Understanding Excise Taxes and How They Affect Your Business

Does your business sell alcohol, tobacco, or luxury products? Have you considered what excise taxes means for your accounting? The tax is designed to regulate consumer behavior associated with negative social, environmental, or health impacts. The thinking is that high levies on tobacco products may contribute to better public health, for example. But, while excise tax is typically included in a product’s selling price, and thereby passed on to consumers, it is still your responsibility as a business to ensure accurate and compliant remittance thereof. In this blog, our CPAs guide you through what you need to know.

The Purpose of Excise Taxes

Unlike sales tax, which applies to most consumer goods, these taxes target specific items, including:

• Fuel. To fund infrastructure and reduce environmental impact.
• Alcohol. Aimed at discouraging excessive consumption and covering related health and social costs.
• Tobacco products. To reduce tobacco consumption, for obvious health risks.
• Luxury items. Imposed on high-end goods like yachts or luxury cars, which are often seen as non-essential.
• Gambling. To regulate the industry and manage social consequences.
• Goods with environmental impact. To discourage using products that contribute to pollution or climate change.
• Firearms and ammunition. To regulate sales and mitigate public safety concerns.

Calculating Excise Taxes

You can’t submit accurate filings without understanding the intricacies around how this type of tax is calculated. The worst part is that the method varies depending on the specific product type or activity you’re selling. Typically it can be determined as follows:

1. Percentage-based taxes. In some cases, the government determines excise taxes by applying a fixed percentage to the product’s value. For example, firearms incur a 10% excise tax, while airline tickets are taxed at 7.5%, with different product types subject to varying rates.
2. Unit-based taxes. Other products are taxed at a fixed amount. For example, the federal excise tax on cigarettes is $1.01 per pack. It is important to note however that state excise taxes vary widely. Through March 31, 2024, these range from as low as $0.17 per pack in Missouri to as high as $5.35 per pack in New York. 

Staying abreast of these rates is key to compliance. If you pay excise taxes on multiple product types, you’re in for even more of a challenge. We advise you to consult an expert.  

How Excise Taxes Impact Business Operations

Incorporating duties into your retail prices can throw another spanner into the works. Because, beyond industry standards, you also need to protect your profit margins. This filters down to operations in the following ways.

• Cost Implications. Increased retail prices (a natural byproduct of excise taxes) may stunt sales. This means that your business must do more when it comes to optimizing supply chain processes to reduce costs. You also need to employ smart sales and marketing tactics to stay competitive.
• Administrative Burden: Maintaining accurate records, preparing tax returns, and ensuring compliance need dedicated resources. However, you can factor automation into your ops processes to streamline the work and reduce the burden.

Excise Tax Filing and Remittance

Want to avoid audits and submit accurate filings the first time round? Follow these steps to stay on track:

1. File the relevant forms: If your business charges and receives excise taxes, you must file Form 720, Federal Excise Tax Return on a quarterly basis and make the accompanying payments. 
2. Consider state-specific laws: You may also need to comply with state-specific requirements, separate from federal submissions. If you look at California, for example, there are additional environmental taxes for businesses supplying hazardous materials. Checking state-specific regulations is key to avoiding penalties.
3. Don’t forget deductions: With all this talk about tax remittance, you may forget that you could be eligible for deductions or credits. For example, businesses that invest in renewable energy-efficient systems or other environmental improvements may qualify for credits such as the Renewable Energy Investment Tax Credit (ITC), and more. 
4. Partner with a pro: A CPA that understands excise and multi-state tax requirements can help you strategize for tax optimization while also reducing the risk of errors for compliant records.

At Fusion, we have years of experience managing excise taxes and optimizing business operations. We also take care of the administrative stuff like ensuring compliant records. It’s a win-win! Contact us today.