IRS Publication 510: Federal Excise Taxes Explained

IRS Publication 510 serves as the official Internal Revenue Service guide for federal excise taxes. These are taxes levied on the manufacture, sale, or use of specific goods, services, or business activities. Unlike income taxes, which are based on profit, excise taxes are applied to particular transactions or activities, often at a set rate per unit, such as per gallon or per pound.

Major Excise Tax Categories

Environmental Taxes

Environmental excise taxes apply to the sale or use of specific products that have an environmental impact. One tax is on petroleum, which includes a tax on crude oil received at a U.S. refinery and on petroleum products entered into the United States for consumption, use, or warehousing. The tax also extends to certain chemicals listed by the IRS as taxable if they are sold or used by a manufacturer, producer, or importer. Another environmental tax is levied on the sale or use of ozone-depleting chemicals.

Communications and Air Transportation Taxes

The communications tax is a federal excise tax applied to amounts paid for local telephone service and certain other communication services. This tax is collected by the service provider from the customer and then remitted to the government. Air transportation taxes consist of several components. A percentage tax of 7.5 percent is applied to the amount paid for the domestic air transportation of people. There is also a separate tax on the domestic transportation of property, which is set at 6.25 percent of the amount paid.

Additional air transportation taxes include a $5.20 per-passenger domestic flight segment fee and a tax of $22.90 per passenger for international arrivals and departures. Aviation fuel is also subject to its own excise tax, with different rates for commercial and non-commercial use. For non-commercial aviation, the tax on kerosene is 21.9 cents per gallon, while for commercial aviation, the rate is 4.4 cents per gallon.

Fuel Taxes

Federal fuel taxes are imposed on gasoline, diesel fuel, and kerosene. The tax is applied to the removal of fuel from a terminal or refinery and is paid by the position holder in the terminal, known as the “rack.” The rate for gasoline is 18.4 cents per gallon, and for diesel fuel, it is 24.4 cents per gallon. These taxes are a funding source for the Highway Trust Fund, which finances federal highway and mass transit projects.

By the time a consumer purchases fuel at a retail station, the federal excise tax is already included in the price. Certain alternative fuels, such as liquefied petroleum gas (LPG), compressed natural gas (CNG), and liquefied natural gas (LNG), are also subject to excise taxes, often at a rate based on their energy equivalence to gasoline.

Tax on Heavy Highway Vehicles

An annual use tax is imposed on heavy motor vehicles that operate on public highways. This tax applies to trucks, truck tractors, and buses with a taxable gross weight of 55,000 pounds or more. The tax amount varies based on the vehicle’s weight, starting at $100 and increasing to a maximum of $550 per year for vehicles weighing 75,000 pounds or more.

The tax period runs from July 1 to June 30, and the tax is paid by the person in whose name the vehicle is registered. There are specific exemptions and suspensions from the tax, for instance, for vehicles that are expected to be used for 5,000 miles or less (7,500 for agricultural vehicles) during the tax period.

Manufacturers Taxes

Certain goods are subject to an excise tax based on their sale by the manufacturer, producer, or importer. For example, sport fishing equipment, electric outboard motors, and certain fishing tackle boxes are taxed. Another category includes bows, quivers, and arrows.

A tax is imposed on the sale of firearms and ammunition. Pistols, revolvers, other firearms, and shells and cartridges are all subject to this tax, with the rate varying between 10 and 11 percent of the sale price. The funds generated from many of these manufacturers’ taxes are often allocated to specific conservation and wildlife restoration programs.

Other Taxes

Publication 510 details several other miscellaneous excise taxes. One such tax is the indoor tanning services tax, which is a 10 percent tax on the amount paid for indoor tanning. The provider of the tanning service collects this tax from the customer at the time of payment. Another area involves taxes related to certain insurance policies issued by foreign insurers.

Required Forms and Registrations

Information Gathering

Before completing any tax forms, a business must gather specific information. The first piece of data is the Employer Identification Number (EIN), which the IRS uses to identify the business entity. You will also need the official business name and address that match IRS records.

Beyond these basics, the required information is specific to the taxable activity. For fuel taxes, this means tracking the number of gallons of each type of fuel sold or used. Businesses subject to air transportation taxes must have records of the amounts paid by customers. For the heavy highway vehicle tax, the Vehicle Identification Number (VIN) and the taxable gross weight of each vehicle are necessary. Maintaining accurate records is a requirement for calculating and substantiating the tax liability.

