Excise taxes: Does your business need to file a federal excise tax return?

Federal excise taxes are imposed on the sale of certain goods, services, and activities. They are taxes on the consumption of specific items. These taxes can indirectly influence consumer behavior by affecting the cost of specific goods or activities, unlike sales tax, which is calculated as a percentage of the price when items are sold or purchased.

Examples where excise taxes apply include motor fuel, alcohol, tobacco, gambling, local telephone service, heavy trucks, tires, airline and cruise transportation, firearms, sport fishing equipment, and indoor tanning services.

Managing excise taxes can be more challenging than income taxes. Depending on the specific taxes, they may be imposed on the manufacturer, retailer, or importer, may be passed on to consumers, and can be imposed when goods or services are sold by the manufacturer or retailer, imported, or used by the manufacturer or consumer. The end users may or may not be aware of the amount of excise tax included in the prices they pay.

Under the Internal Revenue Code, the IRS requires businesses to register with them before they engage in certain excise tax-related activities, using IRS Form 637, Application for Registration (for Certain Excise Tax Activities). If the IRS approves the application, it issues an Approval of Excise Tax Registration Letter (3689).

What is the purpose of excise taxes?

The government imposes certain excise taxes to discourage the use of products and services or change behavior, like tobacco, alcohol, firearms, and gambling. These excise taxes have been known as “sin taxes." The government can use other excise taxes to help pay for costs related to the item being used and taxed, like using gasoline or truck excise taxes to pay for federal highway use and construction, or for environmental purposes, like applying excise taxes on fishing and boating products to wildlife conservation activities.

How are excise taxes calculated?

Excise taxes are calculated in two ways. They can be calculated as a percentage of the selling price or other specified value (ad valorem). For example, the excise tax on air travel is a percentage of the cost of the airline ticket. The more common method is a specific fixed amount charged per unit produced or sold, based on weight, volume, or other physical measurements. Taxes per gallon of motor fuel or per pack of cigarettes are examples of this method. The federal government determines the tax methods and rates.

How are excise taxes reported and paid?

IRS Form 720, Quarterly Excise Tax Return is the quarterly federal excise tax return used to report the excise tax liability and pay the taxes listed on the form. The form includes all items covered by excise taxes.

The deadlines for filing an excise tax return for each quarter of the calendar year are as follows:

Quarter covered: January, February, March

Due by: April 30

Quarter covered: April, May, June

Due by: July 31

Quarter covered: July, August, September

Due by: Oct. 31

Quarter covered: October, November, December

Due by: Jan. 31

A third party may collect the excise tax, file Form 720, and send the tax to the IRS. For example, airlines collect the excise tax on airline tickets sold from the purchase of the tickets.

Although firearms, ammunition, tobacco, and alcohol are subject to excise taxes, they are not reported on Form 720 but instead are reported to the Department of the Treasury's Alcohol and Tobacco Tax and Trade Bureau.

Excise taxes related to specific projects, like improvements to airports and highways, may be collected and held in separate trust funds dedicated to the specific project or purpose until they are paid to the IRS.

There are a number of software vendors that can help companies and their tax specialists accurately calculate and report excise taxes due, keep on top of changes in rules and rates, and file the required excise tax returns and supporting schedules. Financial advisors may be able to help.