What Is the Meaning of the Federal Excise Tax?

A federal excise tax is a tax imposed by the U.S. government on the sale or use of specific goods, services, and activities. Unlike broad-based taxes such as personal income tax, an excise tax targets a narrow list of items. The tax is levied on the manufacturer, producer, or retailer, but the cost is usually incorporated into the final price of the product or service.

This form of taxation serves multiple purposes. It is used to generate revenue for specific government projects, with funds often directed into trust funds. For example, taxes on motor fuels help fund highway construction. In other instances, these taxes are intended to discourage the consumption of products deemed harmful, such as tobacco and alcohol.

Goods and Services Subject to Federal Excise Tax

A wide array of goods and services are subject to federal excise tax, with the revenue often dedicated to specific trust funds or the general fund. The responsibility for collecting and remitting these taxes falls on the manufacturer, importer, or retailer.

Fuel

Federal excise taxes are applied to various types of fuel, representing a source of funding for transportation infrastructure. Gasoline has been taxed at a rate of 18.4 cents per gallon and diesel fuel at 24.4 cents per gallon since 1993. Revenue from these fuel taxes is the primary contributor to the Highway Trust Fund, which supports road and bridge projects. Other fuels, such as kerosene and aviation gasoline, are also subject to federal excise taxes.

Tobacco and Alcohol

Tobacco products and alcoholic beverages are subject to substantial federal excise taxes. For tobacco, the tax is calculated per unit, such as per thousand cigarettes, and equates to approximately $1.01 per 20-count pack of cigarettes. Alcohol taxes vary by the type and alcohol content of the beverage. Distilled spirits are taxed at $13.50 per proof gallon, while tax rates on wine and beer differ based on their alcoholic strength and production volume.

Transportation

The transportation sector is subject to several excise taxes beyond fuel. Air travel is a notable example, with taxes applied to domestic passenger tickets, air cargo, and international flights. A 7.5% tax is applied to the price of domestic airline tickets, and a domestic flight segment fee is also charged per passenger. These revenues are directed to the Airport and Airway Trust Fund to support aviation infrastructure. Additionally, a 12% excise tax is levied on the first retail sale of new heavy-duty trucks, tractors, and trailers.

Environmental and Health-Related

Certain excise taxes address environmental concerns and fund health-related programs. The Superfund chemical excise taxes were reinstated in 2022 on the sale or use of specific chemicals by manufacturers, producers, or importers. A 10% excise tax is also imposed on indoor tanning services.

How Federal Excise Tax is Calculated

The method for calculating federal excise tax liability depends on the specific good or service being taxed. The Internal Revenue Service (IRS) prescribes two primary calculation structures: a per-unit basis and a percentage of price basis. Businesses must identify the correct method for each taxable product.

One method is the per-unit, or specific, tax. This involves applying a fixed dollar amount to each unit of a product sold. For example, the federal excise tax on gasoline is a set number of cents for every gallon sold. A business calculates its total tax liability by multiplying the total number of gallons of gasoline sold by the per-gallon tax rate.

The other method is the ad valorem tax, which is calculated as a percentage of the product’s or service’s sales price. This approach is used for items like indoor tanning services, where the tax is 10% of the service cost. If a salon provides a tanning session for $50, the federal excise tax would be $5. The business collects this amount from the customer and remits it to the government.

Business Remittance and Filing Obligations

Businesses responsible for collecting federal excise taxes must adhere to specific IRS reporting and payment schedules using Form 720, the Quarterly Federal Excise Tax Return. Any business selling goods or providing services subject to these taxes must file Form 720. The form is due quarterly, on the last day of the month following the end of each calendar quarter. For instance, the return for the first quarter ending March 31 is due by April 30.

While the tax return is filed quarterly, the payment schedule is more frequent. Businesses are required to make semi-monthly deposits of the taxes they have collected. A semi-monthly period is defined as the first 15 days of a month or the 16th through the last day of the month. Payments are due by the 14th day following the end of that semi-monthly period.

An exception exists for smaller liabilities. If a business’s total net excise tax liability for the quarter is less than $2,500, it can pay the full amount with its quarterly Form 720 filing instead of making semi-monthly deposits. All payments must be made via electronic funds transfer. Failure to file or pay on time can result in penalties calculated as a percentage of the unpaid tax.