Excise Taxes: A Guide for Small Businesses

The federal government imposes excise taxes on a variety of products and services that are manufactured in or imported into the United States. Business collect excise taxes and pay these excise taxes over the the government. Excise taxes apply to alcoholic beverages, tobacco, firearms, airfares, telephone service, and many other products and services.

Alcohol and Tobacco Tax and Trade Bureau (TTB) collects excise taxes and regulates businesses involved with alcoholic beverages, tobacco products and firearms. The Internal Revenue Service collects all other federal excise taxes.

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. The two federal government agencies regulating these taxes are the Internal Revenue Service and the 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 tax on gasoline and cigarettes is a fixed dollar amount, whereas the 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 this type of tax is to try to 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 are 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!)

Products & Services Subject to Excise Tax

Excise taxes apply to specific products and services. There are numerous of these taxes imposed at the federal and state levels. At the federal level, these taxes are imposed on alcoholic beverages, tobacco products, guns and firearms, gasoline, air travel, telephone service, tires, and variety of other goods and services.

Excise Taxes on Alcohol, Tobacco, & Firearms

Businesses may need to collect and remit excise taxes if the business manufactures, produces, or imports alcoholic beverages, tobacco products, or firearms. The Alcohol and Tobacco Tax and Trade Bureau (TTB) collects the taxes on alcohol, tobacco, and firearms.

Below are the current excise tax rates for various types of alcoholic beverages, tobacco products, firearms, and ammunition:

Excise Tax on Alcohol

Excise taxes are levied on the production of alcohol. Alcoholic products include beer, wine, and distilled spirits. Excise tax rates are based on the volume of production. In the case of wine, the tax rates vary based on alcoholic content by volume.

The excise tax rates on alcoholic beverages in effect for the years 2018 and 2019 include:

Summary of Excise Taxes on Beer, Wine, & Distilled Spirits for 2018-2019

You can download a free alcohol, tobacco, and firearm excise tax rate PDF.

Excise Tax on Tobacco

Excise tax applies to tobacco products. Tobacco products include cigarettes, cigars, pipe tobacco, chewing tobacco, loose tobacco, cigarette papers, and tubes. The tax is based on a flat rate per quantity or weight.

The excise tax rates on tobacco products in effect for the years 2018 and 2019 include:

Summary of Excise Taxes on Tobacco Products for 2018-2019

You can download a free alcohol, tobacco, and firearm excise tax rate PDF.

Excise Tax on Firearms

Excise tax is applies to the sale of firearms and ammunition. Firearm products include pistols, revolvers, guns, rifles, and bullets. The tax rate is a flat percentage based on the sales price.

The excise tax rates on firearms in effect for the years 2018 and 2019 are:

Summary of Excise Taxes on Firearms & Ammunition for 2018-2019

You can download a free alcohol, tobacco, and firearm excise tax rate PDF.

Excise Tax on Services & Manufactured, Produced, or Imported Products

Businesses that provide certain services or that manufacture, produce, or import certain types of products may need to pay excise tax to the IRS. This type of tax applies to a wide range of products and services including air travel, gasoline, and telephone service. In the year 2017, the IRS collected over $63.9 billion in excise taxes.

Federal excise tax applies to the following types of services and products:

