An excise tax is a type of tax that is imposed on certain goods or services at the point of sale or consumption. Unlike general sales taxes, which are levied on all goods and services, excise taxes are targeted to items like tobacco products, alcohol, gasoline, firearms, and other luxury goods. As such, these taxes are also sometimes referred to as luxury taxes, or even “sin taxes”.
In some cases, an excise tax is levied on a product to discourage the production or purchase of that product, like tobacco or alcohol, due to the risk of personal harm (and its impact on the health and productivity of a society). In other cases, it is levied on products that lower classes are unlikely to afford, from luxury cars to extravagant airline tickets.
Excise taxes generally work. For example, in the case of tobacco, the increase in excise taxes correlated roughly with a drop in smoking rates and overall tobacco consumption.
Excise taxes are typically included in the price of the product or service. They can be calculated as a percentage of the sale price (ad valorem), or as a fixed amount per unit of the product or service (specific excise tax). These taxes can also be collected by either the manufacturer or the retailer, depending on the specific tax and the jurisdiction where it is levied.
This means it is part of a business’ growing list of responsibilities to keep track of and collect excise taxes for the government. If a company sells certain goods and services, it must charge and set aside the right amount (based on units sold or revenue generated) for the government.
Types of Excise Taxes
The list of exact items and services that incur an excise tax is quite extensive. Most items that incur an excise tax can be summarized under the following:
- Alcoholic beverages
- Tobacco products
- E-cigarette products
- Legal marijuana (medical and recreational)
- Indoor tanning services
- Air transportation
- Firearm accessories, firearms, and ammunition
- Fuels (especially gasoline)
- Gambling
- Legalized betting (sports betting)
- Vehicles
- Luxury goods (either by classification or past a certain value)
If you aren’t sure if any of the goods or services sold through your business require an excise tax, then the best thing to do is consult the manufacturer or speak directly to the IRS. Generally speaking, any tobacco, alcohol, or firearms products automatically require an such tax and require registration with the ATF. Other products and services, such as indoor tanning salons or online casinos, must work with the IRS.
Who Collects Excise Taxes?
Both state and federal tax authorities may collect these taxes, while the sale of certain products requires additional registration with authorities such as the ATF or the DEA (for marijuana growers, for example).
Before you can sell a product or service that requires an excise tax, you must apply for registration with the IRS. Do so through Form 637, Application for Registration (For Certain Excise Tax Activities).
Form 637 comes with a three-page chart on certain activities that trigger an excise tax. On the first page of the form, list the activities you wish to register via their respective activity letter and provide a brief description of each activity. If additional information is required, you will need to attach this to the form itself before sending it off to the IRS. Furthermore, there are at least a dozen other forms that may be relevant to your business if you sell goods or services with an excise tax.
How are Excise Taxes Levied?
Excise taxes can be levied ad valorem or via a specific tax. This either means a percentage of the value of the goods or services or a flat tax on a unit. Some excise tax activities require an ad valorem tax, while others have a specific tax: a flat dollar value added to a pack of cigarettes or a bottle of wine.
States and federal tax authorities levy excise taxes separately. For example, the specific federal excise tax on a pack of cigarettes is just over a dollar. Connecticut’s excise tax on a pack of cigarettes, on the other hand, is $4.35. A business selling cigarettes in Connecticut needs to include both taxes in the sale of each pack.
Businesses are not required to tell customers about excise taxes.
Why the Government Imposes Excise Taxes
There are a few motivations for the government to impose an excise tax. The first is additional tax revenue. While it might not seem like much, these taxes make up about 3 percent of the federal revenue, not to mention the impact on state budgets. That’s billions of dollars.
They also play a role in putting public policy to work. Airline tickets and cars are taxed higher than the average sales tax to discourage people from traveling too much, due to the environmental impact of a commercial flight, or the purchase of a combustion engine vehicle. In contrast, buying an electric car or installing solar power in your home grants you a significant individual tax credit.
Indoor tanning salons are a relatively new addition to the excise tax list, as part of the Affordable Care Act. In this case, the tax is meant to curb rising rates of melanoma among populations that are a little too fond of tanning beds.
When Are Excise Taxes Due?
A business collecting excise taxes must file its excise tax return and pay its due taxes at the end of every fiscal quarter. A Form 720, Quarterly Federal Excise Tax is needed. This form can be filled out online and e-filed.
As for state excise taxes, these are due depending on local or state tax laws. Some states may also require separate tax returns for certain types of excise tax, or certain goods or services. Because these schedules run separately for a number of different goods and services, these taxes can be difficult to keep track of. And the penalties can be outrageously high.
Taxes paid to the ATF are on a different schedule as well. Here is a compilation of information on federal excise taxes for alcohol, tobacco, and firearms products, and when each individual return and tax amount is due.
Have more questions about the excise taxes? Contact Rush Tax Resolution today.