tax forms. The 
Superfund chemical taxes are expected to be paid by industrial chemical 
companies, which include various manufacturing, refining, and 
wholesaler firms. The extent to which the cost of the Superfund 
chemical taxes will be passed down to the eventual consumers of 
products containing the taxable chemicals or taxable substances is 
variable across a wide array of products.
    After the expiration of the Superfund chemical taxes on December 
31, 1995, the number of quarterly excise tax filers fell by 
approximately 5,500 taxpayers. This number is a reasonable estimate of 
the number of Superfund chemical tax filers in 1995, as the Superfund 
chemical taxes were the only excise taxes to have expired at that time 
and the Superfund petroleum tax filers would still be paying the Oil 
Spill Liability excise taxes, and therefore had not stopped filing 
quarterly excise forms. However, the make-up of the chemical and 
manufacturing industries is expected to have changed since the previous 
imposition of the Superfund chemical taxes. In addition, section 
80201(c)(1) of the IIJA modifies the method under section 4672(a)(2)(B) 
of the Code for determining whether a substance is a taxable substance 
by lowering the required percentage of taxable chemicals used to 
produce the substance from 50 percent to 20 percent of the weight (or 
the value) of the materials used to produce such substance. Given the 
changes in the application of the Superfund chemical taxes, the 
Treasury Department and the IRS do not have readily available data to 
quantify the impact of the excise taxes. The Treasury Department and 
the IRS invite comments, especially data sets or analyses, on the 
number of affected taxpayers.
E. Economic Analysis of the Proposed Regulations
    The proposed regulations provide certainty and consistency in the 
application of Superfund chemical taxes by providing definitions and 
clarifications regarding the statutes' terms and rules. In addition, 
the proposed regulations provide model certificates and examples for 
the taxpayer to follow. An economically efficient tax system generally 
aims to treat income and expense derived from similar economic 
decisions consistently across taxpayers and activities in order to 
reduce incentives for individuals and businesses to make choices based 
on tax rather than market incentives. In the absence of the guidance 
provided in these proposed regulations, taxpayers would bear the burden 
of interpreting the statute and the chances that different taxpayers 
might interpret the statute differently would be exacerbated. For 
example, two similarly-situated taxpayers might interpret the statutory 
provisions pertaining to the calculation of tax differently or reach 
different conclusions regarding eligibility for exemptions from the 
Superfund chemical taxes. Thus, lack of certainty may lead to very 
different tax liabilities for taxpayers undertaking similar activities. 
The Treasury Department and the IRS invite comments, especially data 
sets or analyses, of the impact of the proposed regulations.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) 
(``Paperwork Reduction Act'') requires that a federal agency obtain the 
approval of the OMB before collecting information from the public, 
whether such collection of information is mandatory, voluntary, or 
required to obtain or retain a benefit.
Overview
    The collections of information in these proposed regulations are 
in: Proposed Sec. Sec.  52.4662-2(g)(5) (notification certificate for 
intermediate hydrocarbon streams under section 4662(b)(10)); 52.4662-
2(h)(2) (exemption certificate for tax-free sales for fertilizer, motor 
fuel, and animal feed substances under section 4662(b)); 52.4662-3(c) 
(notification certificate for inventory exchanges under section 
4662(c)); 52.4662-4(a)(4) (supporting information required for claims 
for credit and refund under section 4662(d)(1)); 52.4662-4(b)(3) 
(supporting information required for claims for credit and refund under 
section 4662(d)(2)); 52.4662-4(c)(3) (supporting information required 
for claims for credit and refund under section 4662(d)(3)); 52.4662-
4(d)(3) (supporting information required for claims for credit and 
refund under section 4662(d)(4)); 52.4662-4(e)(2) (certificate to 
support claims for credit and refund under section 4662(d)); 52.4662-
5(b)(5) (exemption certificate for tax-free sales for export under 
section 4662(e)(1)); 52.4662-5(c)(3) (supporting information required 
for claims for credit and refund under section 4662(e)(2)); 52.4662-
5(d)(3) (supporting information required for claims for credit and 
refund by the exporter under section 4662(e)(3)); 52.4671-2(b)(3) 
(exemption certificate for tax-free sales for fertilizer, motor fuel, 
and animal feed substances under section 4672(d)(1)); 52.4671-2(c)(3) 
(supporting information required for claims for credit or refund under 
section 4671(d)(2)); and 52.4672-2(c)(4) (certificate to support claims 
for credit or refund under section 4671(d)(2)).
Estimated Burden
    The IRS Taxpayer Burden Model cannot be used to calculate reporting 
burden not associated with economic activity, as is the case with the 
required reporting in these proposed regulations. Therefore, the IRS is 
providing off-model estimates of the burden associated with these 
proposed regulations. The estimated time to complete a notification 
certificate is 15 to 30 minutes. It is estimated that 100 to 1,000 
taxpayers will complete a notification certificate. The estimated 
minimum burden imposed by the notification certificate is 25 hours (100 
taxpayers x .25 hours), and the estimated maximum burden imposed is 250 
hours (1,000 taxpayers x .25 hours). Using a monetization rate of 
$98.50 (2020 dollars), the total monetized burden for the notification 
certificate requirement is estimated to be between $2,462.50 (25 hours 
x $98.50) and $24,625 (250 hours x $98.50).
    The time to complete a single exemption certificate to support a 
tax-free sale, a certificate to support a claim for credit or refund of 
tax, or a statement of export is estimated to be 30 to 60 minutes, and 
the IRS expects that between 6,000 and 30,000 taxpayers will submit one 
of these documents. The estimated minimum burden imposed by these 
reporting requirements is 3,000 hours (6,000 taxpayers x .5 hour) and 
the estimated maximum burden imposed is 30,000 hours (30,000 taxpayers 
x 1 hour). Using a monetization rate of $98.50 (2020

[[Page 18456]]

dollars), total monetized burden is estimated to be between $295,500 
(3,000 hours x $98.50) and $2,955,000 (30,000 hours x $98.50).
    The total estimated burden for these proposed regulations is 
between 3,025 hours (25 hours + 3,000 hours) and 30,250 hours (250 
hours + 30,000 hours). The total monetized burden under these proposed 
regulations is estimated to be between $297,962.50 ($2,462.50 + 
$295,500) and $2,979,625 ($24,625 + $2,955,000).
    The collections of information contained in this notice of proposed 
rulemaking have been submitted to OMB for review in accordance with the 
Paperwork Reduction Act of 1995 (PRA, 44 U.S.C. 3507(d)) under control 
number 1545-2304. Written comments and recommendations for the proposed 
information collection can be submitted by visiting https://www.reginfo.gov/public/do/PRAMain. Information collection requests may 
be found by selecting ``Currently Under Review--Open for Public 
Comments'' or by using the search function. Comments on the information 
collections may also be sent to the Internal Revenue Service, Attn: IRS 
Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. 
Comments on the collections of information should be received by May 
30, 2023. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the IRS, including whether 
the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by OMB.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103 of 
the Code.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act.
    The proposed regulations provide clarity for manufacturers, 
producers, and importers that sell or use taxable chemicals and for 
importers that sell or use taxable substances. The proposed regulations 
provide general rules related to the Superfund chemical taxes, 
including the attachment of tax, how to calculate the tax, the taxation 
of chemical mixtures, and supporting information required for credit or 
refund claims. The proposed regulations provide rules and model 
certificates for the statutory exceptions and special rules related to 
the section 4661 tax, such as for methane or butane used otherwise than 
as a fuel, qualified fertilizer, fuel, and animal feed substances, and 
tax-free sales for organic taxable chemicals are part of an 
intermediate hydrocarbon stream. The proposed regulations also provide 
rules and model certificates for the statutory exceptions to the 
section 4671 tax for qualified fertilizer, fuel, and animal feed 
substances. Accordingly, the Treasury Department and the IRS intend 
that the proposed rules provide clarity for manufactures, producers, 
and importers and consistent application of the Superfund chemical 
taxes.
    The Treasury Department and the IRS do not have readily available 
data to assess how many entities may be affected by the proposed 
regulations. Even if a substantial number of small entities are 
affected, the economic impact of these regulations on small entities is 
not likely to be significant. The proposed regulations provide 
taxpayers with definitional and computational guidance regarding the 
Superfund chemical taxes as well as rules and model certificates for 
statutory exceptions to the Superfund chemical taxes. As explained in 
the PRA section, the record keeping obligations imposed by these 
proposed regulations are certificates for the statutory exceptions to 
Superfund chemical taxes and credit and refund claims. It is estimated 
that between 6,000 and 30,000 taxpayers will prepare one of such 
certificates annually and it will take no more than one hour to 
complete.
    Accordingly, the Secretary certifies that these proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities. The Treasury Department and the 
IRS specifically invite comments from any party, particularly affected 
small entities, on the accuracy of this certification.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for the Office of Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Proposed Applicability Dates

    These proposed regulations are proposed to apply to sales or uses 
in calendar quarters beginning on or after the date the Treasury 
decision adopting these rules as final regulations is published in the 
Federal Register. Taxpayers and their related parties, within the 
meaning of sections 267(b) and 707(b)(1) of the Code, may rely on the 
provisions of these proposed regulations prior to that date provided 
that they follow the proposed regulations in their entirety (as 
applicable) and in a consistent manner until the date the Treasury 
decision adopting these rules as final regulations is published in the 
Federal Register.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. All commenters are strongly 
encouraged to submit comments electronically. The Treasury Department 
and the IRS will publish for public availability any comment submitted 
electronically or on paper to its public docket on https://www.regulations.gov.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are encouraged to be made electronically. If a public 
hearing is scheduled, a notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4 
(2020-17 I.R.B. 1) provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

Drafting Information

    The principal author of these proposed regulations is Stephanie 
Bland

[[Page 18457]]

of the Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 52

    Chemicals, Environmental protection, Excise taxes, Hazardous waste, 
Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 52 is proposed to be amended as follows:

PART 52--ENVIRONMENTAL TAXES

0
Paragraph 1. The authority citation for part 52 is amended by adding 
entries for Sec. Sec.  52.4661-1, 52.4662-1 through 52.4662-5, 52.4671-
1, 52.4671-2, 52.4672-1, and 52.4672-2 in numerical order and revising 
the entry for Sec.  52.4682-3 to read in part as follows:

    Authority: 26 U.S.C. 7805.
    Section 52.4661-1 also issued under 26 U.S.C. 4661.
    Section 52.4662-1 also issued under 26 U.S.C. 4662.
    Section 52.4662-2 also issued under 26 U.S.C. 4662.
    Section 52.4662-3 also issued under 26 U.S.C. 4662.
    Section 52.4662-4 also issued under 26 U.S.C. 4662.
    Section 52.4662-5 also issued under 26 U.S.C. 4662.
    Section 52.4671-1 also issued under 26 U.S.C. 4671.
    Section 52.4671-2 also issued under 26 U.S.C. 4671.
    Section 52.4672-1 also issued under 26 U.S.C. 4672.
    Section 52.4672-2 also issued under 26 U.S.C. 4672.
    Section 52.4682-3 also issued under 26 U.S.C. 4682(c)(2).
* * * * *

0
Par. 2. Section 52.4661-1 is added to read as follows:


Sec.  52.4661-1  Imposition of tax.

