Article 7 min

Is Your Business Affected by Excise Taxes? Here’s What to Know

Excise taxes are special taxes applied to certain products and services that are either considered luxury items or are thought to be harmful to society. These taxes apply to goods such as alcohol, tobacco, gas, and even services like indoor tanning. Understanding how excise taxes work—and whether your small business is responsible for collecting and paying them—is essential to maintaining compliance with federal, state, and local tax laws.

Summary

💰 What Is an Excise Tax?

Excise taxes are targeted taxes levied on specific goods and services. Often associated with luxury or potentially harmful products, these taxes serve two main purposes: generating public revenue and discouraging undesirable consumption. The federal government collects excise taxes on items like alcohol, tobacco, firearms, air travel, and even tanning services. In addition, states and localities may have their own excise taxes for similar or additional items. These taxes raise billions each year and fund essential public initiatives, including road maintenance and healthcare.

Takeaways:

• Excise taxes target specific goods/services like alcohol, gas, and firearms.
• The purpose is both revenue generation and behavior deterrence.
• Excise taxes are collected at the federal, state, and sometimes local levels.

Key Terms

• Excise Tax: A tax on specific goods/services, often considered harmful or luxurious.
• Sin Tax: Another name for excise taxes on harmful products like tobacco and alcohol.
• Luxury Tax: A type of excise tax applied to high-end items like expensive vehicles.

🏢 Does Your Business Have to Pay Excise Tax?

If your business sells goods or services that fall under excise tax categories, you are likely required to register and remit these taxes. Alcohol, tobacco, and firearms sellers must register with the Alcohol and Tobacco Tax and Trade Bureau (TTB), while businesses selling other taxable items typically register with the IRS using Form 637. Failure to register or comply can result in hefty fines—starting at $10,000 plus additional penalties for ongoing noncompliance. Registration is a critical first step for businesses subject to excise tax obligations, and many products must be approved for sale before distribution begins.

Takeaways:

• Businesses selling excise-taxed goods must register with the IRS or TTB.
• Failing to register can lead to large fines and legal trouble.
• Use Form 637 to register federally for excise-taxable products.

Key Terms

• Form 637: IRS form used to register for excise tax obligations.
• TTB: Alcohol and Tobacco Tax and Trade Bureau, which regulates certain excise-taxed goods.
• Compliance: The act of fulfilling all legal tax obligations and filings.

📊 How Excise Taxes Are Calculated

Excise taxes are calculated in two main ways: ad valorem or specific. An ad valorem tax is based on a percentage of the sale price, while a specific tax is a flat dollar amount per unit. For example, indoor tanning services are subject to a 10% ad valorem excise tax. If a session costs $10, the tax is $1. Specific taxes apply to items like cigarettes, which carry a $1.01 federal tax per pack—plus additional state taxes, such as Connecticut’s $4.35 per pack, making the total tax more than $5 in that state.

Takeaways:

• Excise taxes are either percentage-based (ad valorem) or unit-based (specific).
• Businesses must calculate and apply these taxes accurately at the point of sale.
• Combined federal and state excise taxes can significantly impact pricing.

Key Terms

• Ad Valorem: A tax based on a percentage of the product’s sale price.
• Specific Tax: A fixed tax amount per unit sold.
• Tobacco Tax: A well-known example of a specific excise tax.

🧾 Excise Tax vs. Sales Tax

Though similar, excise taxes differ from sales taxes in key ways. Sales tax is applied broadly to most items a customer purchases and is typically a percentage of the sale. Excise taxes, by contrast, are levied only on particular goods and may be either percentage-based or a flat fee. For business owners, understanding which taxes apply to which products is crucial for accurate pricing and reporting.

Takeaways:

• Sales tax applies broadly; excise tax applies narrowly.
• Excise taxes can be percentage-based or flat-rate, unlike sales tax.
• Both may apply to a single sale, depending on the item.

Key Terms

• Sales Tax: A percentage-based tax applied to most consumer goods.
• Excise Tax: A targeted tax for specific items or services.
• Dual Taxation: When both sales and excise taxes apply to a single item.

📣 Do You Have to Tell Customers About Excise Taxes?

Whether to disclose excise taxes to customers is up to the business. Some businesses choose transparency—especially when prices increase due to new taxes—while others include the tax in the final price without explanation. For example, some indoor tanning salons informed customers when the 10% tax was added under the Affordable Care Act. There's no federal mandate to disclose excise tax to customers, so it’s at the discretion of the business.

Takeaways:

• Business owners can choose to disclose excise taxes to customers.
• Disclosing may help explain pricing changes.
• Many businesses include the tax in the total price silently.

Key Terms

• Price Transparency: Informing customers about tax-related pricing.
• Hidden Tax: When taxes are included in the price but not disclosed.
• Consumer Awareness: The extent to which buyers understand what they're paying for.

🏛️ What Are Excise Taxes Used For?

Excise tax revenue funds a variety of public projects and services. A portion goes into the federal government’s general fund, while other amounts may be earmarked for specific trust funds. Common uses include road maintenance, infrastructure improvements, and public health initiatives. Although excise taxes only make up about 3% of total federal revenue, their targeted nature makes them important funding tools for key programs.

Takeaways:

• Excise tax revenue supports public initiatives like roads and healthcare.
• Some funds are earmarked; others go to the general budget.
• These taxes also serve to encourage healthier behavior through deterrence.

Key Terms

• General Fund: A government fund used for broad purposes.
• Trust Fund: Designated funds for specific uses, such as highways.
• Public Spending: The use of government revenue to support programs and services.

📆 When Are Excise Taxes Paid?

Federal excise taxes are typically due quarterly, one month after the end of each quarter. Businesses must file Form 720, either online or by mail. While some excise taxes—like those on firearms or indoor tanning—have quarterly filing requirements, others may be due annually or semi-monthly, depending on the type of product or service sold. In addition to Form 720, certain forms like Form 2290 and Form 8849 may also be required. State and local excise tax schedules vary, so business owners must check with their local agencies to stay in compliance.

Takeaways:

• Federal excise taxes are filed quarterly via Form 720.
• Some taxes require annual or semi-monthly submissions.
• State and local deadlines may differ from federal ones.

Key Terms

• Form 720: Used to report and pay federal excise taxes quarterly.
• IRS Filing: The process of submitting required tax forms.
• Due Date: The deadline by which taxes must be submitted to avoid penalties.

Conclusion

Excise taxes may seem complex, but understanding how they work can save your small business from costly mistakes. From determining whether your products are taxed to knowing when and how to file, staying informed is key. If you sell products like alcohol, firearms, or offer tanning services, knowing your responsibilities and tax schedules will help you stay compliant and avoid penalties—while ensuring your customers continue to trust your business.