Client avoids a potential $10 tax bill for ozone depleting chemicals
A $200 million importer and distributor of electronics equipment was surprised when it received a $10 million dollar assessment from the IRS for a tax the company was not even familiar with. In 1989, as part of U.S. efforts as a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer, Congress enacted an excise tax on companies that sell or produce products that use chlorofluorocarbons, halons and other ozone depleting chemicals (ODCs). For companies that import such products, the date of entry into the United States is treated as the date of sale. To discourage the use of ODCs, the excise tax on products using these chemicals increases each year. In recent years, the IRS has been working more closely with U.S. Customs and Border Protection (Customs) to identify imports subject to this tax, leading many companies to receive unexpected tax bills.
RSM’s client sought to better understand and mitigate its ODC excise tax exposure.
RSM’s team of excise tax specialists went to work. Companies receiving IRS excise tax assessments related to ODCs generally have only 30 days to respond. Our first step was securing an extension to allow us to examine our client’s products that the IRS claimed contained ODCs. The IRS now has electronic access to the Customs Service database of products entering the country and scours that database for products containing printed circuit boards, display screens and other components that often were manufactured with ODCs. Unfortunately, the IRS relies on charts based on outdated technologies. Since 1989, when the tax was enacted, many countries have banned most ODCs, and many manufacturers have changed their products and manufacturing processes to eliminate or minimize the use of these chemicals.
Unfortunately, once targeted by the IRS, it is up to the company to substantiate with “sufficient and reliable” evidence that its products either were not manufactured using ODCs or that they utilized fewer ODCs in the process than the IRS claims. This is a laborious process that involves tracking every product back to its original manufacturer and collecting invoices, receipts and other documentation surrounding the production process to demonstrate which chemicals are used and in what amounts.
By tracking every product included in our client’s case back to the original manufacturing source and documenting the components, chemicals and processes used in their production, we were able to prove that no ODCs were used, eliminating our client’s entire $10 million tax exposure. We’ve also worked with a variety of other clients facing ODC excise tax bills to eliminate or minimize their tax bills. These clients typically are importing electronics such as cell phones, slot machines, gaming devices, computers and medical devices.