    (a) In general. Section 4661(a) of the Internal Revenue Code (Code) 
imposes an excise tax on any taxable chemical sold or used by the 
manufacturer, producer, or importer of the taxable chemical. See 
sections 4661(a)(1) and 4662(c)(1) of the Code.
    (b) Person liable for tax. The manufacturer, producer, or importer 
of a taxable chemical is liable for the section 4661 tax.
    (c) Attachment of tax--(1) In general. The section 4661 tax 
attaches when the manufacturer, producer, or importer of a taxable 
chemical first sells or uses the taxable chemical. No section 4661 tax 
attaches when the manufacturer, producer, or importer of a chemical 
mixture (as defined in Sec.  52.4662-1(c)(1)) containing one or more 
tax-paid chemicals (as defined in Sec.  52.4662-1(c)(12)), or a 
subsequent purchaser of such chemical mixture, dilutes the chemical 
mixture with a solvent to change the concentration of the tax-paid 
chemical or chemicals in the chemical mixture, provided the solvent is 
not a taxable chemical.
    (2) Foreign manufacturers. No section 4661 tax attaches to a 
foreign manufacturer's sale of a substance listed in the table under 
section 4661(b) to an importer because the substance is not a taxable 
chemical at the time of sale. See section 4662(a)(1). Instead, the 
section 4661 tax attaches to the importer's first sale or use of the 
taxable chemical.
    (3) Taxable chemical that is part of an imported chemical mixture. 
In the case of a taxable chemical that is part of an imported chemical 
mixture that is not a taxable substance (as defined in section 4672(a) 
and Sec.  52.4672-1(b)(8)), the section 4661 tax attaches to the 
importer's first sale or use of the chemical mixture.
    (4) Ores--(i) In general. In the case of a taxable chemical that is 
derived from an ore, neither the mining of the ore nor the extraction 
of the taxable chemical from the ore is a taxable event. Instead, the 
section 4661 tax attaches to the first sale or use of the taxable 
chemical by the manufacturer, producer, or importer after extraction of 
the taxable chemical from the ore, and the person that extracts the 
taxable chemical from the ore is the manufacturer of the taxable 
chemical. For purposes of this paragraph (c)(4)(i), the term extraction 
of a taxable chemical from the ore means the first process that a 
person uses in the United States to separate the taxable chemical from 
the ore. See paragraph (c)(4)(ii) of this section for the special rule 
regarding chromite.
    (ii) Chromite. The mining of chromite, which is an ore, is not a 
taxable event. Instead, tax attaches to the first sale or use of 
chromite by the manufacturer, producer, or importer after the chromite 
is mined. For domestically-mined chromite, the person that mines the 
chromite is the manufacturer.
    (d) Procedural rules. Part 40 of this chapter provides rules 
related to filing excise tax returns, making semimonthly deposits of 
excise tax, making payments of excise tax, and other procedural rules. 
See Sec. Sec.  52.0-1 and 40.0-1(a) of this chapter. Each business unit 
that has, or is required to have, a separate employer identification 
number is treated as a separate person for purposes of filing excise 
tax returns, making semimonthly deposits of excise tax, making payments 
of excise tax, and the registration requirements under section 
4662(b)(10)(C) and (c)(2)(B). See Sec.  40.0-1(d) of this chapter.
    (e) Amount of tax. The section 4661 tax is imposed as a rate per 
ton of taxable chemical sold or used by the manufacturer, producer, or 
importer. See section 4661(b) for the rate of tax per ton of each 
taxable chemical.
    (f) Calculation of tax--(1) Overview. The section 4661 tax is 
calculated by multiplying the number of tons of the taxable chemical 
sold or used by the manufacturer, producer, or importer by the tax rate 
applicable to the taxable chemical under section 4661(b). In the case 
of a fraction of a ton, the tax is calculated by adding the number of 
whole tons (if any) and the number of fractional tons of the taxable 
chemical, and then multiplying the sum of those numbers by the tax rate 
applicable to the taxable chemical. See section 4662(a)(5).
    (2) Determination of weight--(i) In general. The weight of a 
taxable chemical is the actual weight of the taxable chemical at the 
time of sale or use by the manufacturer, producer, or importer, 
measured in tons.
    (ii) Imported chemical mixtures. In the case of a taxable chemical 
that is part of an imported chemical mixture that is not a taxable 
substance, the section 4661 tax is imposed on the actual weight of each 
taxable chemical in the chemical mixture at the time of sale or use of 
the chemical mixture by the importer. If there are multiple taxable 
chemicals in the chemical mixture, the amount of tax is calculated 
separately for each taxable chemical in the chemical mixture.
    (iii) Conversion required for volumetric measurements. Any 
volumetric measurement of a taxable chemical must be converted to a 
weight measurement. To calculate the weight (in pounds) of a taxable 
chemical from a volumetric measurement (in cubic feet), the volume of 
the taxable chemical (in cubic feet) is multiplied by the density of 
the taxable chemical (in pounds per cubic foot). To convert a 
volumetric measurement to a weight measurement for purposes of the 
section 4661 tax, the pressure and temperature used to determine 
density must be the same as the pressure and temperature used to 
determine volume.
    (g) Examples. The following examples illustrate the rules of this 
section.
    (1) Example 1. X, a foreign manufacturer of potassium hydroxide, 
sells 10 tons of potassium hydroxide to Y, a domestic corporation. Y 
enters the 10 tons of potassium hydroxide into the United States for 
consumption, use, or

[[Page 18458]]

warehousing, and then sells it to Z, a domestic corporation. Under 
these facts, Y is the importer of the potassium hydroxide. The section 
4661 tax attaches when Y sells the potassium hydroxide to Z. Y is 
liable for the section 4661 tax. The section 4661 tax is calculated by 
multiplying 10 tons (the weight of the potassium hydroxide) by $0.44 
(the rate of tax per ton of potassium hydroxide). The amount of section 
4661 tax is $4.40.
    (2) Example 2. X, a foreign corporation, sells nickel ore to Y, a 
domestic corporation. Y enters the nickel ore into the United States 
for consumption, use, or warehousing, and then extracts nickel from the 
ore. Y sells 10 tons of the nickel to Z, a domestic corporation. Z 
further processes the nickel to remove impurities and then uses the 
nickel to create an alloy. Under these facts, Y is the manufacturer of 
the nickel. The section 4661 tax attaches when Y sells the nickel to Z. 
Y is liable for the section 4661 tax. The section 4661 tax is 
calculated by multiplying 10 tons (the weight of the nickel) by $8.90 
(the rate of tax per ton of nickel). The amount of section 4661 tax is 
$89.00.
    (3) Example 3. X, a domestic producer of chromite, sells 3,500 
pounds of chromite to Y, a domestic corporation. The section 4661 tax 
attaches when X sells the chromite to Y. X is liable for the section 
4661 tax. The section 4661 tax is calculated by adding the number of 
whole and fractional tons of chromite (1 ton + .75 ton = 1.75 tons), 
and then multiplying 1.75 tons by $3.04 (the rate of tax per ton of 
chromite). The amount of section 4661 tax is $5.32.
    (4) Example 4. X, an importer, enters 1.2 tons of a chemical 
mixture comprised of 98.3 percent sulfuric acid and 1.7 percent water 
for consumption, use, or warehousing. X sells the chemical mixture to 
Y, a domestic corporation. The section 4661 tax attaches when X sells 
the chemical mixture to Y. X is liable for the section 4661 tax. The 
section 4661 tax is calculated based on the weight of the sulfuric acid 
in the chemical mixture (98.3% x 1.2 tons = 1.18 tons), and then 
multiplying 1.18 tons by $0.52 (the rate of tax per ton of sulfuric 
acid). The amount of section 4661 tax is $0.61.
    (5) Example 5. X, an importer, enters 1.2 tons of a chemical 
mixture comprised of 98.3 percent sulfuric acid and 1.7 percent water 
for consumption, use, or warehousing. X sells the chemical mixture to 
Y, a domestic corporation. Y adds water to the chemical mixture, 
resulting in a chemical mixture of 93 percent sulfuric acid and 7 
percent water, and sells the chemical mixture to Z, a domestic 
corporation. The section 4661 tax attaches when X sells the chemical 
mixture to Y. X is liable for the section 4661 tax. The section 4661 
tax is calculated based on the weight of the sulfuric acid in the 
chemical mixture (98.3% x 1.2 tons = 1.18 tons), and then multiplying 
1.18 tons by $0.52 (the rate of tax per ton of sulfuric acid). The 
amount of section 4661 tax is $0.61. No additional section 4661 tax is 
imposed when Y dilutes the chemical mixture by adding water or when Y 
sells the diluted chemical mixture to Z.
    (h) Cross references--(1) Definitions. For definitions that relate 
to sections 4661 and 4662, see section 4662(a) and Sec.  52.4662-1.
    (2) Exceptions and special rules. For exceptions and special rules 
applicable to the section 4661 tax, see section 4662(b) and Sec.  
52.4662-2.
    (3) Inventory exchanges. For special rules related to inventory 
exchanges, see section 4662(c)(2) and Sec.  52.4662-3.
    (4) Credit or refund of tax. For rules related to credits and 
refunds of the section 4661 tax, see section 4662(d) and Sec.  52.4662-
4.
    (5) Exports. For rules related to exports, see section 4662(e) and 
Sec.  52.4662-5.
    (i) Applicability date. This section applies to sales or uses in 
calendar quarters beginning on or after [date of publication of final 
regulations in the Federal Register].
0
Par. 3. Section 52.4662-1 is added to read as follows:


Sec.  52.4662-1  Taxable chemical; other definitions.

    (a) Overview. This section provides definitions for purposes of 
sections 4661 and 4662 of the Internal Revenue Code (Code), Sec.  
52.4661-1, this section, and Sec. Sec.  52.4662-2 through 52.4662-5.
    (b) Taxable chemical--(1) In general. (i) Except as provided in 
section 4662(b), the term taxable chemical means any substance that is:
    (A) Listed in the table under section 4661(b); and
    (B) Manufactured or produced in the United States, or entered into 
the United States for consumption, use, or warehousing. See section 
4662(a)(1).
    (ii) A substance is a taxable chemical only if it satisfies both 
paragraphs (b)(1)(i) and (ii) of this section. For rules regarding 
paragraph (b)(1)(i) of this section, see paragraph (b)(2) of this 
section. For the definition of entered into the United States for 
consumption, use, or warehousing as it relates to the second prong of 
the definition, see paragraph (c)(2) of this section.
    (2) Substances listed in the table under section 4661(b). A 
substance is listed in the table under section 4661(b), and therefore 
satisfies paragraph (b)(1)(i) of this section, if it has the same name 
and molecular formula as a substance listed in the table under section 
4661(b). All isomeric forms of a substance listed in the table under 
section 4661(b) are treated as having the same name and molecular 
formula of the substance. Therefore, except as provided in section 
4662(b)(7) with respect to xylene, an isomer of a substance listed in 
the table under section 4661(b) is a substance listed in the table 
under section 4661(b). The physical state of a substance (that is, 
solid, liquid, or gas) is immaterial. See paragraph (b)(3) of this 
section for the name and the molecular formula, or chemical symbol, of 
each substance listed in the table under section 4661(b).
    (3) Molecular formulas and chemical symbols. The following table 
provides the name and molecular formula or chemical symbol for each 
substance listed in the table under section 4661(b):

                       Table 1 to Paragraph (b)(3)
------------------------------------------------------------------------
                                                Molecular formula or
                   Name                            chemical symbol
------------------------------------------------------------------------
Acetylene.................................  C2H2
Benzene...................................  C6H6
Butane....................................  C4H10
Butylene..................................  C4H8
Butadiene.................................  C4H6
Ethylene..................................  C2H4
Methane...................................  CH4
Naphthalene...............................  C10H8
Propylene.................................  C3H6
Toluene...................................  C7H8
Xylene....................................  C8H10
Ammonia...................................  NH3
Antimony..................................  Sb
Antimony trioxide.........................  SbO3
Arsenic...................................  As
Arsenic trioxide..........................  AsO3
Barium sulfide............................  BaS
Bromine...................................  Br
Cadmium...................................  Cd
Chlorine..................................  Cl
Chromium..................................  Cr
Chromite..................................  FeCr2O4 and MgCr2O4
Potassium dichromate......................  K2Cr2O7
Sodium dichromate.........................  NaCr2O7
Cobalt....................................  Co
Cupric sulfate............................  CuSO4
Cupric oxide..............................  CuO
Cuprous oxide.............................  Cu2O
Hydrochloric acid.........................  HCl
Hydrogen fluoride.........................  HF
Lead oxide................................  PbO
Mercury...................................  Hg
Nickel....................................  Ni
Phosphorus................................  P
Stannous chloride.........................  SnCl2
Stannic chloride..........................  SnCl4
Zinc chloride.............................  ZnCl2
Zinc sulfate..............................  ZnSO4
Potassium hydroxide.......................  KOH
Sodium hydroxide..........................  NaOH
Sulfuric acid.............................  H2SO4

[[Page 18459]]

 
Nitric acid...............................  HNO3
------------------------------------------------------------------------

