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Coal Excise Tax - Chapter 1, Introduction

Revision Date - January, 2011

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date

Black Lung

The Black Lung Benefits Act of 1977 was enacted by Congress to compensate individuals afflicted with the disease known as pneumoconiosis or "black lung disease." Black lung disease is caused by inhaling coal dust for prolonged periods of time, usually at least 10 years. In the early stages, black lung disease does not cause respiratory impairment. However, impairment eventually occurs and despite avoidance of further exposure, death usually occurs within a few years.

Imposition of Coal Excise Tax

Section 4121 of the Internal Revenue Code imposes an excise tax on domestically produced coal. The tax does not apply to lignite. Lignite is defined in accordance with the standard specifications for classification of coals by rank of the American Society for Testing and Materials (ASTM). The taxes collected on the sales of coal are deposited to the Black Lung Disability Trust Fund to finance payments of black lung benefits to afflicted miners.

Producers of coal in the United States are liable for the tax upon the first sale or use of the coal. The producer is the person who has vested interest in the coal immediately after severance from the ground without regard to the existence of any contractual arrangements for the sale or other disposition of the coal or the payment of any royalties between the producer and third parties.

The tax is imposed at two rates, depending on whether the coal is from underground (deep) or surface mines. The tax on deep mined coal is the lower of $1.10 a ton or 4.4 percent of the sales price. The tax on surface mined coal is the lower of $.55 a ton or 4.4 percent of the sales price. Therefore, coal will be taxed at the 4.4 percent rate if the selling price is less than $25/ton for deep coal or less than $12.50/ton for surface coal.

Using a Federal Tax Deposit form, the taxpayer should make semi-monthly deposits based on the incurred liability. (Form books can be obtained by calling 800-829-1040.) Additionally, excise taxes are reported on the quarterly filed Form 720, Quarterly Federal Excise Tax Return. The due date of the return is the last day of the month following the end of the quarter.

Issue Identification

Examinations of coal producers have identified numerous recurring issues resulting in substantial understatements of coal excise tax liabilities. This guide includes 13 potential audit issues related to the coal excise tax; each section includes a brief explanation, cites the appropriate Code sections and references, and identifies helpful audit techniques.

Background Information

In the appendices you will find a glossary of mining terms and referral to additional resource material on the coal mining industry.

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