What Are the Excise Tax Rules in IRS Pub. 510?

Federal excise taxes are applied to the sale or use of specific goods, services, and business activities. Unlike income taxes, which are based on earnings, excise taxes are targeted to fund infrastructure or discourage certain behaviors. IRS Publication 510, “Excise Taxes,” is the guidance document from the Internal Revenue Service that details these taxes, outlining which products are subject to tax, who is responsible for payment, and compliance procedures.

Identifying Applicable Excise Taxes

Determining whether your business activities trigger a federal excise tax is a compliance step. These taxes are linked to specific categories of goods and services detailed within IRS Publication 510. The liability for the tax falls on the manufacturer, retailer, or importer, depending on the specific tax category.

Environmental Taxes

Environmental taxes are imposed on the sale or use of certain chemicals and imported substances that have an environmental impact. The tax is levied on the manufacturer, producer, or importer of dozens of specified chemicals. Businesses dealing with these substances must consult Publication 510 to identify which are taxable.

Communications and Air Transportation Taxes

The federal government imposes excise taxes on certain communication services and on air transportation. The communications tax applies only to local telephone service and not to long-distance or wireless services. For air transportation, taxes are levied on passenger tickets for domestic and international flights, as well as on air cargo. The service provider or air carrier is responsible for collecting and remitting these taxes.

Fuel Taxes

Fuel taxes are applied to the sale or use of various fuels, including gasoline, diesel, and kerosene. The tax is imposed on the producer or importer at the terminal rack. This revenue is a primary funding source for the Highway Trust Fund, which supports the construction and maintenance of the nation’s highway and mass transit systems.

Heavy Highway Vehicle Taxes

A federal use tax is imposed on highway motor vehicles with a taxable gross weight of 55,000 pounds or more to offset the wear and tear these vehicles cause to public roads. Additionally, a separate retail tax is levied on the first sale of new heavy trucks, tractors, and trailers. This tax is calculated as a percentage of the sales price and collected by the retailer.

Manufacturers Taxes

Manufacturers taxes apply to the sale of certain goods by the manufacturer, producer, or importer. Items subject to this tax include coal, certain types of tires, sport fishing equipment, and firearms. The tax liability is triggered at the point of the first sale of these items, with purposes ranging from funding conservation programs to general revenue.

Required Registrations and Forms

Before a business can report and pay excise taxes, it may need to complete specific registrations with the IRS. The primary forms for registration and reporting are Form 637 and Form 720, each serving a distinct purpose.

Form 637 Registration

For businesses involved in specific excise tax activities, particularly within the fuel industry, registration with the IRS is a prerequisite. This is done by filing Form 637, Application for Registration (For Certain Excise Tax Activities). This form is for obtaining a registration status that allows a business to engage in certain tax-free transactions, such as buying or selling fuel without the tax included in the price.

Approval of Form 637 signifies that the IRS has authorized the business to participate in the excise tax system in a particular capacity. This registration is necessary for producers, importers, terminal operators, and other entities in the fuel supply chain to conduct certain transactions without paying taxes upfront and later filing for a refund.

Form 720, Quarterly Federal Excise Tax Return

The primary document for reporting most federal excise taxes is Form 720, Quarterly Federal Excise Tax Return. This form is used to report and pay taxes on a wide range of goods and services, including those related to environmental impacts, communications, air travel, fuel, and manufacturing. The form is structured with different parts and schedules corresponding to the various categories of excise taxes.

A business must identify the specific IRS numbers on the form that relate to its taxable activities. The form requires the taxpayer to calculate the tax due for each category and then aggregate these amounts to determine the total liability for the quarter.

Calculating the Excise Tax Due

The method for calculating tax varies depending on the specific tax and is based on either a per-unit rate or a percentage of the sales price. IRS Publication 510 provides the specific rates and rules needed to perform these calculations for the liabilities reported on Form 720.

Per-Unit Tax

Many federal excise taxes are calculated on a per-unit basis, meaning a flat tax rate is applied to each unit of a product sold or used. For example, the federal excise tax on gasoline is calculated in cents per gallon. To determine the tax due, a business multiplies the total number of gallons sold during the reporting period by the statutory tax rate.

Ad Valorem Tax

Other excise taxes are calculated “ad valorem,” which means they are based on a percentage of the sale price of a product or service. The retail tax on new heavy trucks, for instance, is 12% of the first retail sale price. To calculate an ad valorem tax, the business multiplies the total taxable sales revenue by the applicable tax percentage.

Filing and Paying Excise Taxes

After calculating the total excise tax liability, the final steps are to file the return and remit the payment to the IRS. The process is governed by deadlines and specific procedures for both submitting the tax form and transferring funds.

Filing Deadlines and Methods

Form 720 is a quarterly return due by the last day of the month following the end of the quarter. For example, the return for the first quarter (January, February, March) is due by April 30. Many businesses are mandated to file their excise tax returns electronically through an IRS-approved e-file provider, which offers faster processing and helps reduce errors.

Payment Requirements

The IRS requires most businesses to make their excise tax payments through electronic funds transfer. The most common method is the Electronic Federal Tax Payment System (EFTPS), a free service from the Department of the Treasury. Enrollment in EFTPS is required before use.

For certain high-liability taxes, such as those on fuel and air transportation, taxpayers may be required to make semi-monthly deposits of the tax throughout the quarter. These deposits are also made via EFTPS. The total deposits made are then reconciled on the quarterly Form 720.

Excise Tax Credits and Refunds

In some situations, a business may pay more excise tax than it owes or pay tax on goods later used for a nontaxable purpose. The IRS provides mechanisms for these businesses to recover overpaid amounts, either as a credit against future tax liabilities or as a direct refund.

Common Reasons for Claims

A frequent reason for claiming a credit or refund is the nontaxable use of a product on which tax has already been paid. Examples include fuel used on a farm for farming, by a state or local government, or by a nonprofit educational organization. A business that purchases tax-paid fuel for one of these purposes is entitled to a refund of the excise tax. Overpayments can also occur due to clerical errors.

Claiming a Credit on Form 720

One way to recover an overpayment is to claim a credit on a subsequent Form 720. The taxpayer can report the amount of the credit on the form, which directly reduces the total tax liability for that quarter. This method provides a quick recovery of the overpaid amount as it is integrated into the regular quarterly reporting cycle.

Filing for a Refund with Form 8849

If a business prefers a direct refund, it can file Form 8849, Claim for Refund of Excise Taxes. This form is used to claim a refund of taxes that have been overpaid or paid on items used for nontaxable purposes. Form 8849 is a cover sheet that must be accompanied by one or more schedules depending on the type of tax being refunded, such as Schedule 1 for the nontaxable use of fuels.