    (4) Special rule for ores. Except for chromite, an ore is not a 
taxable chemical.
    (5) Special rule for methane and butane. For rules regarding the 
treatment of methane and butane as taxable chemicals, see section 
4662(b)(1) and Sec.  52.4662-2(a).
    (6) Special rule for substances derived from coal. For rules 
regarding the exclusion from the definition of taxable chemical for 
substances derived from coal, see section 4662(b)(4) and Sec.  52.4662-
2(d).
    (7) Special rule for xylene. For a special rule regarding separated 
isomers of xylene, see section 4662(b)(7).
    (8) Example. X, a domestic corporation, produces isobutylene in the 
United States. Isobutylene is an isomer of butylene and has the 
molecular formula C4H8. The isobutylene is a 
taxable chemical because it is a substance listed in the table under 
section 4661(b) as required by section 4662(a)(1)(A), and it is 
produced in the United States as required by section 4662(a)(1)(B).
    (c) Other definitions--(1) Chemical mixture. The term chemical 
mixture means a substance composed of two or more physically-combined 
components that are not chemically bonded. Chemical mixtures include 
alloys, solutions, suspensions, and colloids.
    (2) Entry for consumption, use, or warehousing--(i) In general. 
Except as otherwise provided in this paragraph (c)(2), the term entry 
for consumption, use, or warehousing, when used with respect to any 
goods, means:
    (A) Brought into the customs territory of the United States 
(customs territory) if applicable customs law requires that the goods 
be entered into the customs territory for consumption, use, or 
warehousing;
    (B) Admitted into a foreign trade zone for any purpose if like 
goods brought into the customs territory would be entered into the 
customs territory for consumption, use, or warehousing; or
    (C) Imported into any other part of the United States for any 
purpose if like goods brought into the customs territory would be 
entered into the customs territory for consumption, use, or 
warehousing.
    (ii) Entry for transportation and exportation. Goods entered into a 
customs territory for transportation and exportation are not goods 
entered into the customs territory for consumption, use, or 
warehousing.
    (iii) Multiple entries. In the case of multiple entries described 
in paragraph (c)(2)(i) of this section, only the first entry is taken 
into account.
    (3) Exportation. The term exportation means the severance of a 
taxable chemical from the mass of things belonging within the United 
States with the intention of uniting it with the mass of things 
belonging within a foreign country.
    (4) Exporter. The term exporter means the person named as shipper 
or consignor in the export bill of lading.
    (5) Importer--(i) In general. The term importer means the person 
entering the taxable chemical for consumption, use, or warehousing. See 
section 4662(a)(3). If the person entering the taxable chemical for 
consumption, use, or warehousing is merely acting as an agent or a 
customs broker for another person, then the agent or customs broker is 
not the importer and the importer is the first person in the United 
States to sell or use the taxable chemical after entry of the taxable 
chemical for consumption, use, or warehousing.
    (ii) Drop ship businesses. If a drop ship business in the United 
States purchases or otherwise arranges for a person outside the United 
States to ship a chemical listed in the table under section 4661(b) 
directly to a purchaser in the United States, the drop ship business is 
the importer of the chemical. If a drop ship business outside the 
United States purchases or otherwise arranges for a person outside the 
United States to ship a chemical listed in the table under section 
4661(b) directly to a purchaser in the United States, the purchaser in 
the United States is the importer of the chemical. For purposes of this 
paragraph (c)(5)(ii), the term drop ship business means a person that 
sells the chemical or arranges for purchasers to purchase the chemical, 
and uses a third party to fill the order by shipping the chemical 
directly to the purchaser. The determination of whether a person is a 
drop ship business is made on a sale-by-sale basis.
    (6) Manufacturer--(i) In general. The term manufacturer includes a 
producer. A manufacturer is any person that produces a taxable chemical 
from new or raw material, feedstocks, or other substances, or from 
scrap, salvage, waste, or recycled substances. A manufacturer includes 
any person that produces a taxable chemical from the mining process, or 
extracts, isolates, separates, or otherwise removes a taxable chemical 
from an ore or from another substance. A manufacturer also includes any 
person that produces a taxable chemical by processing or manipulating a 
substance, such as through the oxidation process. The term manufacturer 
does not include a person that dilutes a chemical mixture comprised of 
one or more tax-paid chemicals with a solvent that is not a taxable 
chemical.
    (ii) Contract manufacturing. If a person manufactures or produces a 
taxable chemical for a second person, pursuant to a contract, order, or 
agreement and in accordance with the second person's specifications, or 
if a person manufactures or produces a taxable chemical for a second 
person from materials owned by the second person, the second person is 
treated as the manufacturer of the taxable chemical manufactured by the 
first person.
    (7) Molecular formula. The term molecular formula means a chemical 
formula that shows the number and kinds of atoms in the substance.
    (8) Sale. The term sale means the transfer of title or substantial 
incidents of ownership (whether or not delivery to, or payment by, the 
purchaser has been made) in a taxable chemical for a consideration, 
which may include, but is not limited to, money, services, or property.
    (9) Section 4661 tax. The term section 4661 tax means the excise 
tax imposed by section 4661(a) of the Code on any taxable chemical sold 
or used by the manufacturer, producer, or importer of the taxable 
chemical.
    (10) Taxable substance. The term taxable substance has the meaning 
given to such term by section 4671(a) of the Code and Sec.  52.4672-
1(b)(8).
    (11) Taxable chemical registrant. The term taxable chemical 
registrant means a person that is registered by the Internal Revenue 
Service (IRS) under Activity Letter ``G.'' A person may apply for ``G'' 
registration by completing Form 637, Application for Registration for 
Certain Excise Tax Activities, and submitting the completed form to the 
IRS.
    (12) Tax-paid chemical. The term tax-paid chemical means a taxable 
chemical on which the section 4661 tax has been paid.
    (13) Ton. The term ton means 2,000 pounds. In the case of any 
taxable chemical measured by volume, the term ton means the amount of 
such taxable chemical, in cubic feet, that is the equivalent of 2,000 
pounds on a molecular weight basis. See section 4662(a)(4) and Sec.  
52.4661-1(f)(2)(iii).
    (14) United States. The term United States has the meaning given to 
such

[[Page 18460]]

term by section 4612(a)(4) of the Code. See section 4662(a)(2).
    (15) Use. Except as otherwise provided in section 4662 and Sec.  
52.4662-2, a taxable chemical is used when it is consumed, when it 
functions as a catalyst, when its chemical composition changes, when it 
is used in the manufacture or production of a chemical mixture or other 
substance (including by mixing or combining the taxable chemical with 
other substances), or when it is put into service in a trade or 
business for the production of income. The loss or destruction of a 
taxable chemical through spillage, fire, natural degradation, or other 
casualty is not a use of the chemical. The mere manufacture or 
production of a taxable chemical is not a use of that chemical.
    (d) Applicability date. This section applies to sales or uses in 
calendar quarters beginning on or after [date of publication of final 
regulations in the Federal Register].
0
Par. 4. Section 52.4662-2 is added to read as follows:


Sec.  52.4662-2  Exceptions and special rules.

    (a) Methane or butane used as a fuel--(1) In general. Methane or 
butane is treated as a taxable chemical only if it is used otherwise 
than as a fuel, or otherwise than in the manufacture or production of 
any motor fuel, diesel fuel, aviation fuel, or jet fuel. Any person 
using methane or butane otherwise than as a fuel, or otherwise than in 
the manufacture or production of any motor fuel, diesel fuel, aviation 
fuel, or jet fuel, is treated as the manufacturer of the methane or 
butane and the tax imposed by section 4661(a) of the Code attaches at 
the time such person so uses the methane or butane. See section 
4662(b)(1) of the Code. See section 4662(b)(10) and paragraph (g) of 
this section regarding the exception for hydrocarbon streams containing 
mixtures of organic taxable chemicals.
    (2) Use otherwise than as a fuel. Methane or butane is used 
otherwise than as a fuel when it is used other than in the production 
of energy. For example, methane or butane is used otherwise than as a 
fuel when it is used as a coolant. Conversely, methane or butane is 
used as a fuel when it is consumed in the production of energy. For 
example, methane or butane is used as a fuel when it is consumed in an 
internal combustion engine to power a vehicle, when it is consumed in 
an engine to power an aircraft, or when it is consumed in a furnace, 
cooking appliance, or lighter to produce heat.
    (3) Examples. The following examples illustrate the rules in 
paragraph (a)(2) of this section.
    (i) Example 1. X, a domestic corporation, produces methane in the 
United States and uses it to fire the furnaces at X's refinery. The 
methane is not treated as a taxable chemical because it is used as a 
fuel by X.
    (ii) Example 2. X, a domestic corporation, produces methane in the 
United States and sells it to Y, a domestic corporation. Y uses the 
methane in the production of antifreeze. The methane is not treated as 
a taxable chemical until Y uses the methane in the production of 
antifreeze. Y is treated as the manufacturer of the methane and the 
section 4661 tax attaches at the time Y uses the methane in the 
production of antifreeze. Y is liable for the section 4661 tax.
    (b) Substances used in the production of fertilizer--(1) In 
general. No section 4661 tax is imposed in the case of nitric acid, 
sulfuric acid, ammonia, or methane used to produce ammonia 
(collectively, fertilizer chemicals, or individually, fertilizer 
chemical) that is a qualified fertilizer substance. See section 
4662(b)(2)(A). Although taxable chemicals other than fertilizer 
chemicals may be qualified fertilizer substances, the section 
4662(b)(2) exception does not apply to such other taxable chemicals. 
For example, zinc sulfate used by the manufacturer to produce a 
qualified fertilizer substance does not qualify for the exception in 
section 4662(b)(2).
    (2) Definitions--(i) Qualified fertilizer substance. Under section 
4662(b)(2)(B), the term qualified fertilizer substance means:
    (A) Any substance used by the manufacturer, producer, or importer 
in a qualified fertilizer use;
    (B) Any substance sold for use by any purchaser in a qualified 
fertilizer use; or
    (C) Any substance sold for resale by any purchaser for use, or 
resale for ultimate use, in a qualified fertilizer use.
    (ii) Qualified fertilizer use. The term qualified fertilizer use 
means any use in the manufacture or production of fertilizer or for 
direct application as a fertilizer. See section 4662(b)(2)(C). The term 
qualified fertilizer use includes the act of putting fertilizer on 
crops or croplands.
    (iii) Fertilizer. The term fertilizer means a substance used to 
improve the growth of plants. The term fertilizer does not include 
pesticides, insecticides, herbicides or fungicides.
    (3) Taxation of nonqualified sale or use. If no section 4661 tax 
was imposed on the sale or use of fertilizer chemicals by reason of the 
exception in section 4662(b)(2), the first person that sells or uses 
any such chemical other than as a qualified fertilizer substance is 
treated as the manufacturer of such chemical. See section 
4662(b)(2)(D). When a fertilizer chemical is sold or used to produce 
both a qualified fertilizer substance and a substance that is not a 
qualified fertilizer substance (derivative substance), the section 4661 
tax is imposed on the fertilizer chemical used to produce the 
derivative substance at the time the manufacturer, producer, or 
importer sells or uses the fertilizer chemical. The amount of the 
section 4661 tax is calculated based on the weight of the fertilizer 
chemical sold or used to produce the derivative substance.
    (4) Tax-free sales. See paragraph (h) of this section for rules 
related to tax-free sales.
    (5) Credit or refund of tax. See section 4662(d)(2) and Sec.  
52.4662-4(b) for rules related to credits and refunds of the section 
4661 tax.
    (c) Sulfuric acid produced as a byproduct of air pollution control. 
No section 4661 tax is imposed on sulfuric acid produced solely as a 
byproduct of and on the same site as air pollution control equipment. 
See section 4662(b)(3). As used in section 4662(b)(3), the term air 
pollution control equipment means any equipment used to comply with the 
Clean Air Act, including any amendments thereto, as codified in 42 
U.S.C. chapter 85, or any similar provision under state law.
    (d) Substances derived from coal--(1) In general. Under section 
4662(b)(4), the term taxable chemical does not include any substance to 
the extent derived from coal. As used in section 4662(b)(4), the term 
coal means bituminous coal, subbituminous coal, anthracite, and 
lignite. A substance is not derived from coal merely because coal 
served as a source of energy in the production of the substance.
    (2) Example. X, a domestic corporation, uses a high-temperature 
carbonization process to convert coal to coke and coal tar. X then 
cracks the coal tar to produce naphthalene. The naphthalene is derived 
from coal and the exception in section 4662(b)(4) applies. Therefore, 
the naphthalene is not a taxable chemical.
    (e) Substances used in the production of motor fuel--(1) In 
general. No section 4661 tax is imposed in the case of acetylene, 
benzene, butylene, butadiene, ethylene, naphthalene, propylene, 
toluene, or xylene (collectively, fuel chemicals, or individually, a 
fuel chemical) that is a qualified fuel substance. See section 
4662(b)(5)(A). Although taxable chemicals other than fuel chemicals may 
be qualified fuel substances, the section 4662(b)(5)

