An excise tax is a tax on the use or consumption of certain products like motor fuels, cigarettes, and alcohol, and on services and activities like sports betting. Excise taxes may be imposed by the federal government or state and local authorities in order to raise revenue, be competitive, and encourage or discourage use.
if your business sells products or engages in activities that may be subject to excise taxes, here's information to help you know when and how to pay and report these taxes.
- Excise taxes are imposed on certain products, services, and activities like cigarettes, gasoline, and gambling.
- The federal government, states, cities, and towns all can set the items subject to excise taxes and tax rates.
- Businesses must collect these taxes from payees and keep records of these payments.
- Federal excise taxes must be reported and paid quarterly.
What Is an Excise Tax?
Excise taxes have been imposed on specific goods and activities in the U.S. since the whiskey tax in 1791. Some are "sin taxes" that aim to control the use of certain products like cigarettes and sports betting. Others are akin to user taxes imposed on goods like motor fuels, in which drivers pay a price for contributing to traffic congestion and the need for road repairs.
Businesses must pay federal excise taxes on many products, services, and activities, including:
- Airline tickets and air cargo shipping
- Alternative fuel mixtures
- Environmental products such as domestic petroleum oil spills and ozone-depleting chemicals
- Communications taxes on local phone services
- Fuels used in business, including gasoline, diesel, kerosene, and ethanol
- Purchase of trucks, trailers, and semi-trailers (at a percentage of the sales price on the first retail sale)
- Ship passenger tax (per passenger)
- Manufacturers' taxes on coal, taxable tires, gas guzzlers, etc.
- Foreign insurance taxes
- Sport fishing equipment, fishing rods, poles, outboard motors, etc.
- Floor stocks tax on ozone-depleting chemical
- Vaccines including those for influenza
In most cases, your business is responsible for collecting these taxes and passing on the collected taxes to the IRS.
State and City Excise Taxes
Many states impose excise taxes on different goods and services. Here are some notable examples:
- Many states and localities use car rental excise taxes to raise revenue, while some states also allow localities to add a rental car tax.
- Several states have imposed excise taxes on recreational marijuana to compete with illicit operators.
- Over half of U.S. states impose excise taxes on vaping products.
- No states have imposed excise taxes on sugar-sweetened beverages, but several localities have. Philadelphia, for example, has a tax of 1.5 cents per ounce.
- Georgia has excise taxes on malt beverages, wines, distilled spirits, cigarettes, cigars, little cigars, and loose or smokeless tobacco.
- Atlanta has excise taxes on hotel/motel stays and car rentals.
- The Oneida Indian Tribe in New York has an excise tag on cigarette sales to non-Indians.
To find out what products, services, and activities are subject in your state, see this list of state tax agencies from the Federation of Tax Administrators. For local excise taxes, search for your locality's website and look for the "tax" or "revenue" department.
How to Report, Pay, and File Federal Excise Taxes
Form 720, the Quarterly Federal Excise Tax Return, is used to report on federal excise taxes collected by the business for a variety of products and services.
Form 720 includes several pages of excise taxes that your business might have to pay and the rate.
Paying Quarterly Excise Taxes
Filing also means paying. Part III of the form requires you to:
- Total the tax due
- Total the deposits you made during the quarter
- Total any overpayment from previous quarters
- Calculate the total balance due
You'll need to pay any balance due when you file the form.
Filing Form 720
You must file Form 720 quarterly, within one month after the end of each quarter, for all the excise taxes you collected during the quarter:
- Quarter-end March: File by April 30
- Quarter-end June: July 31
- Quarter-end Sept: Oct 31
- Quarter-end December: January 31
If the due date is a weekend or holiday, the form is due the next business day.
Excise Taxes as a Trust Fund Tax
Excise taxes are a trust fund tax, meaning that they are collected by the business and held in trust, then paid to the IRS at specific times. Even if you forgot to collect the tax from your customers, you must still pay it to the IRS or your state or locality.
The IRS imposes a trust fund recovery penalty on unpaid federal excise taxes your company owes, for the full amount of the unpaid tax. This penalty can be imposed individually on responsible persons, not just on the company, if the person acted willfully in not paying the tax.
A responsible party can be a business owner, an employee, an accountant, or someone who has the authority to spend business funds.
Frequently Asked Questions (FAQs)
How are excise taxes different from sales taxes?
While both sales taxes and excise taxes are used to raise revenue, they differ in several other ways. Sales taxes are more general, coverinng a wide range of products and services that consumers and businesses buy every day. The only items usually exempt from sales taxes are "essentials," like groceries, rent, medicine, and utilities.
Excise taxes, on the other hand, are for a limited number of items and more specific purposes. Gasoline excise taxes, for example, are often used for road repairs.
How are excise taxes calculated?
Excise taxes have three components:
- The tax base, meaning the qualifications for the item being taxed
- The rate
- The specific measure, like price or weight
Federal excise taxes for tobacco products are based on the type of product (per 1,000) and different rates for each. For example, cigarettes are taxed at $50.33 per thousand.
The federal excise tax rate on sports wagering is 0.25% of the amount wagered for wagers authorized by the state and 2% of the amount wagered if not authorized by the state.
The excise tax for tanning salons is 10% on tanning services that do not involve "phototherapy." In addition, no tax is levied on spray tans.
Recreational marijuana is taxed based on the price, weight, or potency of the content at the rate used by each state imposing the tax.
Excise taxes on rental cars may be a flat-dollar surcharge or a percentage of the price of the rental.