Navigate the complexities of federal excise taxes with our essential guide, designed to clarify who needs to file, when, and how—ensuring you stay compliant and informed every step of the way.
Starts at $0 + state fees and only takes 5-10 minutes
When you’re planning ahead for tax season, you’ll probably read through a long list of taxes and wonder which ones you have to pay. Federal excise taxes are a common tax type that might apply to your small business. But what are excise taxes? Who pays them, and how?
In this guide, we’ll cover the essentials of federal excise taxes so you can tackle them seamlessly if you need to.
An excise tax — more specifically, a federal excise tax — is a tax levied on the sale of certain goods. In most cases, businesses pay excise taxes, but they are allowed to add the cost of the tax onto the consumer by raising the purchase price. It’s a tax that’s levied on small and large businesses alike.
A good number of common items are subject to federal excise taxes, including:
Before selling these taxable goods, a business must file Form 637 to register for certain excise taxes. A few other excise tax types use different forms. Keep in mind that the federal government also charges an excise tax for certain types of retirement account activity, so sometimes individuals need to pay, too.
Some excise taxes have been nicknamed “sin taxes” because they’re levied on items that can arguably have a negative social impact, like smoking or drinking. In theory, the tax discourages that behavior by raising the price. Regardless, excise tax revenues go into federal government trusts that help fund conservation efforts, transportation improvements, road maintenance, and more.
State and local governments can charge their own excise taxes that accompany federal ones. These taxes function very similarly to federal excise taxes, but what each state taxes varies. Those taxes are important, too, but in this guide, we’ll be focused on federal excise taxes.
Excise tax rates come in two different types: ad valorem excise taxes or specific excise taxes. Ad valorem taxes (Latin for “according to value”) occur on a percentage basis, levied as a percent of the retail price. Tanning salons are a common example of this; they’re taxed at a 10% rate. If someone purchases a $50 tanning session, the excise tax will be $5. These taxes stack on top of state sales taxes.
Specific tax rates are excise taxes that are a set cost per unit. Gasoline is a common example of a specific excise tax. The current gasoline tax is 18.3 cents (plus 0.1 cents for storage) per gallon. Since the tax is charged on a per-unit basis, for every gallon of gas a local station sells, they’ll pay 18.4 cents in taxes, which is usually added to the consumer’s purchase price.Need help managing your finances and calculating your tax burdens? Our money app can help you streamline your finances and manage your tax burden.
There are a few different circumstances when a business might be exempt from excise taxes. Some of the most common exemptions include sales to state or local governments, nonprofit education groups, and qualified blood collector organizations. Additionally, taxable items that are sold to another business for use in manufacturing can be exempt.
To be eligible for exemption from excise tax, usually the seller and first buyer (and second, if applicable) both need to register. They’ll also have to provide proof that the sale was exempt.
You can check out our small business tax tips guide for some general tax strategies. But if you have specific questions about your excise tax liability or exemption eligibility, we highly recommend consulting with a licensed tax attorney or CPA for assistance.
For most businesses, filing and paying excise taxes requires filling out Form 720, the Quarterly Federal Excise Tax Return (there are a few businesses that have other excise tax forms). Form 720 is a quarterly tax return with the following due dates:
You will need to submit your excise tax liability payment on or before those dates for each quarter. If you don’t file on time (or within the grace period), you’ll face excise tax penalties.
Note: as part of Form 720, you’ll be required to list your employer identification number (EIN). If you know you’ll owe excise tax and don’t already have an EIN, you should get one right away. Our EIN service can help you register for one quickly and easily.
Starting and managing a business can feel overwhelming, but it doesn’t have to be — especially when you have the right team in your corner. Here at ZenBusiness, we love to team up with small business owners to help them tackle the red tape of business. Whether you need help starting your first LLC, staying compliant every year, or maintaining a registered agent, we’ve got your back.
Who is subject to federal excise tax?
The federal excise tax is levied on businesses that sell qualifying goods. Some of the most commonly taxed businesses include telephone service companies, heavy-duty trucks, gas stations, airlines, and vendors of alcohol and tobacco. But there are plenty of other reasons a business might owe excise tax.
What is a federal excise tax return?
A federal excise tax return is a tax form used for the reporting and payment of a business’s excise tax liability. A business only needs to file an excise tax return if they owe excise taxes. The excise duties you report on the return depend on the good you’re selling. Ad valorem excise taxes are based on a percentage of the retail cost of the good, and special taxes are a fixed rate per unit. Fuel taxes are one of the most common examples of special excise taxes. The federal tax return doesn’t cover additional taxes that might be levied at the state level.
Is excise tax the same as income tax?
No, excise taxes and income taxes are different. An excise tax is levied as a percentage or fixed price of a certain good; in many senses, it behaves similarly to a sales tax (but only for specific items). In contrast, income taxes are levied on the net income a business generates in a given year.
What is excise revenue used for?
Excise revenues often go into different federal government trusts and programs to pay for improvements. For example, air transportation excise taxes contribute to safety and improvement programs for air travel. The tax on truck tires produces revenues that are used to maintain and improve federal highways, as do taxes on gasoline. Excise taxes make up a small portion of annual federal revenues.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
Logo Resources
Start an LLC in Your State
When it comes to compliance, costs, and other factors, these are popular states for forming an LLC.
Still need to form your LLC?
Start Your LLC