[[Page 18461]]

exception does not apply to such other taxable chemicals.
    (2) Definitions--(i) Qualified fuel substance. Under section 
4662(b)(5)(B), the term qualified fuel substance means:
    (A) Any substance used by the manufacturer, producer, or importer 
thereof in a qualified fuel use;
    (B) Any substance sold for use by any purchaser in a qualified fuel 
use; or
    (C) Any substance sold for resale by any purchaser for use, or 
resale for ultimate use, in a qualified fuel use.
    (ii) Qualified fuel use. A qualified fuel use means any use in the 
manufacture or production of any motor fuel, diesel fuel, aviation 
fuel, or jet fuel, or any use of a fuel chemical as such a fuel. See 
section 4662(b)(5)(C).
    (3) Taxation of nonqualified sale or use. If no section 4661 tax 
was imposed on the sale or use of a fuel chemical by reason of the 
exception in section 4662(b)(5), the first person that sells or uses 
such fuel chemical other than as a qualified fuel substance is treated 
as the manufacturer of such fuel chemical. See section 4662(b)(5)(E). 
When a fuel chemical is sold or used to produce both a qualified fuel 
substance and a substance that is not a qualified fuel substance 
(derivative substance), the section 4661 tax is imposed on the fuel 
chemical sold or used as the derivative substance at the time the 
manufacturer, producer, or importer sells or uses the fuel chemical. 
The amount of the section 4661 tax is calculated based on the weight of 
the fuel chemical sold or used to produce the derivative substance.
    (4) Tax-free sales. See paragraph (h) of this section for rules 
related to tax-free sales.
    (5) Credit or refund of tax. See section 4662(d)(3) and Sec.  
52.4662-4(c) for rules related to credits and refunds of the section 
4661 tax.
    (f) Substances used in the production of animal feed--(1) In 
general. No section 4661 tax is imposed in the case of nitric acid, 
sulfuric acid, ammonia, or methane used to produce ammonia (each, an 
animal feed chemical, and collectively, animal feed chemicals) that is 
a qualified animal feed substance. See section 4662(b)(9). Although 
taxable chemicals other than animal feed chemicals may be qualified 
animal feed substances, the section 4662(b)(9) exception does not apply 
to such other taxable chemicals.
    (2) Definitions--(i) Qualified animal feed substance. Under section 
4662(b)(9)(B), the term qualified animal feed substance means:
    (A) Any substance used by the manufacturer, producer, or importer 
in a qualified animal feed use;
    (B) Any substance sold for use by any purchaser in a qualified 
animal feed use; or
    (C) Any substance sold for resale by any purchaser for use, or 
resale for ultimate use, in a qualified animal feed use.
    (ii) Qualified animal feed use. The term qualified animal feed use 
means any use in the manufacture or production of animal feed, animal 
feed supplements, or ingredients used in animal feed or animal feed 
supplements. See section 4662(b)(9)(C).
    (3) Taxation of nonqualified sale or use. If no section 4661 tax 
was imposed on the sale or use of animal feed chemicals by reason of 
the exception in section 4662(b)(9), the first person that sells or 
uses any such chemical other than as a qualified animal feed substance 
is treated as the manufacturer of the chemical. See section 
4662(b)(9)(D). When an animal feed chemical is sold or used to produce 
both a qualified animal feed substance and a substance that is not a 
qualified animal feed substance (derivative substance), the section 
4661 tax is imposed on the animal feed chemical sold or used to produce 
the derivative substance at the time the manufacturer, producer, or 
importer sells or uses the animal feed chemical. The amount of the 
section 4661 tax is calculated based on the weight of the animal feed 
chemical sold or used to produce the derivative substance.
    (4) Tax-free sales. See paragraph (h) of this section for rules 
related to tax-free sales.
    (5) Credit or refund of tax. See section 4662(d)(4) and Sec.  
52.4662-4(d) for rules related to credits and refunds of the section 
4661 tax.
    (g) Hydrocarbon streams containing mixtures of organic taxable 
chemicals--(1) In general. No section 4661 tax is imposed on any 
organic taxable chemical while such chemical is part of an intermediate 
hydrocarbon stream containing one or more organic taxable chemicals, if 
the requirements in paragraph (g)(4) of this section are satisfied. See 
section 4662(b)(10)(A). For purposes of section 4662(b)(10), the term 
intermediate hydrocarbon stream means a mixture of organic chemicals 
that requires further distillation or processing to manufacture or 
produce a taxable chemical.
    (2) Organic taxable chemical--(i) In general. For purposes of 
section 4662(b)(10), the term organic taxable chemical means any 
taxable chemical that is an organic substance. See section 
4662(b)(10)(D). The organic substances that are listed in the table in 
section 4661(b) are acetylene, benzene, butane, butylene, butadiene, 
ethylene, methane, naphthalene, propylene, toluene, and xylene. 
However, only acetylene, benzene, butylene, butadiene, ethylene, 
naphthalene, propylene, toluene, and xylene are organic taxable 
chemicals (provided they also satisfy the requirements of section 
4662(a)(1)(B)). Although methane and butane are organic substances that 
are listed in the table in section 4661(b), they are treated as organic 
taxable chemicals only when used otherwise than as a fuel or otherwise 
than in the manufacture or production of any motor fuel, diesel fuel, 
aviation fuel, or jet fuel (provided they also satisfy the requirements 
of section 4662(a)(1)(B)). See section 4662(b)(1) and paragraph (a) of 
this section. Therefore, methane and butane are not organic taxable 
chemicals at the time of isolation from an intermediate hydrocarbon 
stream. See section 4662(b)(1) and paragraph (a) of this section. As a 
result, no section 4661 tax is imposed on methane or butane at the time 
of isolation from an intermediate hydrocarbon stream.
    (ii) Example. X, a domestic corporation, is a refiner of petroleum 
products. X uses a fluid catalytic cracking process to crack gas oil 
and the fluid catalyst into other chemicals, including liquefied 
petroleum gas (LPG). X next uses a fractioning process to separate a 
stream of C3/C4 (which contains propane, propylene, butane, and other 
chemicals) from the other chemical components of LPG. After 
fractionation, X uses a splitting process to separate the butane from 
the other chemicals contained in the C3/C4 stream. X sells the butane 
to Y, a domestic corporation, which blends the butane into gasoline. In 
this scenario, no section 4661 tax is imposed when X isolates the 
butane through the splitting process, because the butane is not an 
organic taxable chemical at the time the splitting process occurs. 
Further, no section 4661 tax is imposed on X's sale of the butane to Y 
because the butane is not a taxable chemical at the time of the sale. 
Additionally, no section 4661 tax is imposed on Y's use of the butane 
because Y does not use the butane otherwise than as a fuel or otherwise 
than in the manufacture or production of any motor fuel, diesel fuel, 
aviation fuel or jet fuel.
    (3) Isolation of organic taxable chemical from intermediate 
hydrocarbon stream--(i) One-step isolation process. If any organic 
taxable chemical on which no section 4661 tax was previously imposed by 
reason of section 4662(b)(10)(A) is isolated, extracted, or otherwise 
removed from, or ceases to be part of (collectively,

[[Page 18462]]

isolation), an intermediate hydrocarbon stream, such isolation is 
treated as a use by the person causing the isolation, and such person 
is treated as the manufacturer of the organic taxable chemical so 
isolated. See 4662(b)(10)(B).
    (ii) Multi-step isolation process. When the isolation of an organic 
taxable chemical from an intermediate hydrocarbon stream is a multi-
step process, the first process that a person uses to isolate, extract, 
or otherwise remove the organic taxable chemical from the intermediate 
hydrocarbon stream (even if the organic taxable chemical is, at that 
time, still mixed with other substances and further processing is 
possible, but not required) is treated as a use by the person causing 
the isolation, and such person is treated as the manufacturer of the 
organic taxable chemical so isolated. If the taxable chemical is part 
of a chemical mixture at the time of isolation, the section 4661 tax is 
imposed on the weight of the entire chemical mixture, unless the person 
causing the isolation can establish, with specificity, the weight of 
the taxable chemical contained in the chemical mixture.
    (iii) Example. X, a domestic corporation, is a refiner of petroleum 
products. X uses a fluid catalytic cracking process to crack gas oil 
and the fluid catalyst into lighter chemicals, including liquefied 
petroleum gas (LPG). X next uses a fractioning process to separate a 
stream of C3/C4 (which contains propane, propylene, butane, and other 
chemicals) from the other chemical components of LPG. After 
fractionation, X uses a splitting process to separate the propylene 
from the other chemicals contained in the C3/C4 stream, resulting in a 
propane and propylene mixture commonly referred to as refinery grade 
propylene. X sells the refinery grade propylene to Y, a domestic 
corporation, which further refines the refinery grade propylene to 
remove most of the propane and other contaminants. In this scenario, 
X's splitting process is a use of the propylene by X, and X is treated 
as the manufacturer of the propylene. Therefore, X is liable for the 
section 4661 tax. If X can establish, with specificity, the weight of 
the propylene in the mixture, the amount of the section 4661 tax is 
calculated based only on the weight of the propylene in the mixture. If 
X cannot establish, with specificity, the weight of the propylene in 
the mixture, the amount of the section 4661 tax is calculated based on 
the weight of the mixture.
    (4) Requirements. The exception in section 4662(b)(10) applies only 
if, at the time of the sale of any intermediate hydrocarbon stream 
containing one or more or organic taxable chemicals, all of the 
following requirements are satisfied:
    (i) Both parties are taxable chemical registrants;
    (ii) The seller has an unexpired notification certificate from the 
purchaser; and
    (iii) The seller has no reason to believe that any information in 
the notification certificate is false.
    (5) Notification certificate--(i) Overview. The certificate to be 
provided by the purchaser of an intermediate hydrocarbon stream to the 
seller consists of a statement that is signed under penalties of 
perjury by a person with authority to bind the purchaser, is in 
substantially the same form as the model certificate in paragraph 
(g)(5)(ii) of this section, and contains all of the information 
necessary to complete such model certificate. A new certificate must be 
given if any information in the certificate changes or the purchaser 
informs the seller that the certificate is no longer accurate. The 
certificate expires on the earlier of the date the purchaser provides a 
new certificate or the date the purchaser is notified by the Internal 
Revenue Service (IRS) that the purchaser's registration has been 
revoked or suspended.
    (ii) Model certificate.

Notification Certificate of Taxable Chemical Registrant

-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name, address, and employer identification number of person receiving 
certificate

    The undersigned taxable chemical registrant (Registrant) hereby 
certifies under penalties of perjury that Registrant is registered by 
the Internal Revenue Service (IRS) under activity letter ``G'' with 
registration number __, and that Registrant's registration has not been 
revoked or suspended by the IRS.
    Registrant understands that the fraudulent use of this certificate 
may subject Registrant and all parties making such fraudulent use of 
this certificate to a fine or imprisonment, or both, together with the 
costs of prosecution.

-----------------------------------------------------------------------
Signature and date signed
-----------------------------------------------------------------------
Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing
-----------------------------------------------------------------------
Name of Registrant
-----------------------------------------------------------------------
Employer identification number
-----------------------------------------------------------------------
Address of Registrant

    (iii) Use of letter of registration as notification certificate 
prohibited. A copy of the letter of registration issued to a taxable 
chemical registrant by the IRS is not a notification certificate 
described in paragraph (g)(5) of this section and cannot be used as a 
substitute for a notification certificate.
    (h) Tax-free sales of taxable chemicals--(1) In general. To make a 
tax-free sale pursuant to section 4662(b)(2), (5), or (9), the 
manufacturer, producer, or importer (or, in the case of resales, the 
reseller) of the taxable chemical must obtain an unexpired exemption 
certificate from the purchaser, in the form prescribed in paragraph 
(h)(2) of this section, prior to or at the time of sale, and the 
manufacturer, producer, importer, or reseller must have no reason to 
believe that any information in the certificate regarding the use of 
the taxable chemical is false. If the manufacturer, producer, importer, 
or reseller does not obtain an unexpired exemption certificate by the 
time of the sale, or if the manufacturer, producer, importer, or 
reseller has reason to believe that any information in the certificate 
regarding the use of the taxable chemical is false, the manufacturer, 
producer, importer, or reseller is liable for the section 4661 tax. 
However, if the purchaser subsequently uses the taxable chemical in the 
manner described in section 4662(b)(2), (5), or (9), the purchaser may 
file a claim for credit or refund pursuant to section 4662(d) and Sec.  
52.4662-4.
    (2) Exemption certificate--(i) Overview. The exemption certificate 
consists of a statement that is signed under penalties of perjury by a 
person with authority to bind the purchaser, is in substantially the 
same form as the model certificate in paragraph (h)(2)(ii) of this 
section, and contains all of the information necessary to complete such 
model certificate. A new certificate must be given if any information 
in the certificate changes. The certificate expires no later than one 
year from the effective date specified in the certificate. The 
certificate may be included as part of any business records normally 
used to document a sale. The IRS may withdraw the right of a purchaser 
of taxable chemicals to provide a certificate under this section if the 
purchaser uses the taxable chemicals to which a certificate relates 
other than as stated in the certificate.
    (ii) Model certificate.

[[Page 18463]]

Exemption Certificate

(To support tax-free sales of taxable chemicals under section 4662(b) 
of the Internal Revenue Code (Code).)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name, address, and employer identification number of seller
_________
Name of purchaser (Purchaser) certifies the following under penalties 
of perjury:

The sale(s) to which this certificate applies are for (mark below):

___ Sold for use by Purchaser as described in section 4662(b)(2) 
(qualified fertilizer use), section 4662(b)(5) (qualified fuel use), or 
section 4662(b)(9) (qualified animal feed use) of the Code
___ Sold for resale by Purchaser for use, or resale for ultimate use, 
in a qualified use

The taxable chemical to which this certificate applies will be used 
(mark below):
___ Qualified fertilizer use
___ Qualified fuel use
___ Qualified animal feed use

-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name of taxable chemical(s) to be purchased by Purchaser

    This certificate applies to:
    1. Percentage of purchaser's purchases ___ between ___ (effective 
date) and ___ (expiration date) (period not to exceed one year after 
the effective date) under account or order number(s) ______; or
    2. A single purchase invoice or delivery ticket number ______.

    If Purchaser sells or uses the taxable chemical to which this 
certificate relates for a nonqualified sale or use, Purchaser will be 
treated as the manufacturer of the taxable chemical and will be liable 
for the tax imposed by section 4661(a) of the Code.
    Purchaser will provide a new certificate to the seller if any 
information in this certificate changes.
    Purchaser understands that Purchaser may be liable for the penalty 
under section 6701 of the Code (relating to aiding and abetting an 
understatement of tax liability) if this is an erroneous certification.
    Purchaser understands that the fraudulent use of this certificate 
may subject Purchaser and all parties making any fraudulent use of this 
certificate to a fine or imprisonment, or both, together with the costs 
of prosecution.

