Learn how an excise tax works, how this tax may apply to you as a consumer or small business, and the tax form you need to use to remit federal excise taxes.
• Consumers pay excise taxes on certain items, but most excise taxes are collected and forwarded to the government by the companies that sell the taxed items.
• Excise taxes can be imposed by federal, state, and local governments—sometimes on the same item at the same time by multiple governmental agencies.
• Some excise taxes are calculated as a percentage of an item’s price, but others are a flat amount. The federal excise tax on gasoline is a flat 18.4 cents per gallon (tax year 2022).
• Items sold to government agencies, nonprofit organizations, or to companies that will use the items in manufacturing or to sell to a third party for manufacturing may be exempt from some excise taxes.
An excise tax is a tax a government imposes on a particular good or service. These taxes are different from sales taxes, which apply a single sales tax rate to a wide variety of purchases. Excises taxes may only apply to a few transactions in your everyday life, but you should still understand how they work.
The basics of excise tax
The federal government implements the most widely applicable excise taxes, but state and local governments can create their own excise taxes, too. In some cases, several governmental entities will impose an excise tax on the same item.
Each excise tax has its own rate that may be expressed as a flat dollar amount or a percentage. While you as a customer may end up paying the excise tax to a business, you're typically not responsible for remitting and reporting those amounts to the government. Companies that sell items with an associated excise tax must take care of these responsibilities.
Examples of excise taxes
Consumers don't often realize they're paying excise taxes. These taxes are usually lumped into the price they pay or listed as a line item on a receipt. For these reasons, consumers often aren't as aware of excise taxes as they may be of sales taxes. But several excise taxes impact purchases you may regularly make.
Common federal excise taxes are imposed on:
- Gasoline fuel
- Diesel fuel
- Air travel
- Boat travel
- Electric outboard motors
- Indoor tanning services
Some of these taxes are percentage-based. For instance, the indoor tanning services excise tax is 10% of the amount paid, and the electric outboard motors excise tax is 3% of the sales price. This means if you buy an electric outboard motor from a boat shop for $300, you would pay a $9 excise tax.
Other taxes are a flat dollar amount per unit. The gasoline excise tax is 18.4 cents per gallon. If you buy 10 gallons of gasoline, you're paying $1.84 in federal excise taxes as part of the purchase price.
Excise taxes can be implemented on several levels, too. Gasoline excise taxes are often charged at both the state and federal levels.
TurboTax Tip: If you're required to report and remit federal excise tax payments, you’ll typically use Form 720, Quarterly Federal Excise Tax Return to do this. This filing deadline is the end of the month following the end of a quarter, e.g. April 30 for the quarter ending March 31.
Do excise taxes have exemptions?
Some excise taxes do have exemptions. Since each state or local area controls its own excise taxes, an exemption from the excise tax on the federal level doesn't guarantee the same exemption on the state or local level. As for the most common excise tax exemptions, manufacturers may be exempt from tax on:
- Sales to state or local governments for the exclusive use by that state or local government
- Sales to a nonprofit educational organization for its exclusive use
- Sales of items the buyer will use in manufacturing other materials or will sell to a third party for manufacturing
Some of these exemptions come with extra rules. For example, manufacturers and purchasers typically must be registered for manufacturer exemptions. If you run a business that may qualify for these exemptions, read the rules of the specific exemption listed on your local government's website or print materials to see what you must do to qualify for it.
Paying federal excise taxes
If you're required to report and remit federal excise tax payments, you generally must do so quarterly by the end of the month following the end of a quarter. For example, your return would be due on April 30 for the quarter ending March 31. Form 720, Quarterly Federal Excise Tax Return, is the IRS form used to do this.
The form requires you to fill in the amount of the tax you're remitting for each excise line item. You may also have to include quantity, dollar amount, or sales information depending on the specific excise tax. If you decide to make a payment by check or money order, enclose Form 720-V with your payment.
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