What Is an Excise Tax?
Excise taxes are internal taxes that are levied on the sale of specific goods and services, such as alcohol, fuel and tobacco. An excise tax is an indirect tax that is not paid by the customers directly — instead, the excise tax is imposed on the supplier or the producer, who then includes it in the product price.
Excise taxes are imposed by the federal, state, and local governments. The taxes can either be applied as a percentage of the total cost of a product or service or as a fixed amount. For example, the excise tax on a vehicle is a percentage of the total cost while the excise tax on a tobacco and gasoline is a fixed amount.
What this article covers:
- What Is Meant by Excise Tax?
- Which Is an Example of an Excise Tax?
- Who Pays the Excise Tax?
- What Is the Difference Between an Excise Tax and a Sales Tax?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is Meant by Excise Tax?
Excise taxes are taxes levied on certain goods, services, and activities.
If you sell any products that are subject to excise tax, it’s your responsibility as a business owner to collect and pay the taxes to appropriate authorities, federal and state.
The excise taxes are charged in one of two ways:
- Percentage of price: Under this method, excise taxes are charged as a percentage of the product or service. For example, domestic air travel is subject to an excise tax of 7.5% of the price of the ticket plus $4.10 (in 2018).
- Per unit tax: With this method, taxes are charged on each unit sold. For example, an excise tax is levied on each gallon of gas sold.
This may not have an impact on the profit margins of the seller, but it does increase the price of the product, which may affect the demand.
Which Is an Example of an Excise Tax?
Some example excise taxes that are levied by the federal government include:
- Alcohol: per unit excise tax
- Tobacco products: per unit excise tax
- Firearms and ammunition: per unit excise tax
- Gasoline and diesel: per unit excise tax
- Sport fishing equipment: percentage of price excise tax
- Airline tickets: percentage of price excise tax
- Indoor tanning services: percentage of price excise tax
Some of the excise taxes are used for future funding of large capital projects. For example, airport excise taxes are used to fund airport improvements.
Remember, there are both federal and state excise taxes so it’s important to check the requirements with your state.
Who Pays the Excise Tax?
Most customers don’t realize that they are paying excise taxes. This is because the taxes are generally factored into the product cost, rather than listing it separately like sales tax.
If you run a business that’s required to collect excise taxes, it’s your responsibility to collect the tax from the customer and pay it to the government every quarter. To do that, business owners must file Form 720, Quarterly Federal Excise Tax Return which lists the various types of federal excise taxes. In the form, business owners must list the types of taxes that they’ve collected and reported it to the government. In addition, states may have their own filing requirements.
There are certain exemptions to paying excise taxes. Non-profit organizations, government organizations and emergency service providers are exempt from certain excise taxes in some situations.
By keeping a record of these expenditures for which excise taxes were collected, these organizations can claim a refund of the taxes on IRS Form 8849 at the end of the year.
What Is the Difference Between an Excise Tax and a Sales Tax?
Sales tax is the tax that businesses usually collect from the consumer at the point of purchase and pay to the government for the sale of certain goods and services. There are two basic differences between sales tax and excise tax.
While excise tax is levied only on certain goods and services that are considered harmful or linked to specific health issues, sales tax is applied to a broad range of things.
Also, sales tax is calculated a percentage of the sale price. For example, if you buy a more expensive luxury vehicle as opposed to a cheaper utility vehicle, you would need to pay more sales tax. The percentage of sales tax applied is set by the local and state governments in the United States.
On the other hand, an excise tax is often a per unit tax imposed before the purchase price for specific items by the state, local and federal governments. For example, in 2019 a tax of $4.35 is imposed on each 20 cigarette package by the New York State regardless of the base price of the pack.
To pay excise taxes, businesses must file Form 720 a month after the end of each quarter.
The form can be filed through the IRS EFTPS system or sent by mail.