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Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing
-----------------------------------------------------------------------
Employer identification number
-----------------------------------------------------------------------
Address of Purchaser
-----------------------------------------------------------------------
Signature and date signed

    (i) Applicability date. This section applies to sales or uses in 
calendar quarters beginning on or after [date of publication of final 
regulations in the Federal Register].
0
Par. 5. Section 52.4662-3 is added to read as follows:


Sec.  52.4662-3  Inventory exchanges.

    (a) In general. Except as otherwise provided in section 4662(c)(2) 
of the Internal Revenue Code (Code), in any case in which a 
manufacturer, producer, or importer of a taxable chemical exchanges 
such chemical as part of an inventory exchange with another person, the 
exchange is not treated as a sale, and the other person is treated as 
the manufacturer, producer, or importer of the chemical, if the 
requirements in paragraph (b) of this section are satisfied. See 
section 4662(c)(2). For purposes of section 4662(c), the term inventory 
exchange means any exchange in which two persons exchange property that 
is, in the hands of each person, property described in section 
1221(a)(1) of the Code. See section 4662(c)(2)(C).
    (b) Requirements. The section 4662(c) exception applies only if, at 
the time of the exchange, all of the following requirements are 
satisfied:
    (1) Both parties are taxable chemical registrants;
    (2) The manufacturer, producer, or importer has an unexpired 
notification certificate from the person receiving the taxable 
chemical; and
    (3) The manufacturer, producer, or importer has no reason to 
believe that any information in the notification certificate is false.
    (c) Notification certificate--(1) Overview. The certificate to be 
provided by the person receiving the taxable chemical consists of a 
statement that is signed under penalties of perjury by someone with 
authority to bind the person receiving the taxable chemical, is in 
substantially the same form as the model certificate provided in 
paragraph (c)(2) of this section, and contains all of the information 
necessary to complete such model certificate. A new certificate must be 
given if any information in the certificate changes or if the person 
receiving the taxable chemical informs the manufacturer, producer, or 
importer that the certificate is no longer accurate. The certificate 
expires on the earlier of the date the person provides a new 
certificate or the date the person is notified by the Internal Revenue 
Service (IRS) that the person's registration has been revoked or 
suspended.
    (2) Model certificate.

Notification Certificate of Taxable Chemical Registrant

-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name, address, and employer identification number of person receiving 
certificate

    The undersigned taxable chemical registrant (Registrant) hereby 
certifies under penalties of perjury that Registrant is registered by 
the Internal Revenue Service (IRS) under activity letter ``G'' with 
registration number ______, and that Registrant's registration has not 
been revoked or suspended by the IRS.
    Registrant understands that the fraudulent use of this certificate 
may subject Registrant and all parties making such fraudulent use of 
this certificate to a fine or imprisonment, or both, together with the 
costs of prosecution.

-----------------------------------------------------------------------
Signature and date signed
-----------------------------------------------------------------------
Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing
-----------------------------------------------------------------------
Name of Registrant
-----------------------------------------------------------------------
Employer identification number
-----------------------------------------------------------------------
Address of Registrant

    (3) Use of letter of registration as notification certificate 
prohibited. A copy of the letter of registration issued to a taxable 
chemical registrant by the IRS is not a notification certificate 
described in paragraph (c) of this section and cannot be used as a 
substitute for a notification certificate.
    (d) Applicability date. This section applies to sales or uses in 
calendar quarters beginning on or after [date of publication of final 
regulations in the Federal Register].
0
Par. 6. Section 52.4662-4 is added to read as follows:


Sec.  52.4662-4  Credit or refund of tax under section 4662(d).

    (a) Tax-paid chemicals used to make taxable chemicals--(1) In 
general. Any section 4661 tax paid by the manufacturer, producer, or 
importer (initial manufacturer) with respect to a tax-paid chemical 
that is subsequently used by any person (subsequent manufacturer) in 
the manufacture or production of any other substance that

[[Page 18464]]

is a taxable chemical (subsequent taxable chemical) will be allowed as 
a credit or refund to the subsequent manufacturer in the same manner as 
if it were an overpayment of the section 4661 tax. See section 
4662(d)(1) of the Code. The subsequent manufacturer may file a claim 
for credit or refund (without interest) for the amount of the 
overpayment, provided the conditions to allowance set forth in 
paragraph (a)(3) of this section are satisfied. See paragraph (a)(4) of 
this section for the supporting information that a subsequent 
manufacturer must include with a claim for credit or refund. The 
subsequent manufacturer's claim for credit or refund of the overpayment 
cannot exceed the amount of section 4661 tax imposed on the subsequent 
taxable chemical, or that would have been imposed but for the 
application of section 4662(b) or (e) of the Code. See section 
4662(d)(1).
    (2) Allocation required in certain situations. If a subsequent 
manufacturer uses a tax-paid chemical to manufacture or produce 
multiple subsequent taxable chemicals, a subsequent taxable chemical 
and another substance, or one or more subsequent taxable chemicals and 
one or more other substances, the subsequent manufacturer must allocate 
the overpayment of the section 4661 tax paid on the tax-paid chemical 
(first tax) among all subsequent taxable chemicals and other substances 
manufactured or produced with the tax-paid chemical and apply the 
allocation to the claim for credit or refund. The subsequent 
manufacturer must calculate the amount of the first tax to be allocated 
to each subsequent taxable chemical and other substance by multiplying 
the amount of the first tax by a fraction, the numerator of which is 
the weight (in tons) of the portion of the tax-paid chemical the 
subsequent manufacturer used to manufacture or produce the subsequent 
taxable chemical or other substance, and the denominator of which is 
the total weight (in tons) of the tax-paid chemical for which the 
subsequent manufacturer has a certificate described in paragraph (e) of 
this section. The subsequent manufacturer's claim for credit or refund 
of an overpayment cannot exceed the amount of section 4661 tax imposed 
on the subsequent taxable chemical to which the claim relates, or that 
would have been imposed but for the application of section 4662(b) or 
(e) of the Code. See paragraph (a)(4) of this section for the 
supporting information regarding the allocation that a subsequent 
manufacturer must include with a claim for credit or refund. See 
paragraph (a)(5) of this section for examples that illustrate the 
allocation rule.
    (3) Conditions to allowance of a claim for credit or refund. A 
claim for credit or refund of section 4661 tax is allowed under section 
4662(d)(1) and this paragraph (a) only if:
    (i) The first tax was paid to the Internal Revenue Service (IRS) 
and not credited or refunded;
    (ii) After payment of the first tax, the subsequent manufacturer 
used the tax-paid chemical to manufacture or produce a subsequent 
taxable chemical, multiple subsequent taxable chemicals, a subsequent 
taxable chemical and another substance, or one or more subsequent 
taxable chemicals and one or more other substances;
    (iii) The subsequent manufacturer sold or used the subsequent 
taxable chemical for which a credit or refund is sought and section 
4661 tax was imposed (or would have been imposed but for section 
4662(b) or (e)) on such sale or use;
    (iv) The subsequent manufacturer has filed a timely claim for 
credit or refund that contains the supporting information required 
under paragraph (a)(4) of this section; and
    (v) The subsequent manufacturer has a certificate, in the form 
prescribed in paragraph (e) of this section, from the initial 
manufacturer.
    (4) Supporting information required. A subsequent manufacturer's 
claim for credit or refund with respect to the subsequent 
manufacturer's use of a tax-paid chemical to manufacture or produce a 
subsequent taxable chemical, multiple subsequent taxable chemicals, a 
subsequent taxable chemical and another substance, or one or more 
subsequent taxable chemicals and one or more other substances, must 
include the following information:
    (i) The name of the tax-paid chemical, the total number of tons of 
the tax-paid chemical purchased from the initial manufacturer, 
producer, or importer, and the total number of tons of the tax-paid 
chemical used to manufacture or produce each subsequent taxable 
chemical or other substance during the period covered by the claim;
    (ii) The name of each subsequent taxable chemical or other 
substance and the total number of tons of each subsequent taxable 
chemical or other substance so manufactured or produced during the 
period covered by the claim;
    (iii) The amount of section 4661 tax paid with respect to the tax-
paid chemical and the amount of section 4661 tax imposed (or that would 
have been imposed but for section 4662(b) or (e)) on the sale or use of 
each subsequent taxable chemical manufactured or produced with the tax-
paid chemical;
    (iv) If allocation is required, the amount of the first tax 
allocated to each subsequent taxable chemical to which the claim 
relates, and the allocation calculation; and
    (v) The certificate described in paragraph (e) of this section, or 
a copy of such certificate.
    (5) Examples. The following examples illustrate the allocation rule 
in paragraph (a)(2) of this section.
    (i) Example 1--(A) Facts. X, a domestic manufacturer, sells 5 tons 
of Taxable Chemical 1 to Y, a domestic corporation. Section 4661 tax is 
imposed on X's sale of Taxable Chemical 1 at a rate of $8.90 per ton. X 
pays the section 4661 tax in the amount of $44.50. Y uses 3 tons of 
Taxable Chemical 1 to produce 4 tons of Taxable Chemical 2. Y uses 2 
tons of Taxable Chemical 1 to produce 3 tons of Taxable Chemical 3. Y 
then sells the 4 tons of Taxable Chemical 2 and 3 tons of Taxable 
Chemical 3, to Z, a domestic corporation. Section 4661 tax is imposed 
on Y's sale of Taxable Chemical 2 at a rate of $9.74 per ton, for a tax 
of $38.96. Section 4661 tax is imposed on Y's sale of Taxable Chemical 
3 at a rate of $5.40 per ton, for a tax of $16.20. The total amount of 
section 4661 tax imposed on Y's sales of Taxable Chemical 2 and Taxable 
Chemical 3 is $55.16. Y files a claim for refund of the section 4661 
tax X paid with respect to Taxable Chemical 1 (first tax).
    (B) Analysis. Y must allocate the first tax between Taxable 
Chemical 2 and Taxable Chemical 3 as follows: \3/5\ ($26.70) to Taxable 
Chemical 2, and \2/5\ ($17.80) to Taxable Chemical 3. The section 4661 
tax imposed on Y's sale of Taxable Chemical 2 to Z ($38.96), exceeds 
the amount of the first tax allocated to Taxable Chemical 2 ($26.70). 
Therefore, Y's claim for refund with respect to Taxable Chemical 2 is 
limited to $26.70, the amount of the first tax allocated to Taxable 
Chemical 2. The section 4661 tax imposed on Y's sale of Taxable 
Chemical 3 to Z ($16.20), is less than the amount of the first tax 
allocated to Taxable Chemical 3 ($17.80). Therefore, Y's claim for 
refund with respect to Taxable Chemical 3 is limited to $16.20, the 
amount of section 4661 tax imposed on Taxable Chemical 3. Y's total 
claim for refund is limited to $42.90 ($26.70 + $16.20) due to the 
required allocation.
    (ii) Example 2--(A) Facts. X, a domestic manufacturer, sells 3 tons 
of Taxable Chemical 1 to Y, a domestic corporation. Section 4661 tax is 
imposed on X's sale of Taxable

[[Page 18465]]

