Federal Excise Tax: The Ultimate Guide

In this blog, we will provide a detailed overview of federal excise taxes, covering the following key topics:

1. What is Federal Excise Tax?
   We will define federal excise tax, explaining its purpose and how it differs from other tax types.

2. Who Pays Federal Excise Tax?
   Learn about the different entities responsible for paying excise taxes, including businesses, manufacturers, importers, and consumers.

3. Types of Federal Excise Taxes
   Explore the various types of excise taxes, such as those on fuel, communication services, environmental practices, and more.

4. How to Calculate Excise Tax?
   Understand the two main methods for calculating excise tax: ad valorem (percentage-based) and specific (per unit).

5. How to File Federal Excise Tax?
   Learn about the process for filing federal excise tax, including the available filing methods—manual and online—and which is recommended.

6. Federal Excise Tax Exemption
   Discover the exemptions available for certain goods, services, and businesses, including those for fuel and specialized equipment.

7. Penalty for Failing to File FET
   Understand the penalties imposed for failing to file federal excise tax on time and the consequences of non-compliance.

This blog will give you a clear and concise understanding of federal excise taxes, helping you stay informed and compliant.

Federal excise tax is a government-imposed tax on specific goods and services, such as motor fuel, airline tickets, alcohol, and tobacco, that are generally considered harmful to public health or the environment. Unlike income taxes, excise taxes are not based on a person’s income level. Instead, these taxes are levied within a country’s borders, targeting the consumption or usage of particular items.

Businesses are typically responsible for paying excise taxes and often pass these costs onto consumers by incorporating them into the final retail price. In most cases, merchants pay excise taxes to wholesalers, who then factor them into product pricing. Consequently, consumers may not see the direct cost of excise taxes on receipts, but they experience it indirectly through increased prices for specific goods or services.

Federal excise taxes play a significant role in government revenue collection and are applied to goods or services associated with environmental or health-related concerns. Examples include motor fuel sales and airline tickets, which often carry additional costs due to their environmental impact or regulatory requirements.

Excise taxes may be collected either directly from manufacturers or indirectly from consumers, depending on the goods or services involved. The main entities responsible for paying excise taxes include:

• Manufacturers: These are companies or individuals who produce finished goods from raw materials. Manufacturers often pay excise taxes upfront, incorporating them into the product’s cost, which is then passed along the supply chain.

• Importers: Importers, who bring goods into the country from foreign suppliers for sale or trade, are also responsible for excise taxes. These taxes are factored into the pricing when imported goods enter the domestic market.

• Retailers: Retailers purchase products from manufacturers or wholesalers and sell them to consumers. While retailers may not pay excise taxes directly, they often carry products with embedded excise tax costs, which are reflected in retail prices.

• Consumers: As the end users of goods and services, consumers indirectly pay excise taxes, as these costs are built into the prices they pay at purchase.

• Business Owners: Certain excise taxes target specific business activities, requiring some business owners to pay excise taxes directly as part of their operational costs.

Each of these groups contributes to excise tax revenue, which is ultimately reflected in the retail pricing of certain goods and services.

Federal excise taxes vary based on the specific goods or services being taxed. Key types include:

• Environmental Excise Tax: Levied on industries that pollute (e.g., petroleum, chemicals), encouraging eco-friendly practices.

• Communication and Air Transportation Taxes: Applied to airline tickets and shipping services, typically included in the cost to customers.

• Fuel Excise Tax: Imposed on fuels like diesel, gasoline, and kerosene, with rates set by the IRS.

• Retail Excise Tax: Applies to heavy vehicles (e.g., trucks, trailers) that exceed certain weight thresholds.

• Ship Passenger Tax: Charged per passenger on commercial trips lasting a day or more.

• Foreign Insurance Excise Tax: Adds a 1% fee to premiums for foreign insurance policies.

• Manufacturer Excise Tax: Paid by producers of specific goods, such as tires and certain vehicles.

• Other Excise Taxes: Includes taxes on items like,

• Sports fishing equipment

• Tanning services

• PCORI (Patient-Centered Outcomes Research Fee)

• Fuel used on inland waterways and LUST tax included with it

• Floor Stocks tax

• Repurchase of corporate tax

• Sales of designated drugs during statutory periods

• Miscellaneous Excise Taxes: Covers tobacco, alcohol, and firearms, regulated separately by the Alcohol and Tobacco Tax and Trade Bureau (TTB).

Each excise tax targets specific goods or activities to meet regulatory or revenue goals.

Source - IRS

Excise tax calculations depend on the type of tax—either ad valorem or specific tax—and are generally determined using one of two formulas:

• Ad Valorem Tax: Calculated as a percentage of the total purchase price.

• Formula: Price of product × tax rate × quantity = tax liability.

• Example: If a home is valued at $300,000 with a property tax rate of 6%, the ad valorem tax would be $18,000 ($300,000 × 0.06 = $18,000).

• Specific Tax: Applied as a fixed amount per unit (e.g., gallon, litre).

• Formula: Quantity × tax per unit = tax liability.

• Example: A brewery producing 2,000 litres of beer daily, with an excise tax of $5 per litre, would owe $10,000 per day (2,000 × $5 = $10,000).

Each formula reflects the different ways excise taxes are structured, depending on the taxable item or service.

Federal excise tax can be filed on a quarterly basis using IRS Form 720. There are two main methods for filing:

1. Manual Filing: Download Form 720 from the IRS website, complete it manually, and mail the completed form to the IRS at the designated address. While this method is straightforward, it can be time-consuming and may involve longer processing times.

2. Online Filing: Use an IRS-approved electronic filing platform to complete and submit Form 720 online. This method is faster, more efficient, and typically has quicker processing and turnaround times.

Certain businesses and products may qualify for federal excise tax (FET) exemptions under specific conditions. 

• The Energy Improvement and Extension Act (EIEA) of 2008 (PL 110-343), Section 206, provides an exemption for specific idling reduction devices and advanced insulation, which are intended to improve energy efficiency.

• Some of the tires like Recapped or Re-treaded Tires, Tires for Military Use, Tires for Mobile Machinery etc are exempt from the tire excise tax. Read our blog on can I claim a discount on tire excise tax to know details about the tire tax exemptions.

• In addition, several exemptions are available for fuels like diesel, gasoline, and jet fuel. These exemptions apply under specific conditions, such as:

• Foreign Missions and Personnel: Fuel used by foreign embassies or personnel may qualify for an exemption.

• Commercial Aviation: Fuel used in commercial aviation is often exempt.

• Agricultural Use: Fuel used in farming or agricultural operations may be exempt.

• Off-Road Use: Fuel used in off-road machinery and vehicles may also qualify for an exemption.

The IRS imposes penalties for failing to file federal excise tax (FET) on time each quarter, based on the nature of your business. The penalty is calculated as 5% of the unpaid tax for each month the filing is late, up to a maximum of 25% of the total tax due.

WRAP:

By the end of this blog, you will have gained a comprehensive understanding of federal excise taxes, including key topics like who is responsible for paying them, how to calculate and file them, available exemptions, and penalties for non-compliance. Understanding these details is crucial for staying compliant with IRS regulations.

To ensure a seamless filing process, file your Federal Excise Tax now through our easy-to-use Federal Excise Tax online portal and experience a smooth, hassle-free experience.