Do I Need to File a Federal Excise Tax Return?

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.

What is an excise tax?

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:

• Motor fuel
• Heavy trucks
• Airline tickets
• Cruise tickets
• Vaccines
• Certain hunting and fishing equipment
• Alcohol products
• Tobacco products
• Indoor tanning services
• Imports

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 Excise Taxes

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.

How are excise taxes calculated?

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.

Exemptions to Excise Tax

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.

Filing IRS Form 720

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:

• April 30th for January, February, and March
• July 31st for April, May, and June
• October 31st for July, August, and September
• January 31st for October, November, and December

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.