You may wonder what an excise tax is. An excise tax is a domestic tax (as opposed to an international one) imposed by federal, state, and local governments on targeted goods and services, such as gas, tobacco, and alcohol.
Consumers are often not aware of excise taxes because they are, in most cases, folded in with the cost of an item (driving up its price). In a few cases, consumers pay the excise tax directly, such as personal property taxes and on some retirement account activities.
The History of Excise Taxes
The United States levied its first excise tax in 1792 on the making of whiskey — an unpopular measure that ended in 1802. In their early days, excise taxes raised revenues to help offset the costs of waging war and coping with economic downturns.
During the Great Depression, excise taxes accounted for about half of the federal government’ s revenue, bringing in three times as much as individual income taxes. By 1950, excise taxes were 20% of federal tax collections. Today, excise taxes have dwindled to 3% of taxes collected by the U.S. government due to personal and business tax burdens increasing.
The Purpose of Excise Tax
The groundwork for excise taxes are laid in the Constitution of the United States (ratified in 1789), which states:
"The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States."
For the most part, excise taxes are a business tax, separate from other taxes that businesses have to file, such as income taxes. If your business charges and receives excise taxes, you will need to file Internal Revenue Service (IRS) Form 720, Federal Excise Tax Return, each quarter, and submit quarterly payments. You’ll also be expected to submit other collected excise taxes to your state and local governments.
Whether you operate a business in Alaska or Massachusetts, you must track the taxes you’ve collected and paid by adopting sound business accounting practices — even more important today, as many companies struggle to keep their doors open in the face of the COVID -19 pandemic. Unpaid or late taxes and shoddy accounting practices can lead to penalties and unwelcome attention from the IRS.
Businesses typically deal with two types of excise tax: specific or ad valorem. Ad valorem means "according to value" and is charged at a fixed percentage of a good or service. Examples of ad valorem excise taxes include:
- Indoor tanning services: 10%
- Airline tickets: 7.5%
- Firearms: 10%
- Heavy trucks: 12%
A specific excise tax is a set fee applied to a unit of a specific product. Examples of federal specific excise taxes include:
- Cigarettes: $1.01 per 20-pack
- Pipe tobacco: $2.83 per pound
- Beer: $7 for the first 60,000 barrels
- Cruise ship passengers: $3 per passenger
- Motor fuel: $0.183 per gallon
Some excise taxes are considered "sin taxes" — that is, taxpayers are charged for things that have a high social cost when it comes to public health and welfare. These include alcohol and tobacco.
Where do the excise taxes go? The answer depends on which tax is responsible for the revenue. For example, some tobacco tax revenue goes to cancer research and smoking prevention programs. Gas tax revenue often funds infrastructure maintenance, and aviation fuel taxes support air traffic control operations.
Other excise tax revenue can be used for future funding of large capital projects or go straight to the general fund in a jurisdiction, supporting different kinds of programs.
Examples of Excise Taxes
There are five categories of excise taxes on the federal level that account for 93% of total excise tax receipts. These include:
Highway Trust Fund Excise Taxes
Gasoline and diesel taxes (18.4 and 24.4 cents per gallon, respectively) account for more than 90% of total highway tax revenue. The rest comes from taxes on other motor fuels, trucks, trailers, and tires. In 2019, the total highway-related excise tax revenue collected was $40.5 billion — or 41% of all excise tax revenue.
Airport and Airway Trust Fund Excise Taxes
Domestic air travel has a 7.5% tax levied on the price of each ticket, plus $4.30 for each "flight segment" (one takeoff and one landing). The government charges a 6.25% tax on domestic cargo transportation and $18.90 per person for international arrivals and departures. Revenue from Airport and Airway Trust Fund excise taxes equaled $16 billion last year — or 16% of all excise tax receipts.
