Every business faces some form of taxation. Whether it’s income taxes or sales tax, governments have instituted taxation to generate revenue that’s reinvested back into their infrastructure.
But some taxes are only charged to specific goods, services, industries, or activities as a way to keep production and consumption in check.
The most common form of this type of taxation is an excise tax. While many businesses aren’t affected by excise taxes, those that are have extra reporting, payment, and compliance rules to understand. Otherwise, they could face harsh penalties and interest on unpaid taxes.
Read on to understand what excise taxes are, whether they affect your business, and how to stay compliant with this reporting responsibility.
What is an excise tax?
Excise taxes are targeted taxes that apply to specific goods, services, or activities. These taxes can be set by the country, state, or municipality.
It’s the responsibility of the business to pay the tax; however, it’s often paid by the customer by incorporating the tax into the price of the goods. For example, when you fill up your car with a tank of gas, the price is increased such that you’re paying the excise tax that the business is charged.
What is the purpose of an excise tax?
Governments institute excise taxes for two reasons beyond generating tax revenue.
First, excise taxes act like a “sin tax” to discourage the consumption of goods or services that are considered harmful. If the excise tax increases the cost of cigarettes, alcohol, or gasoline, the hope is that consumers are less likely to purchase those things. The revenue generated on an excise tax is intended to offset the social cost of using these products.
Second, excise taxes are a way for governments to pass on the cost of using their infrastructure to its highest users. As an example, the excise taxes collected on gasoline often go towards funding road construction and maintenance, meaning drivers pay more based on their usage.
Features of excise taxes
Excise taxes vary based on what exactly is being taxed, but all excise taxes will share these features.
Targeted
Excise taxes only apply to specific goods, services, or activities. By being specific, governments can leverage excise taxes to enforce certain policies or fund specific programs associated with that good or service.
Indirect
While businesses collect and pay the excise tax, the costs are almost always passed on to the consumer through increased prices. This means the business is acting like a tax collector, charging the excise taxes to the consumer, then filing and remitting the taxes with the government.
Federal, state, and local
A business may face excise taxes at three different levels: federal excise taxes apply nationwide, while state and local excise taxes vary based on where the business is located.
Some goods or services may have multiple layers of excise taxes. When purchased, excise taxes would be collected and paid at the federal, state, and local levels.
Per-unit or ad valorem
There are two main calculation methods for excise taxes.
Per-unit excise taxes are the simplest, most straightforward taxation model. For every unit of something sold, a certain amount is charged to the consumer, such as $0.20 for every gallon of gasoline sold.
Ad valorem taxes are calculated as a percentage of the assessed value of the good or service. If the excise tax is 5% of the value of a good and the assessed value of all goods sold is $2,000, the excise tax would be $100 (0.05 x 2,000).
Types of excise tax
Broadly speaking, excise taxes can be categorized as one of two different types: specific excise taxes or ad valorem excise taxes.
Specific excise taxes
Specific excise taxes (or per-unit excise taxes) are fixed amounts taxed on particular goods and services that are known to create a social cost. Examples include:
- Alcohol taxes: Charged on the sale of beer, wine, and spirits, often at the federal and state levels.
- Tobacco taxes: Applied to cigarettes, cigars, and other tobacco-based products.
- Fuel taxes: Imposed on gasoline, diesel, and other motor fuels to fund transportation infrastructure.
- Environmental taxes: Incurred on activities that generate pollution or have other impacts on the environment, with funds reinvested in green initiatives.
In each of these cases, these goods, services, or activities create some social cost, such as the use of cigarettes leading to increased use of the health care system. The excise tax is a flat, per-unit amount that is often reinvested in that system to offset that cost.
Ad valorem excise taxes
Ad valorem excise taxes similarly apply to specific goods or services, but are applied based on a percentage of the value. This means that the excise taxes paid by consumers increase as the price increases.
As a result, ad valorem excise taxes have a greater effect on the consumption of higher-priced items.
Think of it this way: specific excise taxes are intended to equally discourage the use of something regardless of its price (e.g. a $0.20 excise tax per gallon of gasoline won’t change with market price). On the other hand, ad valorem excise taxes are intended to have a greater impact on wealthier consumers who are buying higher valued goods or services.
Excise taxes on luxury goods and services
Examples of ad valorem excise taxes in action are those that are levied on “luxury” goods or services. These are goods or services that are most likely to be used by wealthy, high-income consumers, like expensive vehicles, jewelry, or private travel.
