The Internal Revenue Service (IRS) has issued long-awaited final regulations on the definition of solid waste disposal facilities for tax-exempt bond purposes (Final Regulations). The Final Regulations largely follow the proposed regulations published in September 2009 (Proposed Regulations, see Federal Register 74 FR 47500) and implement a policy in favor of recycling through the use of solid waste disposal facilities. The Final Regulations will apply to bonds that are sold on or after October 18, 2011 (Effective Date), although under certain circumstances, issuers may apply the Final Regulations to bonds sold before the Effective Date.
What Changed From the 2009 Proposed Regulations?
As in the Proposed Regulations, the Final Regulations eliminate the "no-value" test from the definition of solid waste. Despite public comment to the contrary, the Final Regulations continue to exclude radioactive waste and hazardous waste from the definition of solid waste. However, the Final Regulations limit the exclusion to hazardous waste that is required to be disposed of at a regulated facility and radioactive waste that is subject to regulation. The Final Regulations contain some modifications and clarifications of the Proposed Regulations based on public comments including the following:
- Removing the 5-percent size limitation on residual material and expanding residual material to include material derived from providing a service in which no product is produced
- Retaining the annual 65-percent test for mixed-input facilities, but providing for a three-year curative period for extraordinary events outside operator control and providing that such testing does not begin until the facility is placed in service (defined for this purpose as operating at substantially its design level)
- Clarifying that material is "solid" if it is solid at ambient temperature and pressure
- Clarifying that solid waste can result from governmental operations or activities
- Expanding the definition of solid waste to include animal waste
- Allowing for the introduction of virgin materials and precious metals into a final disposal process despite the exclusion of virgin material and precious metals from the definition of solid waste
- Clarifying that a solid waste disposal process includes spreading of waste in a safe and legal manner
- Clarifying that an energy conversion process ends at the point at which useful energy is first created or incorporated into useful energy
- Clarifying that location, as well as transportation and storage costs, may be taken into account as operational constraints for purposes of the "first useful product" rule
- Removing the 50-percent threshold for a function to qualify as a preliminary function
- Providing a refunding transition rule for bonds issued to refund bonds to which Section 142 applies that were issued prior to the Effective Date if the weighted average maturity is not extended
The Final Regulations
The following is a summary of significant provisions of the Final Regulations:
What Is a Solid Waste Disposal Facility?
A solid waste disposal facility means a facility to the extent that the facility:
- Processes solid waste in a qualified solid waste disposal process;
- Performs a preliminary function; or
- Is functionally related and subordinate to either of the above functions.
What Is Solid Waste?
Solid waste is garbage, refuse and other solid material derived from any agricultural, commercial, consumer, governmental or industrial operation or activity if it is both:
- Used material1 or residual material2; and
- Reasonably expected to be introduced into a qualified solid waste disposal process within a reasonable time after such generation, purchase or acquisition.
Specifically excluded from the definition of solid waste are:
- Virgin material (except to the extent that it constitutes an input to a final disposal process or a residual material)
- Solids within liquids and liquid waste
- Precious metals (except to the extent they constitute an input to a final disposal process or an unrecoverable trace)
- Hazardous material that must be disposed of in a regulated facility
- Radioactive material subject to regulation under the Nuclear Regulatory Act
For purposes of these regulations, a material is solid if it is solid at ambient temperature and pressure.
What Is a Qualified Solid Waste Disposal Process?
A qualified solid waste disposal process may employ any biological, engineering, industrial or technological method. The regulations provide for three eligible types of solid waste disposal processes including a final disposal process, an energy conversion process and a recycling process:
- Final Disposal Process – either the placement of solid waste in a landfill (including spreading solid waste over land in an environmentally compliant manner), the incineration of solid waste without capturing any useful energy or the containment of solid waste with a reasonable expectation that the containment will continue indefinitely and that the solid waste has no current or future beneficial use.
- Energy Conversion Process – a thermal, chemical or other process that is applied to solid waste to create and capture synthesis gas, heat, hot water, steam or other useful energy. The energy conversion process begins at the point of the first application of such process. The energy conversion process ends at the point at which the useful energy is first created, captured or incorporated into the form of synthesis gas, heat, hot water or other useful energy and before any transfer or distribution of synthesis gas, heat, hot water, steam or other useful energy.
- Recycling Process – a process reconstituting, transforming or otherwise processing solid waste into a useful product. The recycling process begins at the point of the first application of a process to reconstitute or transform the solid waste into a useful product, such as decontamination, melting, re-pulping, shredding or other processing of the solid waste to accomplish this purpose. The recycling process ends at the point of completion of production of the first useful product3 from the solid waste. The term "recycling process" does not include refurbishment, repair or similar activities.
What Is a Preliminary Function?
The Final Regulations define a preliminary function as a function to collect, separate, sort, store, treat, process, disassemble or handle solid waste that is preliminary to and directly related to a qualified solid waste disposal process.
Considerations for Mixed-Use Facilities
In general, if a facility is used for both a qualified solid waste disposal function (including a qualified solid waste disposal process or a preliminary function) and a nonqualified function, then the costs of the facility allocable to the qualified solid waste disposal function are determined using any reasonable method, based on all the facts and circumstances, using existing allocation rules for determining amounts properly allocable to an exempt facility.
Except as provided in the paragraph below, for each qualified solid waste disposal process or preliminary function, the percentage of the costs of the property used for such process that are allocable to a qualified solid waste disposal process equals the average annual percentage of solid waste processed in that process while the issue is outstanding. The average percentage of solid waste processed in such process for any year is the average percentage, by weight or volume, of the total materials processed in that process that constitute solid waste for that year.
There is a special rule for mixed-input processes if at least 65 percent of the materials processed is solid waste. For each qualified solid waste disposal process or preliminary function, if the annual percentage of solid waste used in that process or function for each year that the issue is outstanding (beginning with the date the facility is placed in service and operating at substantially its design level) equals at least 65 percent of the materials used in that process, then all of the costs of the property used for such process or function are treated as allocable to a qualified solid waste disposal process. The percentage of solid waste used in such process or function for any year is the percentage, by weight or volume, of the total materials used in that process that constitute solid waste for that year. In case an extraordinary event beyond the control of the facility operator causes the facility to fail to meet the 65-percent test, a three-year curative period may be utilized.
Except for facilities that are functionally related and subordinate to a facility that meets the 65-percent test, facilities qualify as functionally related and subordinate to a mixed-input facility only to the extent that they are functionally related and subordinate to the qualified portion of the mixed-input facility that is used for a qualified solid waste disposal function (including a qualified solid waste disposal process or a preliminary function).
The IRS provided a number of examples to illustrate the application of these regulations. The full text of the Final Regulations, including those examples and supplementary information explaining the rationale of the Final Regulations, is available online (pdf).