The Treasury Department should allow a broader definition of solid-waste materials and disposal processes in regulating the types of facilities that can be financed with tax-exempt bonds, according to an alliance of solid-waste groups.
The recommendations, which were made by the Tax-Exempt Bonds Recycling Coalition last week, urge an easing of the restrictive solid-waste regulations proposed by Treasury in May 2004. Those regulations have not yet been finalized but the department aims to complete them by June 30, according to its 2005-2006 business plan.
Under current federal law, state and local governments and municipal authorities can issue tax-exempt bonds to finance solid-waste disposal facilities if the material processed by those facilities has no market value at the place it is processed and at the time bonds are issued.
The Internal Revenue Service has audited a slew of bond deals for violations of those rules, arguing in many cases that material of value was improperly processed by bond-financed mills and recycling centers. Municipal market participants have countered that the tax code rules are unwieldy and inappropriate for the sector.
As drafted in 2004, the proposed regulations would eliminate the "no-value test" for material, but would not explicitly define what constitutes solid waste for purposes of municipal bond issuance. Instead, they would define the types of facilities that would qualify for tax-exempt financing based on the recycling and disposal processes used.
Writing on behalf of the coalition, a group of municipal issuers, firms, trade associations, and environmental groups, David Koenig, director of tax policy for the American Forest & Paper Association, which heads up the recycling coalition, urged Treasury to revise the definition of a solid-waste disposal function to insure that future scientific and technological developments in solid-waste processing would be covered by the regulations.
"The Coalition notes that one shortfall in the proposed regulations is the 'lock-in' effect limiting qualifying solid-waste disposal facilities to four types of processes, which definition could readily become obsolete," the letter said.
The coalition supports Treasury's decision to eliminate the no-value test and recommended it include garbage, refuse or discarded solid materials that are useless, unused, unwanted, or discarded in a definition of solid waste.
The solid-waste disposal process should be defined as "beginning at the collection, separation, sorting, treatment, disassembly, or handling of the solid waste and ending at the point at which the solid waste material has been converted into a material or product that can be sold in the same manner as a comparable product produced from virgin material," the letter said.
The coalition advised Treasury that, if an appropriate definition of the solid-waste disposal process is crafted, there is no need for a separate category of "preliminary functions" that precede the process, which would simplify the regulations.
Treasury should also retain the current-law rules for the treatment of mixed-input facilities because the proposed regulations "set standards that are overly harsh and impractical to administer," it said.
Koenig said in the last four or five years the building of recycling facilities has been chilled by regulatory problems.
"We're now in March 2006 and hopefully will soon be able to successfully resolve the issue," he said. "We have taken it upon ourselves to try to get to the bottom-line issue - making it work for our companies to finance their recycling facilities using tax-exempt bonds. We've come up with what we think is a measured response; a good-faith effort."
Though Treasury is working on many other projects this year, Koenig said the coalition hopes to be part of efforts to finalize solid-waste regulations by the end of June.
"We think we have enough time," he said. "We feel pretty confident that we'll at least be able to get a meeting to make our case."
"It's a worthwhile effort to try to move the ball forward," said Charles Henck, an attorney with Ballard Spahr Andrews & Ingersoll LLP here. "How it will be taken by the folks responsible for the regs, I don't know. We'll have to see what the reaction is."
