What Is an Excise Tax?

An excise tax is a tax that is often passed onto the customer when they purchase a particular product, such as gasoline. It is often factored into the cost of the product. In addition, a customer may pay excise taxes on activities, including gambling and trucks’ usage of roads. There are many general excise tax programs, one of which involves motor fuel.

Who Must Pay an Excise Tax?

Taxes can be enforced by state and local governments as well. You may have to file an excise tax form and pay the associated taxes if you manufacture or sell particular products or use specific types of facilities, gear, or products. Excise taxes may also apply to you if you operate certain businesses or receive payment for certain services.

As you can see, this is a reasonably vague list. The best way to determine if you are responsible for excise taxes is to look at the IRS’s Publication 510, which delivers a comprehensive outlook.

What Are the Forms that Relate to Excise Taxes?

The IRS has different forms for different industries and activities concerning the collection and payment of excise taxes. Below are the various types of forms that relate to federal excise taxes:

• Form 720: Several wide varieties of taxes must be reported on Form 720, Quarterly Federal Excise Tax Return. These categories include energy, environmental, communications, and air transportation taxes, a tax on the first (retail) sale of heavy trucks, tractors, and trailers, and manufacturer taxes on the use or sale of various articles.
• Form 2290: The federal government levies an excise tax on particular vehicles with a taxable gross weight of 55,000 pounds or more used on public roads. Instances of such vehicles include buses, trucks, and truck tractors. This tax is reported on Form 2290, Heavy Highway Vehicle Use Tax Return.
• Form 730: You may be accountable for a federal excise tax if you employ in operating a wagering pool or lottery. You can also be directed to pay this tax if you are in the business of taking wagers. To figure out the tax on wagers you accept, you need to use Form 730, Monthly Tax Return for Wagers.
• Form 11-C: To participate in wagering activities, you must register the activity and pay the federal occupational tax on wagering by completing Form 11-C, Occupational Tax and Registration Return for Wagering.

State and local governments can assess excise taxes on tobacco products, gasoline, alcoholic drinks, and recreational marijuana in states where it is legal. It’s essential to review the laws of your state to find out if excise taxes apply to your business.

What Are Ad Valorem Excise Taxes?

Ad valorem is a Latin term that means “according to value.” An ad valorem tax is set by percentage, resulting in an excise tax based on the worth of the product or service. For instance, the IRS imposes a 10% excise tax on indoor tanning services. If a tanning salon charges $100 for a tanning session, it must pay the IRS $10 in excise tax.

Likewise, if the business charges $200 for tanning, it must pay a $20 excise tax. Other kinds of ad valorem excise taxes include guns (10%), airline tickets (7.5%), and heavy trucks (12%). Property taxes can also be considered a kind of ad valorem excise tax.

What Are Specific Excise Taxes?

Specific excise taxes are a set tax or fee added to a particular product on a per-unit basis. Some examples of federal, specific excise taxes include cigarettes ($1.01 per pack of 20), pipe tobacco ($2.83 per pound), beer ($7 for the first 60,000 barrels), cruise ship passengers ($3 per passenger), and gas ($0.183 per gallon).

Often, sin taxes on targeted goods like beer and alcohol will be taxed at the federal level and taxed heavily by the state, making the cost of these items higher. For instance, New York has a specific excise tax of $4.35 per cigarette pack of 20.6. Incorporating this with the federal tax of $1.01 makes the excise taxes independently $5.36. These taxes have a significant effect on the consumer.

What Are Excise Taxes on Retirement Accounts?

Excise taxes are also levied on some retirement account activities. Many individuals are acquainted with these taxes as penalties. A 6% excise tax is applied to excess individual retirement account (IRA) contributions that are not rectified by the applicable deadline. A 10% excise tax penalty applies to distributions from particular IRAs and other qualified plans when an investor withdraws before age 59.5.

Furthermore, a 50% excise tax penalty is levied when investors do not take the mandatory required minimum distributions from specific retirement accounts. Minimum distributions are required after age 72 (for anyone who reaches age 70.5 in 2022 or later) for traditional IRA accounts and several other tax-deferred retirement savings plans.

Extension of Fuel Tax Credits

As a result of the Tax Increase Prevention Act of 2014, some fuel tax credits were extended, including the following:

• Credit for biodiesel, including the renewable type
• Credit for biodiesel mixture, including the renewable type
• Credit for alternative fuel
• Credit for alternative fuel mixture
• Credit for second-generation biofuel producer

The above credits expired December 31, 2013, and were extended retroactively through December 31, 2014. Claims that arose in 2014 must be filed per Notice 2015-3.

Registration by the IRS

An indoor tanning service is one type of service provider required to file a federal excise tax return. Under the Affordable Care Act, as of July 1, 2010, indoor tanning service providers were subject to an excise tax of 10 percent. According to the Internal Revenue Code and regulations, every person who participates in certain activities relevant to the excise tax must be registered by the IRS before engaging in that activity.

In other models, a prerequisite to receiving an excise tax benefit is registration by the IRS. An example of an excise tax benefit is the privilege to sell or buy an article free of tax or to file a claim. Form 637, or Application for Registration for Certain Excise Tax Activities, may be used by taxpayers to register for activities under the following sections of the IRC: 4101, 4222, and 4682.

The taxpayer must pass specific registration tests before obtaining an approved-registration number. Depending on the activity, the registration tests vary and could include an inspection of the taxpayer’s business premises.

What Are the Exemptions From Excise Taxes?

You may be able to claim an exemption from some federal excise taxes, such as excise taxes on fuel, if your business is a government organization, a nonprofit educational organization, or an emergency service provider, an example of which is ambulance service. Using IRS Form 8849, you must claim a refund of such taxes at year-end.

You must retain records and document that the products and services for which excise taxes were collected were used solely for the exempt purchase. For example, you should note that the gasoline was utilized solely in an ambulance or police vehicle and not in a vehicle for personal use.

Should I Consult an Attorney?

If you think you owe excise taxes but are unsure whether you must pay such taxes or which excise taxes you are required to pay, you should consult a tax attorney who can help you navigate the tax laws and determine which taxes apply to your business.