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Excise Taxes Explained

The U.S. government, via the IRS in this particular case, charges a number of different types of taxes on goods. The excise tax is just one of them, and it’s one of those tax types where the United States is not alone. Many other countries charge excise taxes as well.

As far as the U.S. is concerned, the excise tax is something that qualifying companies must pay on the goods that they process or manufacture, although some services are charged the tax as well. The tax is paid on the items before they even go to market, and it’s often charged as a lump sum, based on the amount of the goods processed or manufactured.

Want to learn more about excise taxes? Keep reading, as we explain many important facts about the excise tax here.

What Is an Excise Tax?

To put it simply, an excise tax is a tax that’s charged by the government on certain goods and services. The tax is applied before those goods go to market, so it is mostly paid by manufacturers. For example, a mining company that sells coal to various energy producers is charged an excise tax on that mineral. The tax is usually applied to bulk amounts, so it’s charged by the ton in this particular case. Coal that is mined from under the earth is taxed at either $1.10 for each ton sold or, in some cases, 4.4% of the final sales price to the business that purchases it from the mining company. Coal that is surface mined is subject to an excise tax of 4.4% of the overall purchase price (just like the other form of mined coal) or 55 cents per ton (less than the other type of mined coal).

So, where do these excise taxes go? That depends on the industry, good, and service that are being taxed. Continuing with the coal example, those funds are placed in the Black Lung Disability Trust Fund, which provides monetary assistance to miners who have black lung disease from the time spent working in the industry. Excise taxes can also be used to repair roadways and bridges, as well as airport improvements. It all depends on what the tax is placed on. For the most part, the excise tax amounts go towards promoting the common good.

States and Local Governments Charge an Excise Tax as Well

In addition to the excise taxes placed on certain goods and services by the federal government, some local governments, including states, counties, and cities, charge an excise tax as well. A good example of this is on fuel – gasoline. The U.S. government charges an excise tax on fuel manufacturers, as do some state governments. These amounts go towards improving and maintaining federal highways, as well as state highways and even the roads in some local municipalities, depending on how the states divide it up.

Easy to Confuse with Other Taxes

Since some states, counties, and cities have imposed a sin tax on the purchase of certain goods, like cigarettes, to pay for things like professional sports stadiums or even environmental controls, like the e-checks that must be done on certain vehicles in order to renew their license plates and tags, it’s easy to get the two confused. However, these sin taxes are paid by the consumers – those who buy that pack of cigarettes, for example, while excise taxes are solely paid by the manufacturers. This is the easiest way to tell the two types of taxes apart. Simply put, the good taxed might be the same, but who pays them is not.

Which Goods and Services are Subjected to Excise Taxes?

The types of good and services that are subjected to excise taxes vary widely. Here are some of the most common ones:

  • Coal – Coal that is mined from under the earth is taxed at either $1.10 for each ton sold or, in some cases, 4.4% of the final sales price to the business that purchases it from the mining company. Coal that is surface mined is subject to an excise tax of 4.4% of the overall purchase price or 55 cents per ton.
  • Sports Betting – Although sports betting or wagering is technically illegal, due to federal laws, the U.S. government has chosen to let individual states choose whether or not they want to allow sports betting to take place. If they do allow it, there is an excise tax applied to the bets that are made. Currently, these rates are .25 % of the amount of the wager if the state allows for sports betting and 2% if it is not. Also, the agent or location accepting the wager is subject to a $50 annual occupation tax if the state allows sports betting or $500 if it does not.
  • Kerosene – Kerosene that is used for aviation fuel purposes is taxed at a rate of $0.244 per gallon. However, this only applies if the kerosene goes from the manufacturer or distiller to a third party before it ends up going into the tank of an aircraft. If the kerosene goes straight from the distiller into the aircraft, the excise tax does not apply.
  • Tanning Services – There is a 10% excise tax placed on the amounts paid by people to use indoor tanning beds. In some cases, breaking the rules on excise taxes, the tanning company passes the tax on to their customers, forcing them to pay the additional 10%. However, in other cases, it’s paid by the tanning company, not the individual users. This tax was created when the Affordable Care Act was passed and signed into law, and it is meant to discourage people from using tanning services.
  • Additional Excise Taxes – In addition to the taxed goods and services listed above, excise taxes are also placed on alcohol and tobacco products, gasoline and diesel fuel, medical devices, and prescription drugs.

While the goods and services that are taxed are not specially listed in the U.S. Constitution, that document does permit the government to place taxes on items as needed in order. Since the states cannot place tariffs on items that are made in one state and shipping to another, these federal excise taxes help support the states by providing funds for improving roadways and other important things.

How Are Excise Taxes Paid?

The method of gathering excise taxes and sending them to the IRS varies, depending on who collects the funds. Since these taxes can be imposed on importers, manufacturers, retailers, and in some cases, even the consumers, it’s no wonder that many people get confused about this part of the process. Thankfully, the IRS makes it fairly easy to pay your excise taxes.

  • Collecting the Taxes – The company or person in charge of collecting the taxes, whether this is done by a third party or the importer or manufacturer themselves, handles the process of gathering receipts and recording amounts, placing the excise taxes in a special account separate from other funds in order to keep things clean and clear.
  • Filling Out the Tax Form – Whoever collects the excise taxes is also in charge of filling out the form and sending in the funds. There are several different IRS forms that may need to be taken care of. The most common is Form 720, the Quarterly Federal Excise Tax Return. This one is used in many different industries. However, there are also several other forms such as Form 8849, Claim for Refund of Excise Taxes, and Form 2290, Heavy Highway Vehicle Use Tax. Which forms you need to fill out depend on the industry.
  • Submitting the Forms and Money – The excise tax amounts are due at the same time that the form is submitted. The forms can be sent in on paper along with a check for the tax amount due, or they can be filed electronically, along with a direct bank transfer or other means of electronic payment.
  • When to Send in Excise Taxes – Finally, it’s important to note that excise taxes are due on a quarterly (not yearly) basis. The due dates for each quarter are:
    • April 30th for the months of January through March
    • July 31st for the months of April through June
    • October 31st for the months of July through September
    • January 31st (of the following year) for the months of October through December

If the due date falls on a weekend, then the taxes must be submitted by the next business day, or else they are considered late and will be subject to penalties, interest, and fines.

Contact Us Today

If you have any questions about excise taxes or find that you are subject to them and are not sure how to proceed, then we are here to help. Please reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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