What do electronics importers need to know about the ODC excise tax?
Know the origins and application of tax on ozone-depleting chemicals
INSIGHT ARTICLE |
Many importers are unaware of a long-standing tax that can be assessed to importers of electronic products. Knowing the origination and application of the excise tax on ozone-depleting chemicals can keep importers from making costly errors in tax compliance.
During the 1980s, many countries worldwide initiated attempts to protect the earth's ozone layer, which absorbs most of the sun's ultraviolet radiation and protects life on earth. The 1985 Vienna Convention for the Protection of the Ozone Layer was followed in 1987 by the Montreal Protocol on Substances that Deplete the Ozone Layer. The United States complied by taking a market-based approach to encourage reductions in the use of ozone-depleting chemicals (ODCs).
U.S. companies may use ODCs in manufacturing. However, the use of these chemicals is taxed based on a tax rate table that, by statute, increases every year, and has since 1995. The intent of this excise tax is to make the manufacturing process progressively cost-prohibitive, thereby encouraging businesses to switch to alternative technology in their manufacturing processes, while also allowing time for the transition to occur.
During the 1980s, businesses increasingly looked to source their manufacturing overseas in an attempt to stay competitive with the global market. Since the United States could not easily regulate the use of ODCs in a foreign location, they instead taxed the import of certain imported products, most notably electronics, with the presumption that taxed ODCs were used in the manufacturing process unless sufficient and reliable information to the contrary was obtained by the importer.
What constitutes sufficient and reliable information?That is debatable, but feedback received by taxpayers during recent IRS audits sheds some light on the extensive amount of information that must be gathered by importers to comply with the mandate.
In order to claim exemption from the ODC excise tax, importers must provide data from every overseas component part supplier or manufacturer, whether these suppliers are related to—or a third party to—the importer. If the importer does not obtain this information, the IRS presumes that ODCs are used in the manufacturing process and will apply the table method to determine the tax due.
The table method is one of three allowable methods to compute the ODC excise tax and is generally favorable to the IRS as it utilizes a ratio of ODCs used per product based on outdated 1980s manufacturing methods and processes. The following is a sample calculation of the 2015 ODC excise tax due under the table method for an importer of the specified items:
Potential for costly errors unknown
The excise tax on ODCs is computed on Form 6627, Environmental Taxes, which is attached to Form 720—a quarterly excise tax form that many taxpayers do not currently file. If an importer is liable for the ODC excise tax in prior years, but failed to file the required forms, the statute of limitations on this tax has not started. Thus, the IRS could go back numerous years to assess tax, interest and penalties upon discovering a noncompliant importer.
Currently, the Department of U.S. Customs and Border Protection (CBP) is cooperating with the IRS to help uncover noncompliant taxpayers. The CBP requires that Form 7501, U.S. Customs and Border Protection Entry Summary, be completed for all products imported into the United States. Each product is identified on the form using a 10-digit code, which the IRS can access and compare with imported items that have historically used ODCs in the manufacturing process. The IRS then matches these codes with the importer's Form 720, if filed, to determine compliance. Importers with no Form 720 filed or importers that import large quantities of suspected products are frequently selected for audit.
Learn from others’ mistakes
IRS audits of the excise tax on ODCs suggest that importers are securing little to no documentation related to the chemicals used in the manufacturing process. Where information does exist, it is often substandard when compared to the sufficient and reliable requirement. The IRS contracted with the Pacific Northwest National Laboratory to identify an alternate method of detecting ODC use. Through a scientific process in which the imported item is heated and the gasses emitted are captured and tested, the lab is able to determine whether or not ODCs were used in the manufacturing process.
If your company currently imports electronics—including items that have embedded electronics or items that contain a printed circuit board—you should be aware of the increased IRS focus on the application of this tax. Proper documentation is critical, but it is only part of the solution. By establishing a process to meet the sufficient and reliablestandards for past and current imports, your company can improve compliance with respect to this tax. Further, companies that maintain sufficient documentation through the entire manufacturing and supply chain are better prepared in the event of an audit and more likely to avoid expensive penalties if ODCs are determined to be present in tested electronics.