A Small Business Guide to Excise Taxes

Governments implement excise taxes to dissuade the public from engaging with “sinful” goods and activities. Follow our guide if your business is selling or purchasing excise goods and activities.

Yesterday, I woke up and decided I needed to visit my local pharmacy to get some on-sale Halloween candy. Today, I regret the trip and am embarrassed by how little candy is left in the 50-piece pack I purchased mere hours ago.

Imagine if instead of putting candy on sale after Halloween, there was a surcharge to deter people like me from giving in to their sweet tooth only to end up with a stomach ache and a feeling of rue. That’s how excise taxes work.

Overview: What is excise tax?

Excise taxes, or excise duties, are taxes levied on specific goods and activities. Imposed for government revenue generation or to influence consumer behavior, excise taxes apply to goods and services such as cigarettes, alcohol, fuel, and gambling.

Governments hit “sinful” goods and services with excise taxes to discourage their use. For example, the Affordable Care Act of 2010 (ACA) added a nationwide 10% excise tax on indoor ultraviolet tanning beds, a leading cause of melanoma.

Any level of government can add an excise tax to goods and activities, and they can layer up. For a pack of cigarettes, you tack on the federal $1.01 tax to your state’s excise tax. The highest state- or territory-level cigarette excise tax is in American Samoa at $6. Cigarette and alcohol taxes vary by state.

Businesses are ultimately responsible for paying excise taxes on the goods and services they sell, but it’s usually customers who feel the effect. For example, a tanning salon would pass on the 10% excise tax by adding it to customers’ bills.

Manufacturing businesses might have to pay an excise tax for producing certain goods. More on that in the example below.

The revenue raised from excise taxes sometimes funnels into programs aimed at educating the public about product dangers. For instance, a small portion of federally- and state-raised cigarette excise tax revenue funds anti-tobacco educational programs.

Sometimes, it’s more about raising revenue than discouraging bad behavior. Excise taxes apply to less controversial goods, such as gasoline (I said less controversial, not uncontroversial). According to the Census Bureau and Congressional Budget Office, federal and state motor fuel excise tax revenue totaled more than $80 billion in 2018. Most states direct fuel tax revenue to fund transportation infrastructure.

Check your local and state tax authority website for a list of excise taxes and rates. IRS Publication 510 runs through the federal excise taxes.

Excise tax vs. sales tax: What's the difference?

Excise and sales taxes generate government revenue and apply to goods and services produced or sold within the country. While sales tax applies to all goods and services with some exclusions, you pay excise taxes on only a handful of goods and activities.

Sales tax is always calculated as a percentage of a purchase, or “ad valorem.” Some excise taxes are calculated that way, but it’s often a flat rate.

For example, New Jersey imposes a 6.625% sales tax on all goods except unprepared food and clothing. The state has a flat $2.70 tax for a pack of cigarettes, regardless of whether the pack costs $5 or $500.

Like sales tax, the seller is responsible for remitting excise taxes to the appropriate tax authority.

Example of excise tax

California has an excise tax on the manufacture and sale of lead-acid batteries, standard in cars. The lead and sulfur in the batteries threaten groundwater potability when improperly discarded.

The excise tax applies not only to customers but also to the manufacturer of lead-acid batteries. The manufacturer pays a $1 excise tax on every sale, and the retailer must charge customers $1 per lead-acid battery.

Say you own a car repair shop, where you often replace car batteries. You buy lead-acid batteries from Battery City, a local battery manufacturer.

When you buy Battery City batteries, you won't necessarily see the $1 manufacturer tax on your invoice. It's the manufacturer's responsibility to pay the excise tax. However, California law requires you to collect the $1 excise tax from customers, so don’t take the $1 excise tax out of your profits.

How excise tax works

Once you collect sales and excise taxes from customers, record them in your accounting software and remit them at least quarterly.

Accounting for excise taxes mimics recording sales tax. Say you own a New Jersey convenience store that sells cigarettes. When you sell a $10 pack of cigarettes, record the following entry:

Excise taxes must be remitted to the government that levied them. For example, on the sale of a cigarette pack in New Jersey, you’d send $2.70 to the state tax authority and another $1.01 to the U.S. Treasury.

Attach excise tax return IRS Form 720 when you remit your excise tax liability. You’ll find a similar state or local form on the tax authority’s website. Depending on your sales volume and nature of the excise goods, you might have to remit tax collections quarterly or twice monthly.

You report and pay federal cigarette and alcohol excise taxes to the Alcohol and Tobacco Tax and Trade Bureau, part of the Treasury Department.

You can deduct federal excise taxes paid for goods or services on your small business taxes, potentially decreasing your small business effective tax rate. Excise taxes collected from customers are not deductible.

Exercise your excise knowledge

When you encounter excise taxes in your business, you might want to consult a tax professional to help you through the filing. If you plan to go it alone, find a tax software package with tax compliance features.