Excise taxes (commonly known as a “sin” tax) is generally charged on products or services that are not considered “good” for consumers or the environment. The most common products that include an excise tax are alcohol, tobacco and gasoline. As a business owner, if you sell a product or service that is subject to excise tax, you are responsible for collecting and paying that excise tax to the appropriate federal and state authorities.
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What Is Excise Tax?
An excise tax is an additional cost that is charged for certain products and services like alcohol, tobacco and fuel, which the federal government has deemed harmful either to an individual or the environment. There are two agencies of the federal government that regulate excise taxes; the Internal Revenue Service & Alcohol and Tobacco Tax and Trade Bureau (TTB).
Excise tax can be applied to products and services in one of two ways; as a fixed dollar amount or as a percentage of the cost of a product or service. For example, the excise tax on gasoline and cigarettes is a fixed dollar amount whereas the excise tax for a luxury car or truck is a percentage of the cost of the vehicle.
The reason why only specific products are subject to excise tax is to try and discourage consumers from purchasing products like cigarettes or alcohol that can lead to health issues like cancer or liver disease. By adding an excise tax on top of sales tax, the thought is that consumers will purchase fewer of these “bad” products. That said, there’s also some products subject to excise tax that don’t exactly fit this description – we’ll list all of these further below (it might surprise you!)
What Products and Services are Subject to Excise Tax
Below is a list of the products and services that are generally subject to excise tax:
- Alcohol, Tobacco and Firearms
- Products that are manufactured, produced or imported, including fuel, motors for boats and fishing equipment.
- Services, like travel via airplane or cruise line and indoor tanning services.
Alcohol, Tobacco and Firearms
Right after fuel, which we will discuss in a minute, alcohol, tobacco and firearms generate the most in excise taxes. The excise tax for these products is regulated by the Alcohol and Tobacco Tax and Trade Bureau (TTB). Below, I have provided 3 charts directly from the TTB website that shows the current excise tax rates for alcohol, tobacco and firearms.
Alcohol
Alcohol includes beer, wine and distilled spirits. According to the chart below, beer is taxed at a flat rate of $18 per barrel or $.05 per 12 oz. can. There is also a reduced rate that you may qualify for on the first 60,000 barrels.
Summary Table of Current Excise Taxes for Beer, Wine & Distilled Spirits
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Tobacco
Tobacco products include cigarettes, cigars, pipe tobacco, chewing tobacco as well as cigarette papers and tubes. As you can see in the table below, excise tax is based on a flat rate per 1000 units or by weight.
Summary Table of Current Excise Taxes for Tobacco Products
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Firearms
Firearms and ammunition consist of pistols and revolvers and other firearms and ammunition products. As indicated in the table below, both groups are taxed as a percentage of the sales price.
Summary Table of Current Excise Taxes for Firearms and Ammunition
Products that are manufactured, produced or imported
If you manufacture, produce or import any of the following products, you will either pay a flat rate per unit or a percentage of the sales amount in excise tax. Below you will find a brief description of each product along with the latest excise tax rates, which can also be found in IRS Pub 510.
Gasoline
This includes (but is not limited to) several different types of fuel like gas for cars and trucks, aviation gas, diesel fuel, kerosene and compressed natural gas (CNG). The tax on gasoline is $0.184 per gallon and aviation gas is taxed at $0.194 per gallon.
Crude Oil and petroleum products
This applies to crude oil received at a U.S. refinery and petroleum products entered into the U.S. for consumption, use or warehousing. This tax must be calculated using Form 6627.
Bow & Arrows
This not only includes bow and arrows but other parts & accessories needed to use the bow and arrows. An excise tax of 11% of the sales price will be due on these products.
Coal
The type of coal will determine whether a flat amount per ton is charged or a percentage of the sales price. If the flat amount per ton is used, the rate will be either $1.10 or 55 cents. If a percentage of sales is used then it will be 4.4%.
Electric outboard motors
These are motors typically used for boats. Manufacturers, producers and importers will be charged 3% of the sales price.
Sport fishing equipment, fishing rods and fishing poles
The tax on fishing rods and poles is 10% of the sales price, not to exceed $10 per item.
Gas guzzler automobiles
Vehicles that don’t get more than 22.5 miles per gallon fall into this category. This tax must be computed using Form 6197. Depending on the mileage per gallon this tax amount ranges from $3,000 to $7,700 per car.
Tires
A tire that is made of rubber and used on highway vehicles will be subject to a flat rate of $.0945 or $.04725, depending on the type of tire.
Vaccines
Certain vaccines that are sold by the manufacturer in the U.S. are subject to a $.75 per dose tax. This includes but is not limited to vaccines against measles, mumps, chicken pox and polio. You can see a complete list here.
Heavy trucks, trailers or semitrailers
A tax of 12% of the sales price is due on the first retail sale of truck chassis, truck trailer and semitrailer chassis and bodies and tractors used for highway transportation.
Services Subject to Excise Tax
If you provide any of the following services, you are required to pay excise taxes. Below you will find a brief description of each service and the current excise tax rates, which can also be found in IRS Pub 510.
Air Transportation
Air transportation includes transportation of persons or property by air. A tax of 7.5% applies to amounts paid for taxable transportation.
Shipping of Passengers on a Cruise
A flat rate of $3 per passenger is imposed on the operator of the vessel. This tax only applies once, either at the time of first embarkation or disembarkation in the United States.
Foreign Insurance Taxes
Any person who makes, signs, issues or sells insurance policies that are issued by foreign insurers (outside of the U.S.) will be subject to a flat rate per dollar of the premium paid. Depending on the type of insurance, you will pay 1 cent or 4 cent per dollar of the premium payment.
