What Is Excise Tax?

As a small business owner, you have a lot of government documents and tax forms for small business to keep up with. You might be responsible for filing and paying excise tax if you sell certain products or services at your company. What is excise tax?

What is an excise tax?

Excise tax, sometimes simply called an excise or an excise duty, is a tax imposed on certain goods and services. Both federal and state governments can choose what goods and services are subject to excise tax. As an indirect tax, the excise amount is included in the total purchase price of the product or service.

Consumers do not directly pay excise tax to the government. Instead, the IRS imposes the tax on business owners who sell excise items. The business owner passes the tax on to the consumer by including it into the total sale amount.

Excise tax vs. sales tax

Excise tax is different from sales tax because the sales tax amount is clearly indicated in the official receipt of a sale. The consumer does not see the addition of the excise tax on their receipt or bill of sale.
What items are subject to excise tax?
Excise taxes are often added to items that are viewed as unnecessary or extra. In fact, excise taxes are also known as “sin taxes” because they help decrease the sale of items that have a high social cost.

If used excessively, these items might be harmful to people’s health or the environment. An example of an excise tax might include an extra tax on tobacco, alcohol, or gambling.

List of excise tax products

Other products that have excise tax include:

  • Fuel
  • Air transportation,
  • Semi-trailers
  • Ship passengers
  • Coal production
  • Indoor tanning services
  • Sport fishing equipment

The full list of excise tax examples is fairly lengthy and detailed. To get a comprehensive and up-to-date listing of items covered by excise tax, check out IRS Form 720.

Two types of excise tax

There are two types of excise tax. The two types of taxes differ based on how you calculate the tax. Depending on the product or service you are selling, you will use one or the other type of excise tax.

Specific excise tax

Specific excise tax is the most common type of excise tax. You calculate the tax by adding a fixed amount to the selling price of an item. For example, a $12 bottle of wine with a $2 excise tax should be sold for $14.

Ad valorem excise tax

Ad valorem excise tax is the other type of excise tax. You figure ad valorem excise by adding a fixed percentage based on the selling price. For example, a tanning service that costs $20 and has a 10% excise tax should have $2 added to the amount due, making the total cost $22.

How to pay excise tax

You pay federal excise tax quarterly. To make payments, you must file Form 720. Use Schedule A of Form 720 to show the amount of your excise tax due.

Make payments within one month after the end of each quarter. You need to pay excise tax for the quarter ending in:

  • March by April 30
  • June by July 31
  • September by October 31
  • December by January 31

If Form 720 is due on a weekend or holiday, file the form by the next business day. You can file and pay excise tax online through the Excise Tax e-File & Compliance (ETEC) Programs. You can also mail the form and payment to the IRS.

Excise tax on excess benefit transactions

The IRS imposes an excise tax on excess benefit transactions between a disqualified person and a tax-exempt organization. A disqualified person is someone who has influence over a tax-exempt organization. For example, someone who donated money to a charity is a disqualified person.

In an excess benefit transaction, the individual donates something of economic value (e.g., money) to a tax-exempt organization. Then, the tax-exempt organization gives something of value to that individual. When the item the tax-exempt organization provided is of higher value than the amount the individual donated, it is an excess benefit transaction. The disqualified person is liable for an excise tax.

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This article has been updated from its original publication date of November 4, 2016.

This is not intended as legal advice; for more information, please click here.

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