Coal companies must pay US excise taxes on coal sold for export if the coal makes an intermediate stop at a processing plant for conversion into synfuel.
If the coal were exported directly, it would not be taxed. The US government collects excise taxes of $1.10 a ton on coal from underground mines and 55¢ a ton on coal from surface mines. The taxes are paid by the producer and are collected at time of sale. However, the US constitution bars taxes on exports. The IRS conceded in a notice in 2000 that the taxes are not owed on coal sold for export after losing a test case on the issue in a federal district court in Virginia the year before.
To avoid a tax, the coal must be “in the stream of export” when it is sold and it must actually be exported.
The United States used to reward anyone converting coal into a synthetic fuel with tax credits tied to the quantity of synfuel produced measured in mmBtus. In the mid-1990’s, 53 small plants were built that used chemicals to turn coal into synfuel. The processing caused almost no change in the physical appearance of the coal, but there was enough change in the chemical composition for it to qualify as synfuel.
The IRS said in a “technical advice memorandum” made public in May that any coal company selling coal to such a plant and then repurchasing the coal for export could not avoid the US excise taxes on coal since the coal was never exported.
What the company ended up exporting was a different product: synfuel. The technical advice memorandum is a ruling by the IRS national office to settle a dispute arising from a tax audit of the coal company. The ruling is Technical Advice Memorandum 200820035.