The purpose of these excise taxes is similar to income brackets on income taxes: to have wealthier individuals pay a greater proportion of taxes on their consumption.
In turn, these taxes also discourage the consumption of luxury goods, potentially shifting a greater proportion of sales revenue to producers that create goods or services at an accessible price point.
How do excise taxes work?
Excise taxes are applied to the manufacturing, importing, or sales of goods or services. Either a per unit or ad valorem tax is applied at some point in the supply chain.
Manufacturers pay excise taxes on the quantity of goods produced, importers pay excise taxes on the amount of goods they’re bringing into the country, and retailers or service providers pay excise taxes on the units or value sold.
While it’s the business that’s paying the excise tax, they typically pass the cost onto consumers by baking it into the price. For example, if the price of a good is $100 but the government imposes a $10 per unit excise tax, the business increases the price to $110.
Even though consumers pay the excise taxes, they do so indirectly. It’s still the business’s responsibility to record, report, and pay the excise tax on the production, importing, or sale of their activity.
Who is responsible for paying excise taxes?
Who’s responsible for paying the excise tax varies based on where the tax is imposed in the supply chain. Generally speaking, the business that manufactures or imports the taxable item pays the excise tax.
Manufacturers pay excise taxes based on the amount of goods that have been distributed from their facilities or sold to distributors or retailers. This includes producers of alcohol or tobacco products.
Importers pay excise taxes on the quantity of goods brought into the country. Keep in mind that excise taxes are separate from tariffs, and both may be paid on the importing of a taxable good.
Retailers and service providers pay excise taxes based on how many sales they’ve made directly to consumers. An example of this is the 10% percent excise tax on indoor tanning services.
In each of these situations, it’s the business that’s responsible for filing and paying the taxes directly to the government. Even though the consumer typically pays extra for these goods and services to offset the excise tax, they are paying the tax indirectly.
How to file and pay excise taxes
Since excise taxes can be imposed on the federal, state, or local level, there can be three different processes for filing and paying excise taxes, even for just a single good or service.
Federal excise taxes are reported and paid through IRS Form 720, Quarterly Federal Excise Tax Return. Filed and paid four times in a year, the business reports how much it owes in excise taxes based on the level of activity in the quarter.
State and local taxes can vary greatly based on region and level of activity. The filing and payment may be a monthly, quarterly, or annual process.
Always check with your state’s department of revenue for the exact rules on excise taxes you need to know before conducting business.
A step-by-step breakdown of filing and paying excise taxes
Follow these steps to stay up-to-date and in compliance with excise taxes:
- Register with the appropriate agencies: The IRS requires businesses to register before engaging in activities that are subject to excise taxes. This is the same with many state and local excise taxes.
- Set reminders for due dates: Consider putting reminders in a shared calendar so no one is blindsided by an upcoming due date.
- Keep detailed records of all activity: Maintain an accurate record of all taxable transactions, including the quantities, dates, value, and tax amounts of each.
- Close your books on time: Most excise taxes are due one month after the reporting period. Closing your books on time gives you the most time to figure out your tax responsibility.
- Calculate taxes owed: Check the current tax rate for any changes before performing a per-unit or ad valorem excise tax calculation.
- Complete and file forms: Follow the steps on each excise tax form to report your taxes owed. Many excise tax forms are now done through electronic filing systems to cut down processing times, but the form must be submitted ahead of the due date to avoid any penalties.
- Make a timely payment: Most excise payments can be made electronically with minimal processing time. It’s best practice to make an early payment if paying by check to account for the longer processing time.
- Keep copies for your records: Always keep a copy of any completed tax forms and receipts of payment in case of dispute.
When in doubt about excise taxes, it pays to talk with a tax expert or accountant. Building an excise tax process on the correct information gives you the best foundation to build off of as you scale your operations.
Automate reporting to improve the excise tax process
Businesses can only file and pay their excise taxes after reviewing and closing their books. If you want a stress-free excise tax process, you need to think about changes to your accounting process to free up time and close books faster.
With automation, you replace time-consuming, error-prone, manual processes with real-time data and reporting. The result: finalizing your accounting sooner and tackling your reporting and compliance responsibilities quicker.
By adding BILL to your tech stack, you can manage and automate accounts payable, accounts receivable, and expense reporting with ease. In one platform, you gain control, improve visibility, automate workflows, and increase efficiency.
Reach out to schedule a demo and see the platform in action.