Form 720, Quarterly Federal Excise Tax Return

Form 720 is the primary document for reporting a wide range of federal excise taxes. It is a quarterly return, meaning it must be filed four times a year. The form is structured into parts that correspond to the different categories of excise taxes. Part I covers environmental taxes, communications and air transportation taxes, and fuel taxes, while Part II reports manufacturers’ taxes.

When completing Form 720, a business transfers its collected data onto the appropriate lines. Each line on the form has an IRS number that corresponds to a specific taxable product or activity, such as “IRS No. 60” for gasoline. The form requires you to enter the quantity or the dollar amount of sales and then calculate the tax based on the applicable rate.

Form 2290, Heavy Highway Vehicle Use Tax Return

This form is specifically for the annual tax on heavy highway vehicles. The key information required to complete this form is the VIN of each vehicle being reported, its taxable gross weight, and its first month of use during the tax period. The form includes a tax computation table that helps determine the exact tax owed based on the vehicle’s weight category.

Filers must also indicate if a vehicle’s registration is suspended because it is expected to travel fewer than 5,000 miles on public highways. The IRS encourages electronic filing for Form 2290, and for those reporting 25 or more vehicles, e-filing is mandatory. Upon processing the return and payment, the IRS sends back a stamped Schedule 1, which serves as proof of payment and is required for vehicle registration.

Form 6627, Environmental Taxes

Form 6627 is not a standalone return but an attachment to Form 720. Its purpose is to calculate the environmental taxes on petroleum, chemicals, and other designated substances. The form is used to list the specific taxable substances sold or used and to compute the tax for each one. For example, a company selling a taxable chemical would use Form 6627 to determine the tax based on the number of tons sold. The total tax calculated on Form 6627 is then carried over to the appropriate line in Part I of Form 720.

IRS Registration (Form 637)

For certain excise tax activities, particularly those involving fuel, businesses must register with the IRS before engaging in the activity. This registration is done using Form 637, Application for Registration (For Certain Excise Tax Activities). The purpose of this registration is to allow businesses to engage in tax-free transactions, such as the removal of fuel from a terminal without paying tax at the rack.

The application requires detailed information about the business, its owners, and the specific activities it intends to conduct. The IRS reviews the application to determine if the business meets the requirements for registration. Once approved, the business receives a letter of registration with a registration number that must be used on exemption certificates and other transaction documents.

Filing and Paying Your Excise Tax Return

The deadlines for filing Form 720 are tied to the calendar quarters. The due date is the last day of the month following the end of the quarter. This results in deadlines of April 30, July 31, October 31, and January 31. For the annual Form 2290, the filing season runs from July 1 to June 30, and the return is due by the last day of the month following the month of the vehicle’s first use on a public highway within that period.

Returns can be submitted by mail or filed electronically. For paper filing, the return must be mailed to the IRS address specified in the form’s instructions. The IRS maintains a list of approved e-file providers on its website, and the Electronic Federal Tax Payment System (EFTPS) can be used for payment.

Making the tax payment can be done concurrently with filing. If mailing a paper return, a check or money order made payable to the “United States Treasury” can be enclosed. For electronic filers, payments can be made directly through EFTPS. It is important to schedule electronic payments in advance to ensure they are timely.

Claiming Excise Tax Credits and Refunds

A business may become eligible for an excise tax credit or refund if it pays a tax on a product that is later used for a nontaxable purpose. A common example occurs in the fuel industry. A distributor might pay the 24.4-cent-per-gallon tax on diesel fuel, but then sell that fuel to a farmer for use exclusively in an off-road tractor on their farm. Since use on a farm is a nontaxable use, the business that paid the tax is entitled to recover it.

One way to recover overpaid excise tax is by claiming a credit on Form 720. This method allows a business to directly reduce its total excise tax liability for the current quarter. The form includes specific lines for claiming credits for nontaxable uses of various fuels and other products. The amount of the credit is subtracted from the gross tax liability, lowering the amount of tax that needs to be paid for that quarter.

If a business is not liable for any excise taxes in a given quarter or if the credit amount exceeds the tax liability, it can file a separate claim for a direct refund. This is done using Form 8849, Claim for Refund of Excise Taxes. This form and its accompanying schedules are used to detail the reason for the refund claim, such as fuel used by a state or local government or for off-highway business purposes.

Completing Form 8849 requires specific information, including the type of tax, the amount of the claim, and the specific nontaxable use. The form has various schedules tailored to different types of claims; for example, Schedule 1 is used for certain nontaxable uses of fuels.