Federal Excise Taxes (FET) are taxes levied on specific goods, services, and activities. These taxes can apply to various parties, including importers, manufacturers, retailers, and in some cases, consumers—depending on the nature of the excise tax.
When it comes to ethanol and other chemicals, FET is imposed not only to generate revenue for the government but also to discourage excessive use of these substances. This dual purpose helps support public funding while also contributing to environmental protection by promoting reduced consumption of potentially harmful chemicals.
In this guide, we’ll explore the details of Federal Excise Tax as it applies to ethanol and other chemicals. Read on to gain a deeper understanding of how this tax works and why it matters.
Due to their potentially hazardous impact on the environment, many of the chemicals subject to Federal Excise Tax (FET) fall under the Environmental Tax category on Form 720 – Quarterly Federal Excise Tax Return. These taxes are reported and paid quarterly, based on the volume of business transactions and specific use cases.
The relevant IRS Number codes under Form 720 include:
IRS No. 54 – Chemicals (other than ozone-depleting chemicals or ODCs)
IRS No. 17 – Imported chemical substances
IRS No. 98 – Ozone-depleting chemicals (ODCs)
IRS No. 19 – ODC tax on imported products
IRS No. 20 – Floor stocks tax on ozone-depleting chemicals
Each of these categories plays a role in ensuring environmental responsibility while also maintaining regulatory oversight.
The current Federal Excise Tax (FET) on industrial ethanol is applied at a rate of $13.50 per proof gallon. A proof gallon is a standard unit of measurement used to calculate the alcohol content in a liquid, based on 100 proofs (or 50% alcohol by volume) at 60°F.
Based on this rate:
200 proof alcohol (100% pure ethanol) is taxed at $27.00 per gallon
190 proof alcohol (95% ethanol) is taxed at $25.65 per gallon
These rates apply specifically to ethanol used for industrial purposes and are important for businesses dealing with alcohol-based products or solvents.
For detailed and updated tax rates on other chemicals and substances, it's recommended to visit the official IRS website.To calculate the FET on ethanol, multiply the total proof gallons (PG) in your order by the applicable tax rate per proof gallon. This is usually calculated on a per line-item basis, depending on the proof and quantity of ethanol being purchased.
Example Calculation:
Let’s say you are ordering 30 drums of 190 proof ethanol, and each drum contains 104.4 proof gallons.
Total proof gallons = 104.4 PG × 30 drums = 3,132.0 PG
Tax amount = 3,132.0 PG × $13.34 per PG = $41,780.88
Note: The rate used in this example is $13.34, which may vary slightly based on updated tax rates or specific applications.
For more accurate calculations across different quantities and alcohol proofs, you can refer to an FET calculator for ethanol, available through industry tools or government resources.In general, the Federal Excise Tax (FET) on ethanol and chemical substances must be reported and paid using Form 720 – Quarterly Federal Excise Tax Return.
For chemicals specifically, you are also required to complete Form 6627 – Environmental Taxes, which breaks down the tax owed by chemical category. This form must be attached to your Form 720 when filing.
To understand how to properly fill out Form 6627—including how to classify chemical substances and calculate the correct tax amount—refer to the official IRS Instructions for Form 6627. This will provide detailed guidance to ensure accurate reporting and compliance.
If you are filing your Federal Excise Tax (FET) manually, both Form 720 and Form 6627 must be completed and submitted together. However, if you choose to file online through an IRS-authorized e-filing portal, there is no need to fill out the two forms separately. These platforms are designed to integrate the details of both forms, allowing you to simply enter the required information in one streamlined process.
The IRS strongly recommends online filing over manual submission for several reasons, including improved accuracy, faster processing, and easier record-keeping. Choosing the online filing method helps you avoid the complexities and potential errors involved in manual paperwork.Yes, there are certain exemptions and reductions applicable to the Federal Excise Tax (FET) on alcohol fuels. The Omnibus Budget Reconciliation Act of 1990 amended previous exemptions by reducing the excise tax exemption from 6.1 cents to 5.5 cents per gallon. This change affected the tax incentives available for ethanol and other alcohol fuels used in motor fuel blends.
To learn more about this exemption and its legislative background, you can refer to the following resources:
Omnibus Budget Reconciliation Act of 1990 – Legislative Summary (TaxNotes)
Alcohol Fuels Tax Exemption Overview (afdc.energy.gov)
These documents provide a detailed summary of the tax exemption structure, its evolution, and eligibility conditions.
WRAP:
Understanding the Federal Excise Tax (FET) on ethanol and chemicals is essential for businesses navigating compliance and environmental responsibilities. With reinstated tax codes and specific reporting forms like Form 720 and 6627, staying informed ensures accurate filing and avoids penalties.
Leveraging online tools and exemptions can also streamline the process and reduce tax burdens. Ultimately, FET plays a vital role in promoting both fiscal accountability and environmental stewardship.