Background on Illegal Imports of CFCs

Dave Stirpe, Executive Director

Nearly eight years ago, the Alliance for Responsible Atmospheric Policy, an industry coalition, announced that it would assist and work cooperatively with a new government initiative to curtail illegal imports of CFCs. The government investigative group, which was announced on October 25, 1994, is composed of the Environmental Protection Agency (EPA), Internal Revenue Service (IRS), United States Customs Service, Commerce Department, and Justice Department.

"Illegal imports and the avoidance of the excise tax on these compounds make ozone-depleting CFCs more available, reduce the incentive for users to shift from CFCs to alternatives, and penalize legitimate companies who are complying with U.S. laws," stated Dave Stirpe, Executive Director of the Alliance for Responsible Atmospheric Policy.

Accomplishments

In over four years there has been much accomplished by government and the Alliance. For example:

• Approximately 100 individuals have been convicted of smuggling or diverting CFCs into the United States, or for evading federal excise taxes on the CFCs. The first conviction ever for violation of the Clean Air Act resulted from illegal importation of CFCs.

• Approximately 20 individuals have been sentenced for violations. Sentences have ranged from monetary penalties to nearly five years in jail. Sentences total nearly 40 years and $60 million in fines.

• The illegal import issue has been brought to the attention of Montreal Protocol Parties who have adopted beneficial decisions requiring Parties to implement controls to address the problem.

• The Internal Revenue Service has reviewed over 3800 CFC excise tax-related returns and has assessed over $158 million in unpaid taxes and penalties. IRS estimates that there may be an additional $50 million in uncollected CFC excise taxes.

• The Alliance donated six refrigerant identifiers to the United States Customs Service which will aid in the detection of illegal imports of CFCs.

• Of the estimated 10,000 - 20,000 tons of CFCs which have been imported into the U.S. illegally annually, nearly two million pounds of illegally imported CFCs have been impounded by Customs.

• EPA adopted a petition process requiring imports of used CFCs to be approved prior to their shipment into the United States. EPA will soon finalize a rule requiring such approval for transshipments of CFCs through the United States.

• IRS confirmed that the excise tax on CFCs applies not only to new CFCs which are imported or domestically produced, but to all imported CFCs - whether they are new, recycled, reclaimed, contaminated, or off-specification.

• Much publicity has been generated on the issue by the Alliance's Refrigerant Import Committee. The publicity clarified which activity is legal or illegal, and informed CFC users that legally imported material is subject to the tax, that illegally imported material can be of questionable quality, and that illegally imported CFCs may be confiscated.

• The public has been urged to purchase legal CFCs and pay the excise and floor stocks tax on the CFCs.

• Customs agents are trained to detect and be aware of illegal CFCs at the borders through comprehensive training seminars.

• Customs has refined their data gathering to track trends of illegal activity, and is regularly sharing information with other government agencies.

Facts

The following facts are helpful in understanding the genesis of the illegal import problem:

Background on Tax Issue

Because some importers mistakenly believed that the tax only applied to imported new refrigerant, they neglected payment of tax on recycled, reclaimed, and contaminated refrigerant. There is evidence that importers also imported new refrigerant illegally by claiming it was recycled, thus avoiding a requirement that they possess allowances, and thus avoiding the excise tax. This practice resulted in refrigerant being available at prices out of line with prevailing market prices.

The IRS confirmation that the excise tax on ozone-depleting compounds applies to all CFCs is not a new interpretation of the law, but rather is a formal statement of what the tax law has always meant. The confirmation has been helpful in halting the illegal import of CFCs because it removes the incentive to import refrigerant illegally, and reinforces the fact that importers and others cannot make CFCs available at prices which do not reflect the $5.80 per pound tax.

There should now be absolutely no confusion that all imported CFCs are taxed equally whether they are new, used, recycled, or reclaimed. Buyers of CFCs should reject any offer to buy new or imported CFCs at prices which do not include the $5.80 per pound excise tax. The IRS and Customs Service have the authority to confiscate any illegally purchased CFCs, and may prosecute one who buys refrigerant knowing that the tax has not been paid.

