Excise tax: what is it and why should it matter to you?

If you’re a business owner, there’s a lot to keep track of when it comes to finances. From deductibles to submissions, and so much more; business finances never end.

Despite how busy owners are, all should be familiar with excise taxes. That’s why we’re here to explain the five things to know about it.

1. Who Pays It

Excise tax is mostly paid by retailers and merchants directly to their wholesalers. This cost is then typically passed onto consumers through higher retail prices. This means that consumers may not be aware that they are often softening the burden of excise tax.

2. Who Imposes It

Local, state, and federal governments all participate in the regulation and implementation of excise tax. This means that rates can vary depending on the area where you live. Further, depending on the area, the revenue generated from excise tax can be small or significant.

When it comes to federal excise taxes, governments typically implement them by putting tariffs on imported goods. State governments do it by imposing them on things like cigarettes and alcohol. Finally, the local excise tax is usually imposed in the form of added fees. For example, adding an additional area-specific tax on parking tickets.

3. How to Claim Them

Businesses that charge or receive excise taxes must file Form 720 Federal Excise Tax Return. This form needs to be completed quarterly along with payments. For businesses that collect this tax, they are also responsible to pass along these funds to state and local governments (if it’s required).

It is important to note that some merchants may be allowed deductions or credits on their income tax for contributing to excise tax. However, that is determined on a case-by-case basis and should be checked with an accountant or other financial professional.

4. Goods are Taxed Differently

On certain items that carry high social costs and negative impacts, the excise taxes put on them are higher. For example, goods like cigarettes and alcohol have a higher excise tac on them compared to other things because of the negative health repercussions they have. These high costs are sometimes referred to as ‘sin taxes’ where the items are taxed higher given the horrible consequences associated with it.

Excise tax is further determined on an ‘ad valorem’ or ‘specific’ basis. If a good or item has ad valorem tax on it then the cost is based on a fixed percentage whereas specific excise tax refers to a fixed dollar amount.

5. It Is Different from Sales Tax

Seeing as the cost of the excise tax is often wrapped into the overall cost of an item it is commonly confused with sales tax. But these two taxes refer to very different things. An excise tax is imposed on a specific good or service by a government body. Excise tax is also the responsibility of the merchant to pay to the government.

Sales tax differs given that is it paid by the consumer to the merchant who, in turn, passes it onto the government.

If you’re still confused about excise taxes and if they apply to your small business consider getting in touch with a professional to review your accounts. Someone like us at A.P. Accounting and Tax Services can help owners manage their purchases, track taxes, and ensure that their books are in order come tax times.

So, if you’re an owner that needs some help, give us a call today at 407-328-5001.

Image: Unsplash