Chemical 1 at a rate of $9.74 per ton. X pays the tax in the amount of 
$29.22. Y uses 2 tons of Taxable Chemical 1 to produce 3 tons of 
Taxable Chemical 2. Y uses 1 ton of Taxable Chemical 1 to produce 2 
tons of another substance. Y then sells 3 tons of Taxable Chemical 2 to 
Z, a domestic corporation. Tax is imposed on Y's sale of Taxable 
Chemical 2 at a rate of $5.40 per ton, for a tax of $16.20. Y files a 
claim for refund of the first tax paid with respect to Taxable Chemical 
1 (first tax).
    (B) Analysis. Y must allocate the first tax between Taxable 
Chemical 2 and the other substance as follows: \2/3\ ($19.48) to 
Taxable Chemical 2, and \1/3\ ($9.74) to the other substance. Y may 
claim a refund of the first tax in the amount of $16.20 (the full 
amount of tax imposed on Y's sale of Taxable Chemical 2 to Z), because 
the tax imposed on Taxable Chemical 2 does not exceed the amount of the 
first tax that was allocated to Taxable Chemical 2.
    (b) Use as a fertilizer--(1) In general. Any section 4661 tax paid 
that exceeds the amount of section 4661 tax determined with regard to 
section 4662(b)(2) with respect to nitric acid, sulfuric acid, ammonia, 
or methane used to produce ammonia (each, a fertilizer chemical) that 
any person uses as a qualified fertilizer substance will be allowed as 
a credit or refund (without interest) to the person using the 
fertilizer chemical as a qualified fertilizer substance in the same 
manner as if it were an overpayment of section 4661 tax. See section 
4662(d)(2). Such person may file a claim for credit or refund of the 
amount of the overpayment, provided the conditions to allowance set 
forth in paragraph (b)(2) of this section are satisfied. See paragraph 
(b)(3) of this section for the supporting information that must be 
included with a claim for credit or refund pursuant to section 
4662(d)(2).
    (2) Conditions to allowance of a claim for credit or refund. A 
claim for credit or refund of section 4661 tax with respect to a tax-
paid fertilizer chemical that is used as a qualified fertilizer 
substance is allowed under section 4662(d)(2) and this section only if:
    (i) A section 4661 tax with respect to the fertilizer chemical was 
paid to the IRS and not credited or refunded;
    (ii) After payment of the section 4661 tax, a person used the 
fertilizer chemical as a qualified fertilizer substance;
    (iii) The person using the fertilizer chemical as a qualified 
fertilizer substance has filed a timely claim for credit or refund that 
includes the information required under paragraph (b)(3) of this 
section; and
    (iv) The person using the fertilizer chemical as a qualified 
fertilizer substance has a certificate, in the form prescribed in 
paragraph (e) of this section, from the person that paid the section 
4661 tax.
    (3) Supporting information required. Each claim for credit or 
refund with respect to a tax-paid fertilizer chemical used as a 
qualified fertilizer substance must include the following information:
    (i) The name of the tax-paid fertilizer chemical to which the claim 
relates and the total number of tons of the tax-paid fertilizer 
chemical used as a qualified fertilizer substance during the period 
covered by the claim;
    (ii) The manner in which the claimant used the qualified fertilizer 
substance;
    (iii) The amount of section 4661 tax paid with respect to the tax-
paid fertilizer chemical; and
    (iv) The certificate described in paragraph (e) of this section, or 
a copy of such certificate, that relates to the tax-paid fertilizer 
chemical for which the claim is being made.
    (c) Use as qualified fuel--(1) In general. Any section 4661 tax 
paid that exceeds the amount of section 4661 tax determined with regard 
to section 4662(b)(5) with respect to acetylene, benzene, butylene, 
butadiene, ethylene, naphthalene, propylene, toluene, or xylene 
(collectively, fuel chemicals, or individually, a fuel chemical) that 
any person uses as a qualified fuel substance will be allowed as a 
credit or refund (without interest) to the person using the fuel 
chemical as a qualified fuel substance in the same manner as if it were 
an overpayment of section 4661 tax. See section 4662(d)(3). Such person 
may file a claim for credit or refund of the amount of the overpayment, 
provided the conditions to allowance set forth in paragraph (c)(2) of 
this section are satisfied. See paragraph (c)(3) of this section for 
the supporting information that must be included in a claim for credit 
or refund pursuant to section 4662(d)(3).
    (2) Conditions to allowance of a claim for credit or refund. A 
claim for credit or refund of section 4661 tax with respect to a tax-
paid fuel chemical that is used as a qualified fuel substance is 
allowed under section 4662(d)(3) and this section only if:
    (i) A section 4661 tax with respect to the fuel chemical was paid 
to the IRS and not credited or refunded;
    (ii) After payment of the section 4661 tax, a person used the fuel 
chemical as a qualified fuel substance;
    (iii) The person using the fuel chemical as a qualified fuel 
substance has filed a timely claim for credit or refund that includes 
the supporting information required under paragraph (c)(3) of this 
section; and
    (iv) The person using the fuel chemical as a qualified fuel 
substance has a certificate, in the form prescribed in paragraph (e) of 
this section, from the person that paid the section 4661 tax.
    (3) Supporting information required. Each claim for credit or 
refund with respect to a tax-paid fuel chemical used as a qualified 
fuel substance must include the following information:
    (i) The name of the fuel chemical to which the claim relates and 
the total number of tons of the tax-paid fuel chemical used as a 
qualified fuel substance during the period covered by the claim;
    (ii) The manner in which the claimant used the qualified fuel 
substance;
    (iii) The amount of section 4661 tax paid with respect to the fuel 
chemical; and
    (iv) The certificate described in paragraph (e) of this section, or 
a copy of such certificate, that relates to the tax-paid fuel chemical 
for which the claim is being made.
    (d) Use in the production of animal feed--(1) In general. Any 
section 4661 tax paid that exceeds the amount of tax determined with 
regard to section 4662(b)(9) with respect to nitric acid, sulfuric 
acid, ammonia, or methane used to produce ammonia (each, an animal feed 
chemical) that any person uses as a qualified animal feed substance 
will be allowed as a credit or refund (without interest) to the person 
using the animal feed chemical as a qualified animal feed substance in 
the same manner as if it were an overpayment of section 4661 tax. See 
section 4662(d)(4). Such person may file a claim for credit or refund 
of the amount of the overpayment, provided the conditions to allowance 
set forth in paragraph (d)(2) of this section are satisfied. See 
paragraph (d)(3) of this section for the supporting information that 
must be included in a claim for credit or refund pursuant to section 
4662(d)(4).
    (2) Conditions to allowance of a claim for credit or refund. A 
claim for credit or refund of section 4661 tax with respect to a tax-
paid animal feed chemical that is used as a qualified animal feed 
substance is allowed under section 4662(d)(4) and this section only if:
    (i) A section 4661 tax with respect to the animal feed chemical was 
paid to the IRS and not credited or refunded;
    (ii) After payment of the section 4661 tax, a person used the 
animal feed chemical as a qualified animal feed substance;

[[Page 18466]]

    (iii) The person using the animal feed chemical as a qualified 
animal feed substance has filed a timely claim for credit or refund 
that includes the supporting information required under paragraph 
(d)(3) of this section; and
    (iv) The person using the animal feed chemical as a qualified 
animal feed substance has a certificate, in the form prescribed in 
paragraph (e) of this section, from the person that paid the section 
4661 tax.
    (3) Supporting information required. Each claim for credit or 
refund with respect to a tax-paid animal feed chemical used as a 
qualified animal feed substance must include the following information:
    (i) The name of the animal feed chemical to which the claim relates 
and the total number of tons of the tax-paid animal feed chemical used 
as a qualified animal feed substance during the period covered by the 
claim;
    (ii) The manner in which the claimant used the qualified animal 
feed substance;
    (iii) The amount of section 4661 tax paid with respect to the 
animal feed chemical; and
    (iv) A certificate described in paragraph (e) of this section, or a 
copy of such certificate, that relates to the tax-paid animal feed 
chemical for which the claim is being made.
    (e) Certificate--(1) Overview. The certificate to be provided with 
any claim for credit or refund under paragraphs (a) through (d) of this 
section consists of a statement that is signed under penalties of 
perjury by a person with authority to bind the person that paid the 
section 4661 tax, is in substantially the same form as the model 
certificate provided in paragraph (e)(2) of this section, and contains 
all of the information necessary to complete the model certificate.
    (2) Model certificate.

Certificate To Support a Claim for Credit or Refund

(To support claims for credit or refund under section 4662(d) of the 
Internal Revenue Code (Code).)

-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name, address, and employer identification number of person that paid 
the tax imposed by section 4661 of the Code (section 4661 tax)

    The undersigned taxpayer hereby certifies the following under 
penalties of perjury:
    The undersigned taxpayer reported and paid the section 4661 tax on 
the following taxable chemicals (include lot numbers (if applicable), 
quantities (in tons), and dates of sale or use):

-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Amount of section 4661 tax the undersigned taxpayer paid with respect 
to the taxable chemicals listed above: ______
    Tax quarter(s) during which tax payment(s) was made: ______
    The undersigned taxpayer has not received a credit or a refund, and 
will not claim a credit or a refund, with regard to the tax paid on the 
taxable chemical(s) to which this certificate relates.
    The undersigned taxpayer understands that it may be liable for the 
penalty under section 6701 of the Code (relating to aiding and abetting 
an understatement of tax liability) if this is an erroneous 
certification.
    The undersigned taxpayer understands that the fraudulent use of 
this certificate may subject the undersigned taxpayer and all parties 
making any fraudulent use of this certificate to a fine or 
imprisonment, or both, together with the costs of prosecution.

-----------------------------------------------------------------------
Signature and date signed
-----------------------------------------------------------------------
Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing

    (f) Applicability date. This section applies to sales or uses in 
calendar quarters beginning on or after the [date of publication of 
final regulations in the Federal Register].
0
Par. 7. Section 52.4662-5 is added to read as follows:


Sec.  52.4662-5  Exports.

    (a) Overview. Section 4662(e) of the Internal Revenue Code (Code) 
provides rules regarding taxable chemicals that are exported. Paragraph 
(b) of this section provides the circumstances under which a 
manufacturer or producer may make a tax-free sale for export. Paragraph 
(c) of this section provides the circumstances under which a credit or 
refund (without interest) of the section 4661 tax is allowed to the 
person that paid the section 4661 tax. Paragraph (d) of this section 
provides the circumstances under which a credit or refund (without 
interest) of the section 4661 tax is allowed to the exporter.
    (b) Tax-free sales for export--(1) In general. A manufacturer or 
producer of a taxable chemical may sell a taxable chemical tax free 
under section 4662(e)(1) only if the person that purchases the taxable 
chemical from the manufacturer or producer (first purchaser) intends to 
export the taxable chemical or resell it to a second purchaser that 
intends to export the taxable chemical. A manufacturer or producer may 
not sell a taxable chemical tax free to a first purchaser for resale to 
a second purchaser if the second purchaser does not intend to export 
the taxable chemical itself but instead plans to sell it to a third 
purchaser that will resell the taxable chemical or export it. See 
paragraph (b)(5)(i) of this section for the proof required when the 
manufacturer or producer is the exporter. See paragraph (b)(5)(ii) of 
this section for the proof required when the manufacturer or producer 
is not the exporter.
    (2) Exported taxable chemical returned to the United States. If a 
taxable chemical is sold tax free by the manufacturer or producer 
pursuant to section 4662(e)(1) and paragraph (b) of this section and 
the taxable chemical is subsequently returned to the United States, the 
importer of the taxable chemical is liable for the section 4661 tax 
when the importer sells or uses the taxable chemical.
    (3) Sale or resale to a purchaser located outside the United 
States. To make a tax-free sale of a taxable chemical for export to a 
first purchaser that is located outside the United States, the 
manufacturer or producer must obtain from the first purchaser, at the 
earlier of the time title to the taxable chemical passes to the first 
purchaser or the time of shipment, either:
    (i) A written order or contract of sale that states the 
manufacturer or producer will ship the taxable chemical to a location 
outside the United States; or
    (ii) Where shipment is to be made to a location within the United 
States, a statement from the first purchaser showing:
    (A) That the first purchaser is purchasing the taxable chemical to 
fill existing or future orders for shipment to a location outside the 
United States, or for resale to a second purchaser that is engaged in 
the business of exporting and that will export the taxable chemical; 
and
    (B) That such taxable chemical will be shipped to a location 
outside the United States prior to any resale except for export.
    (4) Cessation of exemption. The exemption provided in section 
4662(e)(1) and paragraph (b) of this section will cease to apply on the 
first day following the close of the 6-month period that begins on the 
date the manufacturer or producer sold the taxable chemical to the 
first purchaser, or the date the manufacturer or producer shipped the 
taxable chemical

[[Page 18467]]

to the first purchaser, whichever is earlier, unless the manufacturer 
or producer receives proof of export, in the form prescribed by 
paragraph (b)(5) of this section, within such 6-month period. If, on 
the first day following the close of such 6-month period, the 
manufacturer or producer has not received proof of export, in the form 
prescribed by paragraph (b)(5) of this section, the manufacturer or 
producer is liable for the tax and tax attaches at that time.
    (5) Proof of export--(i) Proof required when the manufacturer or 
producer is the exporter. The following constitutes proof of export 
when the manufacturer or producer is the exporter:
    (A) A copy of the export bill of lading issued by the delivering 
carrier;
    (B) A certificate by the agent or representative of the export 
carrier showing actual exportation of the taxable chemical;
    (C) A certificate of landing signed by a customs officer of the 
foreign country to which the taxable chemical is exported;
    (D) Where the foreign country has no customs administration, a 
statement of the foreign consignee showing receipt of the taxable 
chemical; or
    (E) Where a department or agency of the United States government is 
unable to furnish any one of the foregoing types of proof of 
exportation, a statement or certification on department or agency 
letterhead, executed by an authorized person, that the taxable 
chemicals have been exported.
    (ii) Statement of export required when manufacturer or producer is 
not the exporter--(A) In general. If the manufacturer or producer of a 
taxable chemical is not the exporter of the taxable chemical, the 
manufacturer or producer must have in its possession a statement from 
the first purchaser stating that the taxable chemical was, in fact, 
exported by the first purchaser, or was resold to a second purchaser 
that exported the taxable chemical. The manufacturer or producer must 
receive such statement of export no later than the close of the 6-month 
period that begins on the earlier of the date the manufacturer or 
producer sold the taxable chemical to the first purchaser, or the date 
the manufacturer or producer shipped the taxable chemical to the first 
purchaser. The statement of export consists of a statement that is 
signed under penalties of perjury by a person with authority to bind 
the first purchaser, is in substantially the same form as the model 
statement of export in paragraph (b)(5)(ii)(B) of this section, and 
contains all the information necessary to complete the model statement. 
The statement of export must be included as part of the manufacturer or 
producer's business records.
    (B) Model statement of export.

