The Basics of Excise Taxes

An excise tax is a transactional tax levied on certain goods or services. Excise taxes are sometimes called “sin taxes” because the products or services taxed are generally deemed harmful to one’s heath or the environment such as gasoline, tobacco, alcohol, gambling and even tanning salons. Check the IRS website for a full list of excise taxes.

If you’re a small business owner who sells or produces these specific items or services, excise taxes will be imposed. However, you include the excise tax in the total sale amount of an item or service. So, your customers pay for the excise tax, but it’s your responsibility to collect these taxes and remit them to the IRS.

Types of Excise Taxes

There are two types of excises taxes: specific excise tax and ad valorem excise tax. Depending on what you sell or produce, you’ll be imposed with one of these.

A specific excise tax is a flat dollar amount added to the sale price of a product. For example, California’s excise tax on cigarettes is $2 per pack. It doesn’t matter if a customer buys the cheapest or most expensive pack available, $2 will be added to the original price of the pack.

Ad valorem (“according to value” in Latin) excise tax is a fixed percentage charged on a good or service. An example of this type of tax would be the 10% tax on indoor tanning salons, which was established under the Affordable Care Act in 2010. If a tanning salon offers a $20 monthly membership, $2 (10%) would be added to the amount. This means the total cost you pay would equal $22.

How and When to Report and Pay for Excise Taxes

On a quarterly basis, you are required to report and pay excise taxes to the IRS via Form 720. Schedule A of Form 720 is used to show the total amount of excise taxes you must pay for the quarter.

At the end of each quarter, you have one month to file and pay your excise taxes:

  • 1st quarter (January-March) due by April 30.
  • 2nd quarter (April-June) due by July 31.
  • 3rd quarter (July-September) due by October 31.
  • 4th quarter (October-December) due by January 31.

You can send your completed Form 720 by mail or online through an IRS-approved software provider. To keep track of your excise taxes, the best and easiest way is to utilize a bookkeeping service such as ours.

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