• Air transportation: A tax rate of 7.5% applies to amounts paid for transportation of persons and 6.25% for transportation of property. This tax also applies to aircraft management services and the use of international air travel facilities.
• Bows and arrows: A tax rate of 11% of the sales price applies to bows, quivers, broadheads, and points, as well as 51 cents per arrow shaft.
• Coal: The excise tax rate depends on how the coal is mined. For underground-mined coal, the tax rate is either $1.10 per ton or 4.4% of the sale price, whichever is lower. For surface-mined coal, the tax rate is either 55 cents per ton or 4.4 of the sale price, whichever is lower.
• Crude oil and petroleum products: An oil spill liability tax of 9 cents per barrel applies to crude oil received at a U.S. refinery and petroleum products entering into the U.S. for consumption, use, or warehousing. This tax also applies to natural gas and petroleum products.
• Cruise ship passengers: An excise tax of $3 per passenger is imposed on the operator of the vessel. This tax does not apply to crew members.
• Electric outboard motors: Typically used for boats, the excise tax rate is 3% of the sales price. This tax also applies to parts and accessories.
• Fishing equipment: A tax of 10% of the sales prices applies to fishing rods and poles, not to exceed $10 per item. A 3% rate applies to tackle boxes. Manufacturers and resellers are responsible for paying the tax.
• Gas guzzler automobiles: Applies to vehicles with fuel economy less than 22.5 miles per gallon. The excise tax depends on the miles per gallon and ranges from $1,000 to $7,700 per car. Manufacturers calculate and report the gas guzzler tax on Form 6197. This tax does not apply to limousines, ambulances, police cars, or firefighting trucks.
• Gasoline: Aviation gasoline is taxed at $0.194 per gallon; other types of gasoline are taxed at $0.184 per gallon. There are different tax rates on diesel fuel, kerosene, compressed natural gas (CNG), and other fuels.
• Heavy trucks, trailers, and semi-trailers: A tax rate of 12% of the sales price is due on the first retail sale of truck chassis, truck trailer chassis, semi-trailer chassis, and bodies and tractors used for highway transportation.
• Indoor tanning salons: An excise tax of 10% of the price paid for indoor tanning salon services. This tax does not apply to phototherapy services performed by medical professionals.
• Insurance policies sold by foreign insurance companies: Excise taxes apply to insurance policies that are issued by foreign insurers. Casualty insurance, fidelity, and surety bonds have a tax rate of 4 cents per dollar (or fraction of a dollar) of premiums. Life, sickness, accident insurance, and annuities have a tax rate of 1 cent per dollar (or fraction of a dollar) of premiums.
• Telephone service: Local telephone service and teletypewriter exchange services are subject to a 3% excise tax.
• Tires: Rubber tires designed for highway use are subject to an excise tax of $.0945 for each 10 pounds of maximum-rated load capacity over 3,500 pounds. Biasply or super single tires (other than those designed for steering) are taxed at a lower rate of $.04725.
• Vaccines: Certain vaccines sold by the manufacturer in the U.S. are subject to an excise tax of 75 cents per dose. This includes, but is not limited to, vaccines against influenza, measles, mumps, chicken pox, and polio.

How to Register a Business to Collect Excise Tax

Before purchasing, manufacturing, or selling products and services subject to excise tax, businesses will need to register with the Alcohol and Tobacco Tax and Trade Bureau (TTB) to collect taxes relating to alcohol, tobacco, and firearms. Businesses that collect other types of excise taxes will need to register with the Internal Revenue Service (IRS).

The penalties for not registering for excise tax are pretty steep. The initial penalty is $10,000. After that, the penalty is $1,000 per day for each day you fail to register. You must provide reasonable cause for the delay in order for the IRS to consider waiving this tax registration penalty.

The process for registering for excise tax includes:

• Register with the TTB: Submit your application online, or you can download a PDF of the application and send it via postal mail. TTB processing times range from 17 to 225 days, depending on the type of permit.
• Register with the IRS: Submit Form 637. If your application is approved, the IRS will send you a Letter of Registration. You can find more details about the Form 637 registration process on IRS.gov.

When & How to Pay Excise Taxes

Businesses report and pay excise taxes to the Alcohol and Tobacco Tax and Trade Bureau (TTB) either semi-monthly, quarterly, or annually, based on the expected total tax liability for the year. Excise taxes are reported to the IRS quarterly and paid semi-monthly on the 14th and 29th days of the month.

We discuss the excise tax due dates and filing process for the TTB first, and then the excise tax due dates and filing process for the IRS:

How to Pay Excise Tax to the TTB for Alcohol, Tobacco, & Firearms

To file and pay federal excise taxes for alcohol, tobacco, and firearms, businesses complete the TTB Smart Form 5000.24. These tax payments are due either annually, quarterly, or semi-monthly, depending on total excise tax liabilities for last year and the current year.

The frequency of your due dates is determined based on your total excise tax liability as follows:

• Annual filing: If your total tax liability was $1,000 or less last year, and you reasonably expect it to be $1,000 or less this year.
• Quarterly filing: If your total tax liability was $50,000 or less last year, and you reasonably expect it to be $50,000 or less this year.
• Semi-monthly filing: Businesses with total tax liabilities over $50,000 last year or this year.