Ron Linden, Program Coordinator for the Internal Revenue Service has stated "The IRS is committed to taking the actions necessary to increase voluntary compliance with the federal excise tax due on the sale or use of taxable ozone depleting chemicals." IRS is presently reviewing previously filed tax returns to determine if any tax due has not yet been paid. The Internal Revenue Service has reviewed over 3800 CFC excise tax-related returns and has assessed nearly $158 million in unpaid taxes and penalties. IRS estimates that there may be an additional $50 million in uncollected CFC excise taxes.

According to the IRS, the CFCs are subject to the tax on the date they are sold or used by the importer. The person liable for the tax is the person that first sells or uses the CFCs after they enter into the United States for consumption, use, or warehousing. The only exemption from the tax on imported CFCs is for their use as a feedstock.

According to the Alliance, the public should know that a floor stocks tax applies to CFCs owned by any person other than the manufacturer, producer, or importer on January 1 which are held for sale or for use in further manufacture. The floor stocks tax is most applicable to wholesalers, retailers, contractors, distributors, and any other type of business that held stocks of ozone-depleting compounds on January 1. For example in 1997, the $.45 per pound floor stocks tax is calculated as the difference between the 1996 tax - $5.80 per pound - and the 1997 tax which was - $6.25 per pound. The intent of the tax is to prevent hoarding of the compound at the lower price.

The law provides an exemption from the floor stocks tax for those holding 400 pounds or less of taxed compounds. Anyone holding more than 400 pounds should pay the tax by June 30 of each year on all pounds of the compounds they hold. The tax will increased to $7.15 per pound on January 1, 1999. Therefore a $.45 floor stocks tax will be due by June 30, 1999. The tax is scheduled to increase $.45 per year through 2000.

Criminal Activity

The Alliance has commended the government task force for the attention they have given to this issue over the past years. Such attention led to the indictment, conviction, and sentencing of many individuals for illegally importing or diverting CFC refrigerant. The Alliance applauds these actions and looks forward to further investigations, convictions, and severe penalties for persons involved in this illegal activity.

"The government's aggressive position and the publicity the enforcement has received should deter importers and other purchasers from acting illegally, and should curtail the further development of any CFC black market," stated Stirpe.

According to Fred McGreevy, Program Officer for U.S. Customs, "Customs has committed resources to identify this illegal activity and is serious about enforcing the law."

Illegal importers have devised schemes to import or divert export of newly produced CFCs in violation of the EPA regulations, or import new CFCs without consumption allowances by labeling them as recycled. Sometimes new CFCs have been illegally labeled as other material. All of these activities have been designed to avoid the federal excise tax and are violations of many government laws and regulations.

Purchasers of the illegal refrigerant are also at risk. The government has the authority to confiscate any illegally imported refrigerant, even if it has been passed down through the marketplace.

Consumers should also be wary of the refrigerant since some of the imported material has been found to be of extremely poor quality. Recently, random samples of suspected illegal CFC-12 were procured and analyzed and some were found to be far below industry's specification for quality refrigerant. For example, one sample was 50% high in moisture and contained 10 times the acceptable level of non-absorbable gases. Distributing or using poor quality refrigerants may cause major system problems and damage a company's reputation.

The civil penalty for violating EPA regulations can be up to $25,000 per kilogram wrongfully imported. Criminal penalties can include up to 5 years in prison for a first offense and up to 10 years for repeat offenses. Violations of IRS regulations can result in civil fines, penalties, and/or criminal prosecution with substantial prison terms, in addition to confiscation of the product. In order to report any violations regarding imports or excise taxes, please call: Ron Linden at IRS: 202-622-4177; EPA: 800-296-1996; or Fred McGreevy at Customs: 202-927-0484.

International treaty and federal law prohibited the production and importation of new CFCs in the United States after January 1, 1996. However, a small amount of CFCs may be produced for export to developing countries to fulfill their needs during their transition. In addition, a small amount may be produced for essential uses approved under the Montreal Protocol. CFC refrigerants are used in home and commercial refrigeration, and automobile and large building air conditioners.

The Alliance is an industry coalition of users and producers of CFCs and their alternatives. It is concerned with the use of ozone-depleting compounds and works with government to develop responsible policies toward ozone protection. For more information, please contact Dave Stirpe at the Alliance at 703-243-0344.