This guide is for U.S. businesses that must collect, report and deposit federal excise taxes. We’ll go over Form 720, the quarterly tax return for excise taxes, review the process for paying excise taxes, and help you figure out how much and how often you need to pay.
What is an excise tax?
An excise—also sometimes referred to as a duty or ‘sin tax’—is usually levied on goods and services that are perceived as harmful in some way, like tobacco, narcotics, or polluting fuels.
In the United States, most excise taxes focus on the transportation industry, fuels, some health-related goods and services, substances like alcohol and tobacco, and certain types of manufacturing.
Some common goods and services that are subject to excise taxes include:
- Motor fuel
- Aviation gasoline
- Diesel fuel
- Compressed natural gas (CNG)
- Ozone-depleting chemicals (ODCs)
- Air travel
- Sports fishing equipment
- Archery equipment
- Tobacco Products
- Alcoholic beverages
- Heavy trucks and trailers
- Indoor tanning services
Excise tax vs. sales tax
Sales taxes apply to most goods and services, while excise taxes are targeted and apply to only a few.
Sales taxes are calculated as a percentage of the final sale price, while excise taxes are sometimes charged on a per unit basis. (I.e. per gallon of fuel sold.)
Finally, sales taxes will usually appear on your sales receipt, on top of sales price, whereas excise taxes are often included in the sales price and invisible to consumers.
How much are excise taxes?
Most IRS excise taxes are calculated per unit or as a percentage of the final sales price.
For example, the LUST Tax, a levy on the petroleum industry that pays into a multi-million dollar federal fund used to fix ‘Leaking Underground Storage Tanks’ (LUST), is $0.001/gallon.
The tax on fishing tackle boxes meanwhile, is calculated as a percentage: 3% of the sales price of each tackle box.
There are quite a few federal excise taxes, and they vary a lot in type and amount. Check out the latest version of Publication 510, the IRS’s official guide to excise taxes, for a summary of all of them.
What are excise tax exemptions?
These are “nontaxable use” exceptions that let you buy and use excise-taxed goods and services without paying excise taxes on them.
Exemptions can get quite complicated, are usually highly specific to each excise tax, and often involve obtaining an exemption certificate. See Publication 510 for a detailed rundown of each exemption.
How to report and pay excise taxes using Form 720
The PDF version of IRS Form 720, the ‘Quarterly Federal Excise Tax Return,’ is seven pages long and the front page looks like this:
The form is divided into three parts and three schedules, and also includes a payment voucher.
This is where you’ll list and calculate all of your environmental, transportation, fuel and manufacturing taxes, and any other excise taxes that must be deposited semi-monthly. (See below for more on semi-monthly deposits.)
If your Part I excise tax liability is less than $2,500 for that quarter, you might be able to pay quarterly instead of semi-monthly.
If you’re reporting any environmental taxes in Part I, you might also have to fill out and attach Form 6627.
This is where you’ll add up liabilities for any excise taxes that don’t require semi-monthly deposits. You pay these quarterly, every time you file Form 720.
This is where you’ll total up the liabilities you calculated in Parts I and II and figure out whether you have a balance due (or have overpaid) for that quarter.
This is where you’ll figure out your total excise tax liability for the quarter, and whether or not you’ll have to make bimonthly payments.
Businesses that collect excise taxes usually have to pay them bimonthly (i.e. every two weeks). However, if your total Part I excise tax liability for that quarter is less than $2,500, you only have to pay quarterly.
This schedule is specific to businesses in the petroleum industry—it’s used to report gallons of taxable fuel exchanged within a fuel terminal rack (i.e. a loading facility at a fuel terminal).
Businesses that report any liability in Parts I or II use Schedule C to claim exemptions from (see ‘exemptions’ above) or credits against or other reductions to that liability, specifically if:
- Their business engaged in the nontaxable use of certain fuels
- They sold fuels at a tax-excluded price
- They qualify for certain alternative fuel credits
If you suspect you might be eligible, check out Publication 510 for an exhaustive list of claims and credits.
When do I have to file?
Form 720 is a quarterly return that must be filed on the following dates:
You can file Form 720 electronically by accessing the IRS e-file on your computer, or by hiring a tax professional who uses e-file.
When do I pay?
If the total excise tax liability you calculated in Part I of Form 720 for the quarter is less than $2,500, you’ll pay those taxes at the time you file Form 720.
If you collect more than $2,500 in Part I excise taxes in one quarter, you’ll have to make bimonthly (i.e. twice monthly) deposits to the IRS.
These deposits are due on the 14th day following the last day of each two week period. As the IRS points out, “generally, this is the 29th day of a month for the first semi monthly period and the 14th day of the following month for the second semi monthly period.”
A note on the ‘Alternative method’
If you owe any ‘Communications and Air Transportation Taxes’ (IRS no. 22, 26, 27, 28) and calculate those taxes based on amounts billed or tickets sold, rather than on amounts actually collected, those taxes are considered collected during the first week of the second following semimonthly period.
This is called the ‘Alternative method’ of determining excise tax deposits. For more on how it works, check out page 11 of the instructions to Form 720.
How do I make deposits?
You must make excise tax deposits electronically. One way to do this is to use the IRS’s Electronic Funds Tax Payment System (EFTPS), which lets you transfer tax payments directly from your bank account or schedule them in advance. (To sign up, you’ll need your tax ID number and your banking information.)
You can also arrange for your financial institution, tax professional or other third party to make deposits on your behalf.
Excise taxes and the Affordable Care Act
One of the biggest recent changes in excise tax law came in 2010, when the Affordable Care Act (ACA) introduced a bunch of tax reforms, including substantial new excise taxes on the health insurance and medical device industries to offset the costs of the ACA.
Congress repealed many of the bigger ACA-related excise taxes earlier this year, but one of them survived: the ‘Tanning Tax,’ a 10% excise tax on non-medical, UV light indoor tanning services.
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