Tobacco Excise Taxes
These excise taxes cover cigarettes, cigars, snuff, chewing tobacco, pipe tobacco, and roll-your-own tobacco, as well as cigarette papers and tubes. Depending on the tobacco products, the excise tax is calculated per 1,000 cigars or cigarettes or pound of tobacco. The tax for a pack of 20 cigarettes is about $1. At $12.5 billion, revenue from tobacco excise taxes in 2019 accounted for 13% of all excise tax revenue. While the IRS collects most federal excise taxes, tobacco taxes are collected by the U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau.
Alcohol Excise Taxes
Distilled spirits, wine, and beer have different excise tax rates. Distilled spirits are usually taxed at $13.50 per proof gallon ($13.34 for some quantities until the end of 2020). For wine, excise tax rates range from $1.07 per gallon for wines with 16% alcohol or less to $3.40 per gallon for sparkling wines (lower tax rates for some wines are in effect until the end of 2020).
Beer is usually taxed at $18 per barrel, but a reduced excise tax rate of $3.50 per barrel applies to the first 60,000 barrels for breweries that produce less than 2 million barrels (lower rates apply to both until the end of 2020). Excise tax revenue from alcoholic beverages in 2019 totaled $10 billion.
Affordable Care Act Excise Taxes
The Affordable Care Act (ACA) contains several health -related excise taxes, including:
- A $9.6 billion fee imposed on health care insurance providers: This will be repealed after 2020.
- A $2.8 billion fee imposed on manufacturers and importers of branded prescription drugs: This is a fixed aggregate amount for each calendar year set as a proportion of sales.
- A 10% tax on indoor tanning services: There also used to be a 2.3% tax on medical devices, but Congress repealed it in 2019.
Even with exemptions, health -related excise tax revenue brought in $12 billion to the federal government in 2019 or 12% of total excise tax receipts.
State Tobacco Excise Taxes
Excise taxes can vary according to state governments. For example, take the ones charged to taxpayers for tobacco. Until June 30, 2020, the state excise tax on cigarettes ranged from $0.17 per pack in Missouri to $4.35 per pack in Connecticut and New York. Five states (Georgia, Missouri, North Carolina, North Dakota, and Virginia) impose an excise tax on cigarettes that is less than $0.50 per pack.
Different state excise taxes are also levied on cigars, little cigars, roll-your-own tobacco, pipe tobacco, non-combustible tobacco, chewing tobacco, dissolvable tobacco, dry snuff tobacco, moist snuff tobacco, and snus tobacco. For example, cigars are not taxed by Florida, Pennsylvania, Washington, D.C., and Palau. Alabama, Arizona, Oklahoma, Texas, and Vermont, American Samoa, Guam, and Puerto Rico impose excise taxes on cigars based on a per-unit basis, ranging from $0.011 to $2. The rest of the United States, the Marshall Islands, the Northern Mariana Islands, and the U.S. Virgin Islands tax cigars as a percentage of the price of the product.
Excise Tax vs. Sales Tax
Excise taxes are levied on specific goods and services (most often luxury goods or ones linked to health and social issues), and their cost is usually folded into the price that consumers pay. Sales taxes are also government taxes, which apply to a much broader range of goods and services and are usually on sales receipts.
A sales tax is usually a percentage of the sales price, so you’ll pay a lot more sales tax buying a Porsche than a Toyota Corolla. An excise tax is often a per-unit price, such as per gallon of wine or 1,000 cigarettes.
Keep on Top of Your Business Requirements
If you are a small business that collects excise taxes and submits them to the federal, state, or local governments, with their different filing requirements, your documentation and accounting records must be well organized. Also, keep in mind that if you are a nonprofit, government organization, or emergency service provider, you may be exempt from some excise taxes, enabling you to claim a refund on your income taxes.
Keeping small business customers organized so that they can bill and get paid faster is what Skynova does. (Even more important in a time of business disruptions caused by the coronavirus pandemic.) We offer business templates for everything from invoices and estimates to bills of sale. You can also check out our easy-to-use and free-to-try software products. Running your business doesn’t have to be an "excise" in frustration.