A U.S. coal producer owes three separate coal taxes: the federal Black Lung excise tax under Internal Revenue Code Section 4121, the federal Abandoned Mine Land reclamation fee collected by the Office of Surface Mining Reclamation and Enforcement, and, in most coal-producing states, a state severance tax. Each has its own rate structure, form, and deadline, and getting one wrong can mean penalties or overpayment.
The Federal Black Lung Excise Tax
The main federal tax on coal is an excise tax imposed under 26 U.S.C. § 4121. It applies to coal mined in the United States and sold by the producer.1Office of the Law Revision Counsel. 26 U.S. Code 4121 – Imposition of Tax It also applies when a producer uses the coal in something other than a mining process, such as burning it as fuel or converting it into coke. In those situations the IRS treats the use as a sale and calculates the tax from a constructive sale price.2eCFR. 26 CFR 48.4121-1 – Imposition and Rate of Tax on Coal Routine processing steps like cleaning, breaking, or sizing coal before selling it do not count as “use.”
Revenue from the tax flows into the Black Lung Disability Trust Fund under 26 U.S.C. § 9501, which pays compensation and medical coverage to miners totally disabled by black lung disease and to survivors of miners who died from it.3Office of the Law Revision Counsel. 26 U.S. Code 9501 – Black Lung Disability Trust Fund4U.S. Department of Labor. About the Federal Black Lung Program
Rates and the 4.4 Percent Cap
The per-ton rate depends on how the coal is extracted:
- Underground-mined coal: $1.10 per ton
- Surface-mined coal: $0.55 per ton
Both rates are capped. The tax on any ton of coal cannot exceed 4.4 percent of the producer’s sale price.1Office of the Law Revision Counsel. 26 U.S. Code 4121 – Imposition of Tax When 4.4 percent of the sale price comes out lower than the flat per-ton figure, the producer pays the smaller amount. For underground coal, the $1.10 rate only becomes the binding number once the sale price passes roughly $25 per ton; below that, the percentage controls. The Inflation Reduction Act of 2022 made these rates permanent.
What’s Exempt
Two categories fall outside the tax entirely. Lignite, a lower-grade coal with high moisture content, is not subject to it. Coal mined in the United States for export is also exempt.5U.S. Office of Natural Resources Revenue. Coal Excise Tax Keep documentation showing exported coal left the country: the general excise tax export exemption in 26 U.S.C. § 4221 does not apply to coal under § 4121, so the § 4121 exemption is the only path.
The AML Reclamation Fee
Separately, the Office of Surface Mining Reclamation and Enforcement collects a reclamation fee on every ton of coal produced. The fee funds cleanup of mines abandoned before 1977, when the Surface Mining Control and Reclamation Act created the modern regulatory framework. The Infrastructure Investment and Jobs Act of 2021 reauthorized the fee for an additional 13 years at reduced rates.
Producers report and pay this fee quarterly on OSMRE Form OSM-1, the Coal Reclamation Fee Report.6Office of Surface Mining Reclamation and Enforcement. Forms, Applications, and Instructions Surface-mined coal carries a higher per-ton charge than underground-mined coal, and lignite carries the lowest. Unlike the Black Lung excise tax, the AML fee does apply to lignite. Corrections to a prior filing go on the OSM-1 Amended form.
State Severance Taxes
Most coal-producing states impose their own severance tax on the removal of coal from the ground. Revenue typically supports local infrastructure, schools, and environmental reclamation in mining areas. The mechanics vary: some states tax a percentage of the coal’s gross value at the point of sale, some use a flat per-ton charge, and some combine both. Montana bases its coal severance tax on both extraction method and heat content, with surface-mined, high-BTU coal taxed at a considerably higher percentage than underground, low-BTU coal.7Montana Department of Revenue. Coal Severance Tax
State severance taxes exist independently of the federal obligations, so producers pay both. Many states offer exemptions for coal consumed on-site in certain processing activities or for production below a minimum threshold.
Filing Form 720 and Paying the IRS
Coal producers report the Black Lung excise tax on IRS Form 720, the Quarterly Federal Excise Tax Return.8Internal Revenue Service. Form 720 – Quarterly Federal Excise Tax Return Coal entries sit in Part II under Manufacturer’s Taxes, on four lines:
- Line 36: underground-mined coal at $1.10 per ton
- Line 37: the 4.4 percent of sales price calculation for underground coal
- Line 38: surface-mined coal at $0.55 per ton
- Line 39: the 4.4 percent of sales price calculation for surface coal
For each mining method, enter both figures and pay the lower one. That requires accurate tonnage records at the point of first sale and documentation of the actual sale price for each transaction.
Form 720 is due quarterly:9Internal Revenue Service. Instructions for Form 720
- First quarter (January–March): April 30
- Second quarter (April–June): July 31
- Third quarter (July–September): October 31
- Fourth quarter (October–December): January 31
You can mail the completed form to the IRS processing center in Ogden, Utah, or file through an authorized e-file provider.9Internal Revenue Service. Instructions for Form 720
Payments generally go through the Electronic Federal Tax Payment System (EFTPS). As of late 2024, producers can also use IRS Direct Pay to send payments directly from a bank account without registering for EFTPS.9Internal Revenue Service. Instructions for Form 720 Some Form 720 filers must also make semi-monthly deposits during the quarter rather than paying the full amount at filing. This applies when excise tax liability exceeds thresholds set out in the Form 720 instructions. Lower-volume producers who file and pay quarterly should confirm they fall below the semi-monthly threshold to avoid deposit penalties.
Penalties for Late Filing and Late Deposits
Missing a filing deadline triggers the failure-to-file penalty: 5 percent of the unpaid tax for each month or partial month the return is late, up to 25 percent.10Internal Revenue Service. Failure to File Penalty On a large quarterly coal bill, that adds up fast.
Failure to make a required deposit on time carries a separate, tiered penalty:
- 1–5 days late: 2 percent of the underpayment
- 6–15 days late: 5 percent
- More than 15 days late: 10 percent
- Still unpaid after an IRS delinquency notice: 15 percent
Deposit penalties apply to the shortfall, not the entire tax bill, but they stack on top of any failure-to-file penalty and the interest the IRS charges on unpaid balances.11Office of the Law Revision Counsel. 26 U.S. Code 6656 – Failure to Make Deposit of Taxes A producer who both files late and deposits late can face overlapping charges that significantly exceed the underlying tax.
Records to Keep
The IRS requires producers to keep employment and excise tax records for at least four years after the tax becomes due or is paid, whichever is later.12Internal Revenue Service. How Long Should I Keep Records For coal tax purposes that means tonnage records, weight tickets, sales contracts, sale price documentation, EFTPS or Direct Pay confirmation receipts, and copies of each filed Form 720. If an audit dispute arises three years after filing, weight tickets and sales records are the only way to prove the 4.4 percent cap calculation was correct. Retain OSM-1 filings for the same period.