Statement of Export

(To support tax-free sales of taxable chemicals under section 
4662(e)(1)(B) of the Internal Revenue Code (Code).)


_________

Name of Purchaser (Purchaser) certifies the following under penalties 
of perjury:


Name of taxable chemical(s) purchased by Purchaser:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------

    Purchaser purchased the taxable chemical(s) specified above tax 
free on ______ (purchase date). The taxable chemicals were thereafter 
exported.
    Purchaser has in its possession proof of export with respect to the 
taxable chemicals identified in this statement. The proof of export is:
-----------------------------------------------------------------------
-----------------------------------------------------------------------

    Purchaser will retain the business records needed to document the 
export of the taxable chemical(s) to which this statement applies and 
will make such records available to the Internal Revenue Service.
    Purchaser has not previously executed a statement with respect to 
the taxable chemical(s) identified in this certificate.
    Purchaser understands that Purchaser may be liable for the penalty 
under section 6701 of the Code (relating to aiding and abetting an 
understatement of tax liability) if this is an erroneous certification.
    Purchaser understands that the fraudulent use of this statement may 
subject Purchaser and all parties making any fraudulent use of this 
certificate to a fine or imprisonment, or both, together with the costs 
of prosecution.

-----------------------------------------------------------------------
Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing
-----------------------------------------------------------------------
Employer identification number
-----------------------------------------------------------------------
Address of Purchaser
-----------------------------------------------------------------------
Signature and date signed

    (c) Credit or refund--(1) In general. The person that paid the 
section 4661 tax with respect to a taxable chemical is allowed a credit 
or refund (without interest) if:
    (i) Such chemical was exported by any person; or
    (ii) Such chemical was used as material in the manufacture or 
production of a substance that was exported by any person and, at the 
time of export, was a taxable substance (as defined in section 4672(a) 
of the Code and Sec.  52.4672-1(b)(8)). See section 4662(e)(2)(A).
    (2) Conditions to allowance of claim for credit or refund. A claim 
for credit or refund of section 4661 tax with respect to a tax-paid 
chemical that is exported (or with respect to a tax-paid chemical that 
is used as material in the manufacture or production of a substance 
that is a taxable substance at the time of export) is allowed under 
section 4662(e)(2) and paragraph (c) of this section only if the person 
that paid the section 4661 tax establishes that:
    (i) The person has repaid or agreed to repay the amount of the 
section 4661 tax to the person that exported the tax-paid chemical (or 
the taxable substance manufactured or produced with the tax-paid 
chemical); or
    (ii) The person has obtained the written consent of the exporter to 
the allowance of the credit or the making of the refund; and
    (iii) The person provides the supporting information described in 
paragraph (c)(3) of this section.
    (3) Supporting information required. Each claim for credit or 
refund with respect to a tax-paid chemical that is exported (or with 
respect to a tax-paid chemical that is used as material in the 
manufacture or production of a substance that is a taxable substance at 
the time of export) must include the following information:
    (i) The name of the tax-paid chemical to which the claim relates 
and the total number of tons of the tax-paid chemical exported during 
the period covered by the claim (in the case of a tax-paid chemical 
used to manufacture or produce a taxable substance, the claim must also 
include the name of each taxable substance and the number of tons of 
each taxable substance exported during the period covered by the 
claim);
    (ii) The amount of section 4661 tax paid with respect to the tax-
paid chemical (in the case of a taxable substance, the amount of 
section 4661 tax paid with respect to each tax-paid chemical used in 
the manufacture or production of the substance); and
    (iii) Proof of export of the taxable chemical (or the taxable 
substance) in the form prescribed by paragraph (b)(5) of this section.
    (d) Credit or refund directly to exporter--(1) In general. The 
exporter is allowed a credit or refund (without interest), provided the 
conditions to allowance in paragraph (d)(2) of this

[[Page 18468]]

section are satisfied. See section 4662(e)(3).
    (2) Conditions to allowance. Any section 4661 tax paid on a taxable 
chemical (or on any taxable chemical used as material in the 
manufacture or production of a taxable substance) may be credited or 
refunded (without interest) to the exporter pursuant to section 
4662(e)(3) and paragraph (d) of this section only if:
    (i) The person that paid the section 4661 tax waives the right to 
claim a credit or refund of the section 4661 tax; and
    (ii) The exporter provides the supporting information described in 
paragraph (d)(3) of this section.
    (3) Supporting information required. Each claim for credit or 
refund by the exporter must include the following information:
    (i) The name of the tax-paid chemical to which the claim relates 
and the total number of tons of the tax-paid chemical exported during 
the period covered by the claim (or in the case of a taxable substance, 
the name of the taxable substance to which the claim relates, the name 
of each tax-paid chemical used as material in the manufacture or 
production of the taxable substance, and the total number of tons of 
each tax-paid chemical used as material in the manufacture or 
production of the taxable substance that was exported during the period 
covered by the claim);
    (ii) Proof of export of the tax-paid chemical (or the taxable 
substance) in the form prescribed by paragraph (b)(5) of this section; 
and
    (iii) A statement, signed under penalties of perjury by the person 
that paid the section 4661 tax, providing:
    (A) That the person that paid the tax waives the right to claim a 
credit or refund of the section 4661 tax;
    (B) The amount of section 4661 tax the person paid on the sale of 
the taxable chemical (or on the sale or use of each taxable chemical 
used to manufacture or produce the taxable substance); and
    (C) The date the person paid the section 4661 tax.
    (e) Applicability date. This section applies to sales or uses in 
calendar quarters beginning on or after [date of publication of final 
regulations in the Federal Register].
0
Par. 8. Section 52.4671-1 is added to read as follows:


Sec.  52.4671-1  Imposition of tax.

    (a) In general. Section 4671(a) of the Internal Revenue Code (Code) 
imposes an excise tax on any taxable substance sold or used by the 
importer of the taxable substance.
    (b) Person liable for tax. The importer of a taxable substance is 
the person liable for the section 4671 tax.
    (c) Attachment of tax. The section 4671 tax attaches at the time 
the importer first sells or uses the taxable substance.
    (d) Procedural rules. Part 40 of this chapter provides rules 
related to filing excise tax returns, making semimonthly deposits of 
excise tax, making payments of excise tax, and other procedural rules. 
See Sec. Sec.  52.0-1 and 40.0-1(a) of this chapter. Each business unit 
that has, or is required to have, a separate employer identification 
number is treated as a separate person for purposes of filing excise 
tax returns, making semimonthly deposits of excise tax, and making 
payments of excise tax. See Sec.  40.0-1(d) of this chapter.
    (e) Amount of tax--(1) In general. Except as provided in paragraph 
(e)(2) of this section, the amount of section 4671 tax with respect to 
any taxable substance is the amount of section 4661 tax that would have 
been imposed on the taxable chemicals used as materials in the 
manufacture or production of the taxable substance if the taxable 
chemicals had been sold in the United States for use in the manufacture 
or production of the taxable substance. See section 4671(b)(1).
    (2) Special rules. If the importer does not furnish sufficient 
information to the Secretary of the Treasury or her delegate 
(Secretary) to determine the amount of section 4671 tax imposed on any 
taxable substance, the amount of section 4671 tax is 10 percent of the 
appraised value of the taxable substance at the time the substance was 
entered into the United States for consumption, use, or warehousing. 
See section 4671(b)(2). Alternatively, the Secretary may prescribe a 
tax rate for any taxable substance in lieu of the amount prescribed in 
section 4671(b)(2). The tax rate prescribed by the Secretary equals the 
amount of section 4671 tax that would have been imposed if the taxable 
substance were produced using the predominant method of production of 
such substance using a stoichiometric material consumption equation 
that assumes a 100-percent yield. See section 4671(b)(3). Importers of 
taxable substances are not required to use the rate or rates prescribed 
by the Secretary and may instead calculate the amount of section 4671 
tax pursuant to section 4671(b)(1) and Sec.  52.4671-1(e)(1).
    (3) Example. An importer sells a substance that is a taxable 
substance listed in section 4672(a)(3). The taxable chemical, 
acetylene, constitutes, by weight, 19 percent of the materials used to 
produce the taxable substance. Section 4671 tax attaches at the time of 
the importer's sale of the taxable substance. The Secretary has 
prescribed a tax rate for the taxable substance pursuant to section 
4671(b)(3). The importer may calculate the amount of section 4671 tax 
pursuant to section 4671(b)(1), or use the rate prescribed by the 
Secretary to calculate the amount of section 4671 tax imposed on the 
importer's sale of the taxable substance.
    (f) Exemption for substances taxed under sections 4611 and 4661. No 
section 4671 tax is imposed on the importer's sale or use of any 
taxable substance if tax is imposed on such sale or use under section 
4611 or 4661 of the Code. See section 4671(c).
    (g) Applicability date. This section applies to calendar quarters 
beginning on or after [date of publication of final regulations in the 
Federal Register].
0
Par. 9. Section 52.4671-2 is added to read as follows:


Sec.  52.4671-2  Certain fertilizer, fuel, and animal feed uses.

    (a) In general. Section 4671(d) of the Internal Revenue Code (Code) 
provides that rules similar to section 4662(b)(2) of the Code 
(pertaining to fertilizer), section 4662(b)(5) (pertaining to motor 
fuel), and section 4662(b)(9) (pertaining to animal feed) apply with 
respect to taxable substances used or sold for use as described in 
section 4662(b)(2), (5), and (9).
    (b) Tax-free sales--(1) In general. No section 4671 tax is imposed 
on a taxable substance used or sold for use as described in section 
4662(b)(2), (5), or (9), if all taxable chemicals used as materials in 
the manufacture or production of such substance would have been exempt 
under section 4662(b)(2), (5), or (9) if such taxable chemicals had 
been sold in the United States for use in the manufacture or production 
of the taxable substance. To make a tax-free sale of a taxable 
substance pursuant to section 4671(d)(1), the importer (or, in the case 
of resales, the reseller) of the taxable substance must obtain an 
unexpired exemption certificate from the purchaser, in the form 
prescribed in paragraph (b)(3) of this section, prior to or at the time 
of sale, and the importer or reseller must have no reason to believe 
that any information in the certificate regarding the use of the 
taxable substance is false. If the importer or reseller does not obtain 
an unexpired exemption certificate by the time of the sale, or if the 
importer or reseller has reason to believe that any information in the 
certificate regarding the use of the substance is false, the importer 
or reseller is liable for the full

[[Page 18469]]

amount of the section 4671 tax. However, if the purchaser subsequently 
uses the taxable substance as described in section 4662(b)(2), (5), or 
(9), the purchaser may file a claim for credit or refund pursuant to 
section 4671(d)(2) and paragraph (c) of this section.
    (2) Tax-free sales not available in certain situations. The 
provisions of paragraph (b)(1) of this section apply only if all 
taxable chemicals used as materials in the manufacture or production of 
a taxable substance would have been exempt under section 4662(b)(2), 
(5), or (9) if such taxable chemicals had been sold in the United 
States for use in the manufacture or production of the taxable 
substance. Section 4671 tax is imposed on a taxable substance used or 
sold for use if the taxable chemicals used as materials in the 
manufacture or production of such taxable substance consist of one or 
more taxable chemicals that would have been exempt under section 
4662(b)(2), (5), or (9), and one or more taxable chemicals that would 
not have been exempt under section 4662(b)(2), (5), or (9). If the 
purchaser subsequently uses the taxable substance as described in 
section 4662(b)(2), (5), or (9), the purchaser may file a claim for 
credit or refund of the section 4671 tax paid on the taxable chemicals 
that would have been exempt under section 4662(b)(2), (5), or (9) 
pursuant to section 4671(d)(2) and paragraph (c) of this section and 
were used as materials in the manufacture or production of the taxable 
substance.
    (3) Exemption certificate--(i) Overview. The exemption certificate 
consists of a statement that is signed under penalties of perjury by a 
person with authority to bind the purchaser, is in substantially the 
same form as the model certificate in paragraph (b)(3)(ii) of this 
section, and contains all of the information necessary to complete such 
model certificate. A new certificate must be given if any information 
in the certificate changes. The certificate expires no later than one 
year from the effective date specified in the certificate. The 
certificate may be included as part of any business records normally 
used to document a sale. The Internal Revenue Service (IRS) may 
withdraw the right of a purchaser of a taxable substance to provide a 
certificate under this section if the purchaser uses the taxable 
substance to which a certificate relates other than as stated in the 
certificate.
    (ii) Model certificate.

Exemption Certificate

(To support tax-free sales of taxable substances under section 
4671(d)(1) of the Internal Revenue Code (Code).)