The due dates for filing and paying excise tax filers include:

2018 & 2019 Due Dates for TTB Excise Taxes: Annual Filers

2018 & 2019 Due Dates for TTB Excise Taxes: Quarterly Filers

2018 & 2019 Due Dates for TTB Excise Taxes: Semi-monthly Filers

Read More

How to Pay Excise Tax to the IRS for Products & Services

Excise tax on services and products (other than alcohol, tobacco, and firearms) is paid semi-monthly to the IRS on the 14th and 29th days of the month. Excise tax returns are filed with the IRS quarterly. Learn more about what information is required in the FitSmallBusiness guide on How to Complete IRS Form 720.

The due dates for Form 720, Quarterly Federal Excise Tax Return, include:

2018 & 2019 Due Dates for Excise Tax Filing of Form 720

Excise Tax Penalties & Interest

Business that file excise tax returns late and/or pay the tax after the deadline may be subject to penalties and interest. Both the IRS and the TTB penalize businesses for failing to register, for failing to file, and for failing to pay. The government also charges interest on late tax payments.

Excise tax penalties and interest rates include:

• Failure to File Penalty: 5% of the tax not paid for each month or part of a month that the return is late. Maximum late filing penalty is 25%.
• Failure to Pay Penalty: One-half of 1% of unpaid taxes for each month or part of a month after the due date that the tax is not paid. Maximum late payment penalty is 25%.
• Failure to Deposit Penalty: This penalty ranges from 2% to 15% of the underpayment, depending on the number of days a deposit is late.
• Trust Fund Recovery Penalty: 100% of the unpaid tax. Potentially applies to businesses that willfully fail to collect or to pay the taxes for telephone service, air transportation, and indoor tanning salon services.
• Interest: Interest compounds daily on unpaid tax and penalties. Interest rates are determined by the IRS quarterly. For the first quarter 2019, the interest rate is 6%.

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.

How to Keep Track of Excise Taxes

Businesses will need to keep track of the relevant production and sales data, excise tax collected from customers, and excise tax paid over to federal and state governments. This data could be kept in financial accounting software, digital spreadsheets, or paper ledgers.

There are a handful of software options for preparing and electronically filing excise tax returns, as well as scheduling electronic tax payments. One such software for preparing federal and state excise tax returns is Avalara. We recommend Avalara because it can import your tax data from back-office systems such as QuickBooks.

State Obligations for Excise Taxes

Various states impose excise taxes on marijuana, gasoline and fuels, tobacco products, and alcohol. The Federation of Tax Administrators publishes summaries of state excise taxes, as well as spreadsheets of state excise tax rates, on its website.

Frequently Asked Questions About Excise Taxes

We have discussed the general rules around federal excise taxes. Much more can be said about these taxes.

Some questions that business owners often ask about excise taxes include:

Can businesses e-file excise tax returns?

Yes. TTB tax returns, operational reports, and payments can be filed electronically via Pay.gov. IRS excise tax returns (Form 720) can be e-filed through software programs or through an authorized e-file provider. The IRS publishes annual lists of software providers that can e-file Form 720.

Does a business need to use a CPA to prepare excise tax returns?

Maybe. Certified public accountants (CPAs) can help mitigate risk by setting up processes and software systems to collect the right data and verify the excise tax calculations. CPAs can carefully review the excise tax returns on IRS Form 720 or TTB Smart Form 5000.24 before they are filed with the government.

Is kombucha subject to the federal excise tax on alcohol?

Maybe. If the kombucha product reaches an alcohol content of at least 0.5% alcohol by volume at any point during the manufacturing process, the kombucha becomes subject to federal excise tax regulation by the TTB. This is true even if the finished product has less than 0.5% ABV.

The Bottom Line

Certain types of products and services are subject to excise taxes at the federal and state level. The Alcohol and Tobacco Tax and Trade Bureau collects taxes on alcoholic beverages, tobacco products, and firearms. The Internal Revenue Service collects taxes on other products and services.

To help automate the preparation of excise tax returns, consider using software such as Avalara. Avalara can integrate with QuickBooks and other enterprise-level information systems to compile the data needed for the tax returns.

Visit QuickBooks