For example, let’s say I have a life insurance policy and the excise tax is 1 cent per dollar of the premium payment. If my premium is $12.10 then my tax is 13 cents.
Indoor Tanning Salon
A flat rate of 10% of the sale amount is due in excise tax if you provide indoor tanning salon services. You are to charge this tax to your customers.
Communications
Local telephone service and any leased telephone equipment that you may use in your business is subject to a 3% excise tax.
Paperwork that must be filed to register your Business to Collect Excise Tax
Before you can purchase, manufacture or sell products and services (other than alcohol, tobacco and firearms) subject to excise tax, you must submit Form 637 to register your business. If your application is approved, the IRS will send you a Letter of Registration. You can find more details about the registration process here.
The penalty for not registering your business is pretty steep. The initial penalty is $10,000. After that, it is $1,000 per day for each day that you fail to register. You must be able to provide reasonable cause for the delay in order for the IRS to consider waiving this penalty.
In order to sell alcohol, tobacco or firearms, you must submit an application to the Alcohol, Tobacco Tax Trade Bureau (TTB). You can submit your application online, or you can download a PDF of your application and send it via snail mail. The average application takes about 75 days to process. You must receive approval from the TTB before you can begin operations.
What to do with Excise Tax Collected & When to Pay
Since alcohol, tobacco and firearms is regulated by the TTB, the due dates to pay and file will differ from the products and services regulated by the IRS. Let’s discuss the TTB filing requirements first and then the IRS.
Alcohol, Tobacco and Firearms
To file and pay your excise taxes for alcohol, tobacco and firearms, you must complete the TTB Smart Form 5000.24. You can access this form and complete it online here.
If you are in the alcohol and tobacco business then you will be required to file and pay excise taxes on a semimonthly or quarterly basis. If you did not pay more than $50,000 in excise tax in the previous year and/or you do not expect to owe more than $50,000 in excise taxes in the current year, then you will be required to file on a quarterly basis.
Below is a chart that summarizes the due dates for quarterly filers.
2017 Due Dates for Excise Tax – Quarterly Filers
| Tax Return Period | Due Date |
|---|---|
| 1st Qtr (Jan 1 - Mar 31) | April 14, 2017 |
| 2nd Qtr (Apr 1 - Jun 30) | July 14, 2017 |
| 3rd Qtr (Jul 1 - Sep 30) | October 13, 2017 |
| 4th Qtr ( Oct 1 - Dec 31) | January 12, 2018 |
If you paid more than $50,000 last year and/or will owe more than $50,000 this year, then you will be required to file on a semimonthly basis. Below is a table directly from the TTB website that summarizes the 2017 due dates for semimonthly filers.
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All Other Products & Services
Excise tax on all other products and services (except alcohol, tobacco and firearms) must be paid quarterly to the IRS. You will use Form 720 to report and calculate the total excise taxes due and collected. The due dates are summarized in the table below. You can learn more about what information is required and how to complete Form 720 here.
Summary Table of Due Dates for Excise Tax Payment & Filing of Form 720
| Quarter | Due Date |
|---|---|
| 1st Quarter (Jan 1 - Mar 31) | April 30 |
| 2nd Quarter (Apr 1 - Jun 30) | July 31 |
| 3rd Quarter ( July 1 - Sept 30) | Oct 31 |
| 4th Quarter (Oct 1 - Dec 31) | January 31 of the following year |
Penalties and Interest
Like most taxes, if you fail to file your returns and/or pay your taxes due on time, you will be penalized. In the table below, you will find a list of the penalties you will be subject to for delinquent excise taxes on all products (including those regulated by the TTB) that are subject to excise taxes.
Summary Table of Current Interest & Penalties for Late Excise Taxes on Alcohol, Tobacco and Firearms
| Penalty | Amount |
|---|---|
| Failure to File Penalty | 5% of the tax not paid for each month or part of a month that the return is late. |
| Failure to Pay Penalty | 1/2 of 1% of your unpaid taxes for each month or part of a month after the due date that the tax is not paid. This penalty cannot be more than 25% of your unpaid tax. NOTE: If a penalty for failure to file and a penalty for failure to pay both apply for the same month, the amount of the penalty for failure to file for that month is reduced by the amount of the penalty for failure to pay tax shown on a return. |
| Failure to Deposit Penalty | This penalty ranges from 2% to 15% of the underpayment depending on the number of days a deposit is late. |
| Interest | Interest will compound daily on any unpaid tax or penalty. |
How to Keep Track of Excise Taxes
Excise tax can be a lot more challenging to keep track of than sales tax. This is due to the fact that some products are taxed on a per unit basis whereas others are taxed as a percentage of sales. Therefore, I recommend that you use excise tax software to make your life easier. Avalara is a tax software that you can use to calculate, file and pay your excise taxes. You can check out Avalara excise tax software here.
State Obligations
Our focus in this federal excise tax guide has been primarily on the requirements at the federal tax level. However, each state has their own rules and regulations that you must also follow regarding excise taxes. You can learn more about what your state requirements are when it comes to collecting, filing and paying excise taxes here.
The Bottom Line
By now you probably have learned everything that you did (or didn’t) want to know about excise taxes. For most people, taxes in general can be overwhelming. Excise taxes in particular are probably one of the most complicated taxes to keep track of because (unlike sales tax) it is only applicable to a specific group of items.
In order to ensure that you are not eating this cost, you have to build in excise taxes when you price your products for sale to your end customer.
To make it easier on yourself, I suggest you check out Avalara, which can automate this process for you. By using a tax software program, you will have the confidence that the calculations are accurate and that your taxes are filed and paid on time. Avalara integrates directly into your QuickBooks account to make dealing with sales tax even more streamlined.
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