-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name, address, and employer identification number of seller

_________
Name of Purchaser (Purchaser) certifies the following under penalties 
of perjury:

    The sale(s) to which this certificate applies are for (mark below):

___ Sold for use by Purchaser as described in section 4662(b)(2) 
(qualified fertilizer use), section 4662(b)(5) (qualified fuel use), or 
section 4662(b)(9) (qualified animal feed use) of the Code
___ Sold for resale by Purchaser for use, or resale for ultimate use, 
in a qualified use

    The taxable substance(s) to which this certificate applies will be 
used (mark below):

___ Qualified fertilizer use
___ Qualified fuel use
___ Qualified animal feed use

-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name of taxable substance(s) to be purchased by Purchaser

    This certificate applies to:
    1. Percentage of Purchaser's purchases ___ between ___ (effective 
date) and ___ (expiration date) (period not to exceed one year after 
the effective date) under account or order number(s) ______; or
    2. A single purchase invoice or delivery ticket number ______.
    If Purchaser sells or uses the taxable substance to which this 
certificate relates for a nonqualified sale or use, Purchaser will be 
treated as the importer of the taxable substance and will be liable for 
the tax imposed by section 4671.
    Purchaser will provide a new certificate to the seller if any 
information in this certificate changes.
    Purchaser understands that Purchaser may be liable for the penalty 
under section 6701 of the Code (relating to aiding and abetting an 
understatement of tax liability) if this is an erroneous certification.
    Purchaser understands that the fraudulent use of this certificate 
may subject Purchaser and all parties making any fraudulent use of this 
certificate to a fine or imprisonment, or both, together with the costs 
of prosecution.

-----------------------------------------------------------------------
Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing
-----------------------------------------------------------------------
Employer identification number
-----------------------------------------------------------------------
Address of Purchaser
-----------------------------------------------------------------------
Signature and date signed

    (c) Credits and refunds--(1) In general. If any section 4671 tax 
was paid with respect to a taxable substance used or sold for use as 
described in section 4662(b)(2), (5), or (9), the portion of the tax 
attributable to any taxable chemical used as material in the 
manufacture or production of such substance that would have been exempt 
under section 4662(b)(2), (5), or (9) if the taxable chemical had been 
sold in the United States will be allowed as a credit or refund 
(without interest) to the person using the substance in the same manner 
as if it were an overpayment of section 4671 tax. See sections 
4671(d)(2) and 4662(d). Such person may file a claim for credit or 
refund of the amount of the overpayment, provided the conditions to 
allowance set forth in paragraph (c)(2) of this section are satisfied. 
See paragraph (c)(3) of this section for the supporting information 
that must be included in a claim for credit or refund pursuant to 
section 4671(d)(2).
    (2) Conditions to allowance of a claim for credit or refund. A 
claim for credit or refund of section 4671 tax is allowed under section 
4671(d)(2) and this section only if:
    (i) A section 4671 tax was paid to the Internal Revenue Service and 
not credited or refunded;
    (ii) After the imposition of section 4671 tax, a person used the 
taxable substance as described in section 4662(b)(2), (5), or (9);
    (iii) The person using the taxable substance has filed a timely 
claim for credit or refund that includes the information required under 
paragraph (c)(3) of this section; and
    (iv) The person using the taxable substance has a certificate, in 
the form prescribed in paragraph (c)(4) of this section, from the 
person that paid the section 4671 tax. The claimant must have a 
separate certificate for each taxable substance to which the claim 
relates.
    (3) Supporting information required. Each claim for credit or 
refund must include the following information:
    (i) The name of the taxable substance to which the claim relates 
and the total number of tons of the taxable substance used as described 
in section 4662(b)(2), (5), or (9) during the period covered by the 
claim;
    (ii) The name of any taxable chemicals used as material in the 
manufacture or production of the taxable substance that would have been 
exempt under section 4662(b)(2), (5), or (9) if the taxable chemicals 
had been sold in the United States;

[[Page 18470]]

    (iii) The type of qualified use (fertilizer, fuel, or animal feed);
    (iv) The total amount of section 4671 tax paid on the taxable 
substance under section 4671(a);
    (v) If the amount of section 4671 tax was calculated pursuant to 
section 4671(b)(1) and Sec.  52.4671-1(e)(1), the rate of tax and 
conversion factors for any taxable chemicals used as material in the 
manufacture or production of the taxable substance that would have been 
exempt under section 4662(b)(2), (5), or (9) if the taxable chemicals 
had been sold in the United States; and
    (vi) A certificate described in paragraph (c)(4) of this section, 
or a copy of such certificate, that relates to the taxable substance 
for which the claim is being made.
    (4) Certificate--(i) Overview. The certificate to be provided with 
regard to claims for credit or refund under this section consists of a 
statement that is signed under penalties of perjury by a person with 
authority to bind the person that paid the section 4671 tax, is in 
substantially the same form as the model certificate provided in 
paragraph (c)(4)(ii) of this section, and contains all of the 
information necessary to complete the model certificate.
    (ii) Model certificate.

Certificate To Support a Claim for Credit or Refund

(To support claims for credit or refund under section 4671(d)(2) of the 
Internal Revenue Code (Code).)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Name, address, and employer identification number of person that paid 
the tax imposed by section 4671 of the Code (section 4671 tax)

    The undersigned taxpayer hereby certifies the following under 
penalties of perjury:
    The undersigned taxpayer reported and paid the section 4671 tax on 
the following taxable substance (include lot numbers (if applicable) 
and the date(s) of sale or use):
-----------------------------------------------------------------------

    Number of tons of the taxable substance on which tax was paid: 
______
    Name of any taxable chemicals used as material in the manufacture 
or production of the taxable substance:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------

    Total amount of section 4671 tax the undersigned taxpayer paid with 
respect to the taxable substance listed above:
-----------------------------------------------------------------------
    Rate of tax for the taxable substance listed above (complete only 
if the amount of tax was calculated pursuant to section 4671(b)(1)):
-----------------------------------------------------------------------
    Conversion factor for each taxable chemical listed above (complete 
only if the amount of tax was calculated pursuant to section 
4671(b)(1)):
-----------------------------------------------------------------------
    Tax quarter(s) during which tax payment was made:
-----------------------------------------------------------------------
    The undersigned taxpayer has not received a credit or a refund, and 
will not claim a credit or a refund, with regard to the tax paid on the 
taxable substance to which this certificate relates.
    The undersigned taxpayer understands that it may be liable for the 
penalty under section 6701 of the Code (relating to aiding and abetting 
an understatement of tax liability) if this is an erroneous 
certification.
    The undersigned taxpayer understands that the fraudulent use of 
this certificate may subject the undersigned taxpayer and all parties 
making any fraudulent use of this certificate to a fine or 
imprisonment, or both, together with the costs of prosecution.
-----------------------------------------------------------------------
Signature and date signed
-----------------------------------------------------------------------
Printed or typed name of person signing
-----------------------------------------------------------------------
Title of person signing

    (d) Applicability date. This section applies to calendar quarters 
beginning on or after [date of publication of final regulations in the 
Federal Register].
0
Par. 10. Section 52.4672-1 is added to read as follows:


Sec.  52.4672-1  Definitions.

    (a) Overview. This section provides definitions for purposes of 
sections 4671 and 4672 of the Internal Revenue Code (Code), Sec. Sec.  
52.4671-1 and 52.4671-2, this section, and Sec.  52.4672-2.
    (b) Definitions--(1) Conversion factor. The term conversion factor 
means the ratio of the weight of an individual taxable chemical used in 
the production of a substance to the total weight of the substance.
    (2) Entry for consumption, use, or warehousing. The term entry for 
consumption, use, or warehousing has the meaning given such term by 
Sec.  52.4662-1(c)(2).
    (3) Importer--(i) In general. The term importer means the person 
entering the taxable substance for consumption, use, or warehousing. 
See section 4662(a)(3). If the person entering the taxable substance 
for consumption, use, or warehousing is merely acting as an agent or a 
customs broker for another person, then the agent or customs broker is 
not the importer and the importer is the first person in the United 
States to sell or use the taxable substance after entry of the taxable 
substance for consumption, use, or warehousing.
    (ii) Drop ship businesses. If a drop ship business in the United 
States purchases or otherwise arranges for a person outside the United 
States to ship a taxable substance directly to a purchaser in the 
United States, the drop ship business is the importer of the taxable 
substance. If a drop ship business outside the United States purchases 
or otherwise arranges for a person outside the United States to ship a 
taxable substance directly to a purchaser in the United States, the 
purchaser in the United States is the importer of the taxable 
substance. With regard to any sale of a taxable substance, the term 
drop ship business means a person that sells the taxable substance or 
arranges for purchasers to purchase the taxable substance, and uses a 
third party to fill orders by shipping the taxable substance directly 
to the purchaser. The determination of whether a person is a drop ship 
business is made on a sale-by-sale basis.
    (4) Predominant method of production. The term predominant method 
of production means the method used to produce the greatest number of 
tons of a particular substance worldwide, relative to the total number 
of tons of the substance produced worldwide.
    (5) Sale. The term sale means the transfer of title or substantial 
incidents of ownership (whether or not delivery to, or payment by, the 
purchaser has been made) in a taxable substance for a consideration, 
which may include, but is not limited to, money, services, or property.
    (6) Section 4671 tax. The term section 4671 tax means the excise 
tax imposed by section 4671(a) of the Code on any taxable substance 
sold or used by the importer of the taxable substance.
    (7) Taxable chemical. The term taxable chemical has the meaning 
given such term by section 4662(a)(1) of the Code and section Sec.  
52.4662-1(b).
    (8) Taxable substance. The term taxable substance means any 
substance, which at the time of sale or use by the importer, is listed 
in section 4672(a)(3) or has been added to the list of taxable 
substances pursuant to section 4672(a)(2) or (4). The term does not 
include any substance that the Secretary of the Treasury or her 
delegate has removed from the list of taxable

[[Page 18471]]

substances through the process described in section 4672(a)(2) or (4). 
A substance that satisfies the weight or value test, but that is not 
listed in section 4672(a)(3) and has not been added to the list of 
taxable substances pursuant to section 4672(a)(2) or (4), is not a 
taxable substance.
    (9) Use. A taxable substance is used when it is consumed, when it 
functions as a catalyst, when its chemical composition changes, when it 
is used in the manufacture or production of another substance 
(including by mixing or combining the taxable substance with other 
substances), or when it is put into service in a trade or business for 
the production of income. The loss or destruction of a taxable 
substance through spillage, fire, natural degradation, or other 
casualty is not a use. The mere manufacture or production of a taxable 
substance is not a use of that taxable substance.
    (10) United States. The term United States has the meaning given 
such term by section 4612(a)(4) of the Code. See sections 4672(b)(2) 
and 4662(a)(2).
    (11) Weight or value test. The term weight or value test means the 
test under section 4672(a)(2)(B) for determining whether taxable 
chemicals constitute more than 20 percent of the weight or more than 20 
percent of the value of the materials used to produce a substance, 
based on the predominant method of production.
    (c) Applicability date. This section applies to calendar quarters 
beginning on or after [date of publication of final regulations in the 
Federal Register].
0
Par. 11. Section 52.4672-2 is added to read as follows:


Sec.  52.4672-2  List of taxable substances.

    (a) Overview. Section 4672(a)(3) of the Internal Revenue Code 
(Code) provides the initial list of taxable substances. Section 
4672(a)(2) and (4) provides mechanisms by which substances may be added 
to or removed from the list. Therefore, the list of taxable substances 
is subject to change. The Internal Revenue Service (IRS) will maintain 
the current list of taxable substances at https://www.irs.gov/businesses/small-businesses-self-employed/superfund-chemical-excise-taxes.
    (b) Requests to modify the list of taxable substances--(1) In 
general. An importer or exporter of any substance, or a person other 
than an importer or exporter (interested person), may petition to add a 
substance to or remove a substance from the list of taxable substances. 
See section 4672(a)(2). The procedures governing the exclusive process 
by which importers, exporters, and interested persons may request 
modifications to the list of taxable substances are provided in 
guidance published in the Internal Revenue Bulletin. See Sec.  
601.601(d) of this chapter.
    (2) Synthetic organic substances. A synthetic organic substance is 
eligible for addition to the list of taxable substances through the 
process described in paragraph (b)(1) of this section unless such 
substance is a textile fiber (other than a polymer in extruded fiber 
form), yarn, or staple, or a fabricated product that is molded, formed, 
woven, or otherwise finished into an end-use product. However, such 
substance may be added to the list of taxable substances only if it 
meets the weight or value test.
    (3) Inorganic substances. An inorganic substance is eligible for 
addition to the list of taxable substances through the process 
described in paragraph (b)(1) of this section unless it is a fabricated 
product that is molded, formed, or otherwise finished into an end-use 
product. However, such substance may be added to the list of taxable 
substances only if it meets the weight or value test.
    (c) Applicability date. This section applies to calendar quarters 
beginning on or after [date of publication of final regulations in the 
Federal Register].

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-06278 Filed 3-27-23; 11:15 am]
BILLING CODE 4830-01-P