On August 19, 2011, the Internal Revenue Service issued final regulations defining "solid waste disposal facilities" that can be financed with tax-exempt private activity bonds.

Finishing a process that began with the issuance of proposed regulations in May 2004 and September 2009, the IRS has issued final regulations defining solid waste disposal facilities as facilities that –

  • Process solid waste in a qualified solid waste disposal process;
  • Perform a preliminary function; or
  • Are functionally related and subordinate thereto.

Definition of solid waste. In general, "solid waste" is defined as garbage, refuse, and other solid material derived from any agricultural, commercial, consumer, governmental, or industrial operation or activity if the material is either "used material” or “residual material.” The person who generates, purchases, or otherwise acquires such material must reasonably expect, within a reasonable time after such generation, purchase, or acquisition, to introduce it into a “qualified solid waste disposal process.” As expected, given the approaches taken in the proposed regulations, the final regulations discard the "no value" test for solid waste applicable under prior regulations.

"Used material" is defined as any material that is a product of any agricultural, commercial, consumer, governmental, industrial operation or activity, or a component of such product or activity, that has been previously used. In the tactful phrasing of the final regulations, used material also includes animal waste produced by animals from a biological process.

"Residual material" is defined as a residual byproduct or excess raw material that remains after completion of any agricultural, commercial, consumer, governmental, or industrial production process or activity or the provision of any service. As of the date of issuance of the bonds used to finance a solid waste disposal facility, the material must reasonably be expected to have a fair market value that is lower than the value of all the products made in the production process or lower than the value of the service that produces such residual material.

Items excluded from the definition of solid waste include:

  • Virgin material;
  • Any solid or dissolved material in domestic sewage or other significant pollutant in water resources such as silt, dissolved or suspended solids in industrial waste effluents, dissolved materials in irrigation return flows or other common water pollutants, liquid or gaseous waste, or other materials that are not solid at ambient temperature and pressure;
  • Precious metals;
  • Hazardous materials that must be disposed of at a facility that is subject to final permit requirements under subtitle C of title II of the Solid Waste Disposal Act as in effect on the date of enactment of the Tax Reform Act of 1986; and
  • Radioactive material subject to regulation under the Nuclear Regulatory Act as in effect on the date of issuance of the bonds in question.

Definition of qualified solid waste disposal process. A “qualified solid waste disposal process” means the processing of solid waste in a final disposal process, energy conversion process or recycling process. In general, the disposal process may employ any biological, engineering, industrial, or technological method.

The term "final disposal process" means the placement of solid waste in a landfill, spreading of solid waste over land in an environmentally compliant method with no intent to remove such solid waste, incineration without capturing any useful energy, or the containment of solid waste with a reasonable expectation, as of the date of issuance of the bonds in question, that the containment will continue indefinitely and that the solid waste has no current or future beneficial use.

An "energy conversion process" is any process applied to solid waste to create and capture synthesis gas, heat, hot water, steam, or other useful energy. The process begins at the point of the first application of the process and 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 thereof, regardless of whether or not such gas, heat, hot water or other useful energy constitutes a “first useful product” as defined in the regulations, as described below.

A "recycling process” is a process which reconstitutes, transforms, or otherwise processes solid waste into useful products. The process begins at the point of the first application of the process to reconstitute or transform the solid waste into a useful product and ends at the point of completion of production of the “first useful product” from the solid waste. Recycling does not include refurbishment, repair, or similar activities, defined to mean the breakdown and reassembly of a product if such activity is done on a product-by-product basis and the finished product contains more than 30% of its original materials or components.

The term "first useful product" means the first product produced from the processing of solid waste that is useful for consumption in agricultural, consumer, commercial, governmental, or industrial operations or activities that could be sold for such use, whether or not actually sold. The determination of whether a useful product has been produced may take into account operational constraints that affect the point in production when a useful product reasonably can be extracted or isolated and sold independently. Costs of extracting, isolating, storing, and transporting the product to market may only be taken into account as operational constraints if the product is not to be used as part of an integrated manufacturing process or industrial process in the same location as that in which the product is produced.

A "preliminary function" is 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.

Mixed-use facilities. In the case of facilities used for both a qualified solid waste disposal function and a nonqualified function, the costs properly allocable to the qualified solid waste disposal function can be determined under any reasonable method. Facilities qualify as functionally related and subordinate to the qualified solid waste disposal function of a mixed-use facility only to the extent that they are functionally related and subordinate to the portion of the mixed-use facility that is used for one or more qualified solid waste disposal functions.

Except as provided in the regulations, the percentage of the cost of a project used for a qualified solid waste disposal process or preliminary function cannot exceed the average annual percentage of solid waste processed in that disposal process or preliminary function while the issue is outstanding. The annual percentage of solid waste processed in that qualified solid waste disposal or preliminary function for any year is the percentage, by weight or volume, of the total materials processed in that qualified solid waste disposal process that constitute solid waste for that year. However, if the annual percentage of solid waste processed in a qualified disposal process or preliminary function for each year that the issue is outstanding (beginning with the date such facilities are placed in service within the meaning of Treasury Regulation Section 1.150-2 (c)), equals at least 65% of the materials processed in the qualified solid waste disposal process or preliminary function, all of the cost of the property used for such process is treated as allocable to a qualified solid waste disposal process. An exception is made for extraordinary events that are beyond the control of the operator of the solid waste disposal facility, such as a natural disaster, strike, major utility disruption, or governmental intervention, that causes a solid waste disposal facility to be unable to meet the 65% test for a particular year. Under the exception, the percentage of solid waste processed for the year affected by the extraordinary event equals (i) the sum of the amount of solid waste processed in the facility for that year and the amount of solid waste processed during the following two years in excess of the amount required to meet the general 65% threshold during each of such two years, divided by (ii) the total materials processed in the solid waste disposal facility during the year affected by the extraordinary event. If the resulting measure exceeds 65%, the facility is treated as meeting the requirements of the 65% test for the year of the extraordinary event.

Effective date. The final regulations apply to private activity bonds to which Section 142 of the Code applies that are sold on or after October 18, 2011. Issuers may apply the regulations in whole, but not in part, to issues to which section 142 applies which were sold before October 18, 2011. The regulations need not be applied to bonds issued to currently refund bonds to which the regulations did not apply if the weighted average maturity of the refunding bonds is no longer than the remaining weighted average maturity of the refunded bonds.