This article is the second in the three-part series of articles breaking down the proposed prevailing wage and apprenticeship requirements, Buy America requirements, and direct pay election included in the proposed green energy tax credits introduced in the Build Back Better Act, or BBB Act. This article addresses the proposed Buy America domestic requirements that taxpayers must meet to qualify for more generous “bonus rate” credits proposed under the BBB Act.
“Buy America” Domestic Content Provisions
As is common with respect to federal procurement and state and local agency procurement using federal grant funds, the bonus tax credits are tied to a domestic content requirement to incentivize U.S. manufacturing. Specifically, the domestic content provisions in the legislation generally require that any steel, iron, or manufactured products that are part of a credit-eligible project be produced in the United States.
Like other domestic preference systems such as the Buy American Act, or BAA, and the various Department of Transportation agencies’ Buy America requirements, the legislative language has two distinct rules: one that applies to iron and steel used in the project, and a separate rule for manufactured products, with more onerous restrictions applying to iron and steel. For those elements of the project that fall within the steel and iron requirements, all steel and iron manufacturing processes must take place in the U.S., from melting forward, with a small exception for metallurgical processes involving the refinement of steel additives.
For manufactured products, the legislation requires meeting certain domestic content thresholds, which will increase over time, effectively allowing for some percentage of foreign content. Specifically, the text provides that manufactured products shall be deemed to have been manufactured in the U.S. if not less than the “adjusted percentage” of the total cost of the components and subcomponents across the project is attributable to components that are mined, produced, or manufactured in the U.S.
For purposes of this requirement, the adjusted percentage is:
- 40% for projects that begin construction before 2025,
- 45% for projects that begin construction in 2025,
- 50% for projects that begin construction in 2026, and
- 55% for projects that begin construction thereafter.
For offshore wind facilities, the adjusted percentage is:
- 20% for projects that begin construction before 2025,
- 27.5% for projects that begin construction in 2025,
- 35% for projects that begin construction in 2026,
- 45% for projects that begin construction in 2027, and
- 55% for projects that begin construction thereafter.
As is often the case with respect to domestic preferences, we anticipate that many companies will face some practical challenges associated with meeting domestic content requirements.
First, there is the issue of interpreting and applying the rules. The legislation does not define or clarify what materials and supplies will fall under the more onerous iron and steel requirements versus the more lenient manufactured products standard, nor does it expressly state whether iron and steel content that is part of a manufactured product will be subject to the iron and steel rules. Current systems approach differently the threshold issue of defining what falls into which category. For example, under the BAA applicable to direct federal procurement, the iron and steel rules apply to end products that are “wholly or predominantly of iron and steel,” defined as more than 50% iron and/or steel content by cost. For end products that have 50% or less iron and steel content, such products—including iron and steel components and materials that comprise the product—are subject to a more lenient test that allows for greater foreign steel or iron content.
Under the Federal Transit Administration’s, or FTA’s, Buy America implementation regulations, the FTA provides representative examples of what constitute “steel and iron end products,” such as structural steel and track work, versus “manufactured end products”—such as terminals, garages, and information systems—without using any bright line rule based on the percentage of iron or steel content in such items. As with the BAA, if an item falls under the manufactured end product rule, any iron and steel content of the end product does not have to be evaluated separately under the iron and steel rules. It is unclear what approach the Department of the Treasury will take in implementing regulations and guidance, though we would expect Treasury to look at existing systems such as the BAA and the FTA Buy America as providing potential approaches.
In addition to interpreting the rules, we would expect companies to encounter challenges as they evaluate their supply chains and navigate what adjustments may be necessary to leverage the bonus tax credits. Most commercial companies have dynamic and global supply chains and may never have evaluated whether they are able to comply with these types of sourcing restrictions. This type of analysis may require reaching out to suppliers to determine what currently is manufactured in the U.S. and what domestically manufactured alternatives may be available for items that historically have been manufactured outside of the U.S. Additional complexities include the ongoing global pandemic, which has put incredible pressure on supply chains. And under the accelerated timeline for green energy projects funded or incentivized by the pending legislation, many companies may find themselves struggling to perform the required analysis and to implement appropriate compliance measures.
For those companies that anticipate leveraging the tax credits, now is the time to begin surveying the supply chain to understand what materials and supplies will be used in the project, where such materials and supplies currently are manufactured, and opportunities to shift the supply chain as necessary to meet the applicable domestic content requirements. There also may be opportunities to engage early with Treasury to advocate for regulations and guidance that are clear and feasible for industry.
As in the case of the prevailing wage and apprenticeship requirements, we anticipate credit eligibility challenges from the IRS.
In the last article in this series, we will discuss the direct pay option provisions proposed in the BBB Act.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Adelicia Cliffe is a partner at Crowell & Moring. Her practice includes a broad range of counseling, transactional, and litigation capabilities with respect to government contracts, international trade, and national security issues including sourcing restrictions, export controls, and procurement.
Irina Pisareva, a partner in Crowell & Moring’s tax group, has 25 years of experience advising businesses and investors on transaction tax and cross-border tax matters. She provides tax advice to investment funds, corporations, tax-exempt investors, venture capital, private equity groups, and high-net-worth individuals and family offices.
David B. Blair is a partner at Crowell & Moring and chair of its tax group. He has more than 30 years of experience assisting energy clients with tax planning, controversy and litigation.
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