What is a Federal Excise Tax?

• Federal excise tax is imposed by governments on certain items, including goods/services, specific industries and activities. These taxes are paid either by the manufacturer, importer or service provider and will be included in the price the consumer pays for that good/service.

• Each category of goods/services has its own Federal Excise Tax Rate (fuel, air travel, environmental, etc.), so that the government properly taxes each industry for its use of Federal resources (e.g., enabling air travel, emissions, etc.).

• A Federal Excise Tax Return is filed quarterly using IRS Form 720, which includes all Federal Excise Tax categories minus the categories of Tobacco and Alcohol.

• To accurately file it, you must understand what taxes apply to you, the current Federal Excise Tax Rates and the dates when you must file your return; penalties may apply.

• The best way to manage your excise tax obligations is to file your Excise Tax Return online using an IRS-authorized software program to minimize mistakes and ensure timely filing upon your return date.

Overview

Excise tax is an important component of the U.S. tax system. It is imposed on certain commodities, services and businesses operating in the United States. 

Consumers do not typically know when they are paying excise taxes; however, they do experience the added cost of these taxes through the price of the products they purchase. 

For businesses, compliance with the excise tax system is crucial to maximizing efficiency; the process to file returns and the quarterly report requirement will all impact the business's operations.

This blog will provide a complete and comprehensive summary of excise taxes and the different types of excise taxes, as well as how to determine the rate of Excise Taxes and how to properly complete and file an accurate excise tax return.

ALSO CHECK - How to File Federal lust tax online

Categories of Excise Tax

Below given categories is an updated, simplified breakdown of the categories of excise tax, as defined by the IRS.

Environmental Excise Tax

• The Environmental Excise Tax applies to entities or activities that harm the environment. 

• Businesses that produce or distribute petroleum products, certain chemicals and/or ozone-depleting products must calculate the federally defined Environmental Excise Tax rates. 

Excise Tax for Air Transportation and Communications

• The Air Transportation and Communications Excise Tax applies to airline passenger tickets, passenger and freight transport and telecommunications services, among other services. 

• Airlines and other carriers generally include Excise Taxes in the price of airline tickets or the price of cargo transport. 

Fuel Excise Taxes

• Fuel Excise Taxes are levied against taxable fuels like gasoline, diesel, kerosene and diesel-water emulsions and Alternative Fuels at specified federal excise tax rates per gallon. 

• This revenue is used for both transportation infrastructure and for environmental programs.

Retail Excise Taxes

• Retail Excise Taxes for Heavy Vehicles are levied on the retail sale of heavy trucks, tractors and semi-trailers exceeding certain weight thresholds. 

• Dealers and Manufacturers are required to maintain many records and ensure that they accurately calculate and appropriately pass along excise tax to their supply chain.

Ship Passenger Excise Tax

• Ship Passenger Excise Tax is imposed when individuals travel on Commercial Water Vessels and receive overnight accommodations. 

• Each individual passenger incurs an excise tax liability.

Foreign Insurance Excise Tax

• Foreign Insurance Excise Tax is a 1% tax applied to premiums paid to Foreign Insurers and businesses that enter into International Insurance Arrangements will need to report these Premiums on their Excise Tax Returns.

Manufacturer Excise Taxes

• Manufacturer Excise taxes are paid by the Manufacturer, Importer or Producer of certain products such as Vaccines, Gas Guzzlers and some Tires. 

• It is necessary to know the appropriate federal excise tax rate in order to properly calculate and report excise taxes.

Additional Categories of Excise Taxes

Additional Categories of Excise Taxes include PCORI Fees, Indoor Tanning Services, Sports Fishing Equipment, Inland Waterway Fuel Usage and others. Although alcohol and tobacco are also subject to excise taxation, they are regulated by the Alcohol and Tobacco Tax and Trade Bureau (TTB) and not reported on Form 720.

How To File Federal Excise Tax:

Federal excise tax is generally filed using Form 720 on a quarterly basis. There are two filing methods:

1. Manual: Complete Form 720 manually and mail it to the IRS.

2. Online: File using an IRS-approved online portal.

It's important to file before the Form 720 due dates to avoid penalties. Note that all tax categories except alcohol and tobacco use Form 720; alcohol and tobacco have separate filing procedures.

The Most Efficient Method for Filing Excise Tax

To streamline compliance, many businesses utilize IRS-approved electronic filing services. eFile720 is one of the most widely used Electronic filing services that allows users to input relevant federal excise tax rates, validate their forms and submit their Federal Excise Tax Returns efficiently. 

Try eFile720 free for your next Form 720 filing

FAQs

1. Who has to pay excise taxes to the federal government?

Businesses that manufacture, import, sell or distribute goods and provide related services within one of the categories identified by IRS do have to calculate and remit the Excise Tax. 

2. How are the Federal Excise Tax Rates determined?

The Federal Excise Tax Rates are determined by category as set forth by the IRS. 

The rates may be set based on the number of the units, by a fixed percent of the sales price or on a flat per-item basis for specific goods and/or services.

3. Is every company required to file a Federal Excise Tax Return?

NO. Only businesses that deal with goods and/or service offerings that are subject to excise tax should file a Federal Excise Tax Return. 

Some of the examples are distributors of fuels, manufacturers of fuels, providers of aviation services, operators of tanning salons and sellers of large trucks.

4. How often does a business have to file its Excise Taxes?

All businesses must file their Excise Taxes quarterly, which may be completed on Form 720, with the exception of the volume of taxable activity.

5. Does a business have to file its Excise Taxes online?

There is no requirement that a business electronically file Excise Taxes.

But it is highly advised since it will minimize errors, speed up the processing and aid in consistently applying tax rates correctly at the time of filing.