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What is excise tax?

When it comes to taxation in the United States, it can be challenging to keep up with all the different taxes that your business is expected to pay. Excise tax is one of the most important, so it’s vital that your accounting team understands how it works and what’s at stake. Find out more about excise tax payment, starting with our excise tax definition.

Excise tax definition

Excise tax is a flat-rate tax levied on the sale of specific goods, services, and activities. It’s a form of indirect taxation, which means that it’s not paid directly by the consumer. Instead, excise taxes are imposed on the producer/supplier, who include it in the product price. If any of the products that your business sells are subject to excise tax, it’s your responsibility to collect and pay the taxes to the relevant authorities.

Excise tax is applied either as a per-unit tax or as a percentage of the sales price. With the per-unit method, taxes are charged for each unit sold. With the percentage method, excise taxes are charged as a percentage of the goods or services. Although this won’t affect your bottom line, it can affect demand as the overall price of the product will increase, at least to a certain extent.

Who pays the excise tax?

Excise tax is factored into the cost of the product, rather than listed separately. In most cases, consumers make the excise tax payment without even being aware of it. If your business is required to collect excise tax, you’ll need to collect it from your customers before making the excise tax payment to the government once per quarter. To do this, you’ll need to fill out Form 720, Quarterly Federal Excise Tax Return. It’s also important to note that on a state-level, there may be additional filing requirements.

Excise tax exemptions

There are a few excise tax exemptions that you should bear in mind. Non-profit organizations, emergency service providers, and government organizations will receive exemptions on specific excise tax payments in certain situations. If your organization can get an excise tax exemption, be sure to keep a record of these expenditures and claim a refund at the end of the tax year via IRS Form 8849.

Excise tax examples

Excise taxes are only levied on specific products or services. These include:

  • Alcohol (per-unit)

  • Firearms/ammunition (per-unit)

  • Indoor tanning services (percentage of price)

  • Gasoline and diesel (per unit)

  • Airline tickets (percentage of price)

Beyond these excise tax examples, tobacco, telephone services, heavy trucks, outdoor fishing equipment, and gambling are subject to excise tax.

Excise tax vs. sales tax: what’s the difference?

Excise tax may seem similar, or even identical, to sales tax or consumption taxes, but there are a couple of important distinctions between these forms of taxation. Firstly, sales tax is applied to most products/services, from food and drinks to clothing and antiques. While there are a couple of essential items that may be exempt from sales tax, they’re very much the exception to the rule. By contrast, excise tax payment is required for a much smaller range of products and services.

It’s also important to note that sales tax is calculated as a percentage of the purchase price. For example, if you purchase a high-end laptop, you can expect to pay more sales tax than you would have done if you’d bought a budget laptop. However, as we explained earlier in the article, excise tax is often applied on a per-unit rate. As such, you can expect to pay the same amount of excise tax on any bottle of alcohol, for example, regardless of the price of the bottle.

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