In contrast to sales tax, levied on nearly everything and paid directly by the consumer, excise tax is applied only to certain goods and is paid by the merchant. Although entrepreneurs prefer to focus on generating revenue, excise tax is one of the many details business owners must understand to run a successful operation.
In this article, we’ll answer the question “What is excise tax?”, provide an overview of commonly taxed goods and their associated rates, and show you how to file with the IRS properly.
Table of Contents
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Excise Definition
Excise tax is levied on certain goods and commodities produced or sold within a country and on licenses granted for certain activities.
In decades past, the tax was a significant revenue generator for the US government. However, as the law evolved, the proportion of revenue collected this way declined. Now, it’s primarily used to discourage the consumption of certain products, such as tobacco or alcohol, and to regulate particular industries, such as those that produce significant pollution.
Excise Tax vs Sales Tax
For business owners, excise and sales taxes may seem similar. They’re collected on goods and services, contribute to higher prices, and are the business’s responsibility to collect and remit to the IRS.
However, there are some slight differences:
| Sales Tax | Excise Tax |
| Charged as a percent | Charged as a percent or flat amount |
| Blanketed across all goods and services | Applied only to specific goods and services |
| Paid by the consumer | Paid by the business |
| Applied at point of sale | Applied to production or consumption; not necessarily point of sale |
State and federal governments assess many different excise taxes. However, five categories are the most important: highway, aviation, tobacco, alcohol, and health. These accounted for 93% of total excise tax receipts in 2019.
Here is a list of the most common excise tax rates business owners should know.
| Good | State Tax (Varies) | Federal Tax |
| Gasoline1 | $0 – $0.51 per gallon | $0.184 per gallon |
| Diesel2 | $0- $0.57 per gallon | $0.244 per gallon |
| Beer3 | $0.06 – $1.05 per gallon | $3.5 per barrel, up to 60,000 $16 per barrel, gallon 60,001 + |
| Wine4 | $0 – $1.7 per gallon | $1.07 – $3.15 per gallon, depending on ABV |
| Spirits5 | $0 – $14.27 per gallon | $2.7 per gallon, up to 100,000 $13.34 per gallon, gallon100,001 + |
| Cigarettes6 | $0.17 – $5.35 per pack of 20 | $1.01 per pack of 20 |
| Cigars7 | $0.02 thru 75% of price per pack of 20 | $1.01 per pack of 20 |
| **Healthcare8 | **Varies | **Varies |
Other Excise Taxes
While the above constitutes the lion’s share of all excise taxes collected, federal and state entities charge quite a few others. Depending on your business, you may want to keep these in mind as well:
- Aviation fuel
- Guns
- Ammunition
- Luxury chars
- Jewelry
- Furs
- Airline tickets
- Environmental taxes
- Mass communication services
- Gambling
- Recreational cannabis
- Carbon emissions
- Sugary drinks
- Financial transactions
Excise Tax Deductions
Excise taxes contribute to a higher cost of doing business. Still, as long as the tax is directly related to your business’s ordinary and necessary operations, you can take advantage of them as deductions.
However, some taxes, such as on luxury items, have different rules. It’s important to know that excise tax on fuel is already included in the cost; don’t double deduct when you take the mileage reimbursement for company vehicle costs.
To maximize your deductions, the key is to have a system for tracking business expenses. Modern software solutions can link to business accounts and take care of this automatically. If you’re using a spreadsheet to track finances, consider switching to another method or if your business is complex enough, consider indinero’s online bookkeeping services.
Systematizing Excise Tax Collection
By implementing a system for collecting excise tax, you can preserve your time as a business owner while remaining compliant with the law.
Determine Applicable Goods and Services
The first step is to identify what your obligations are. This includes an overview of local, state, and federal regulations and industry-specific guidelines.
Educate Your Team
Business growth relies on effective delegation. Educating your team, especially those in sales, finance, and compliance, ensures the responsible parties know these rules.
Consider designating a single person to hold responsibility for excise tax. When more than one individual is responsible for a task, no one takes full responsibility, and the job may not be completed.
Integrate Collection Into Point-of-Sale Systems
If applicable, integrating tax collection into an automated system can ensure the correct amount of tax is collected while avoiding human error.
Implement Record-Keeping Procedures
Maintaining records of sales, production volumes, and other relevant data is important for accurately filing your taxes. Without this information, the IRS can’t verify the accuracy of your reports, and you run the risk of an uncomfortable audit. (Here’s what to do if you do get audited.)
Filing Excise Tax
Excise tax is not reported on other typical business tax forms. Every business must file a quarterly or annual form 720 to do so. Depending on your business, you might also have to file a specialized form as well:
- Form 2290: heavy highway vehicle use
- Form 11-C: gambling
- Form 5330: excise tax related to employee benefit plans
How to Pay Excise Tax Online
In April 2023, the IRS received a sizable appropriation from Congress and dedicated those funds to modernizing its tax collection system and increasing audit support on high net-worth individuals.
As part of that overhaul, it’s now easier than ever to file taxes online.
- Click here to pay your federal excise tax online with a debit or credit.
- See here for a comprehensive directory of state tax and government agencies.
Changes in Excise Tax Law
Excise taxes often change slightly from year to year. Sometimes, legislatures adjust rates to reflect changes in inflation; other times, new taxes are implemented.
Keeping in touch with a tax professional can keep you informed of these changes, but here are the changes coming to excise tax law in 2024.
- Oregon and Utah are increasing excise tax applied to motor fuel.
- Kentucky is instituting a new tax on electric vehicle power.
- Maine and Hawaii are updating their tobacco and e-cigarette excise taxes.
Conclusion
Many goods and services are subject to excise tax, but the most important by tax receipt are alcohol, tobacco, health, fuel, and aviation.
As a business owner, be sure to implement a system for recording, collecting, and remitting excise tax to state and federal tax agencies. Human error is the biggest obstacle to legal compliance.
If you’d like help with these or other accounting matters, consider contacting indinero’s expert accounting and tax services.
- https://www.eia.gov/tools/faqs/faq.php?id=10&t=5 ↩︎
- https://www.complyiq.io/gas-tax-state-2/ ↩︎
- https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
- https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
- https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
- https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
- https://www.complyiq.io/cigarette-tax-state/ ↩︎
- https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise ↩︎
