Excise Tax

What is an Excise Tax?

An excise tax is a selective tax imposed by a federal, state, or local government on a specifically identified product, service, transaction, or activity. Unlike a general sales tax, it does not apply broadly to most consumer purchases. 

Depending on the governing law, a manufacturer, importer, retailer, service provider, or consumer may be legally responsible for the tax. 

Federal excise taxes generated $106 billion in 2025, equal to approximately 2% of total federal revenue, according to the Congressional Budget Office. 

Because the responsible party, taxable amount, and filing obligation vary by tax and jurisdiction, understanding the process begins with determining how an excise tax applies to a particular transaction.

How Does Excise Tax Work?

Excise tax works by attaching a tax obligation to a specific event involving a taxable product, service, use, or activity.

The applicable federal, state, or local rule identifies when the tax arises, who is legally responsible, and which quantity or value must be used to calculate the amount.

The process generally follows five steps:

1. A transaction, use, or activity meets the applicable taxable conditions.

2. The governing rule assigns liability or collection responsibility to a designated party.

3. The tax is calculated using the prescribed rate and taxable base.

4. The amount is collected from another party or absorbed as a business cost.

5. The responsible party remits the liability to the appropriate taxing authority.

Legal responsibility and economic burden can follow different paths.

Under the current IRS Instructions for Form 720, the federal filing responsibility applies to a person who is liable for, or responsible for collecting, one of the excise taxes listed in Parts I or II of the form. 

The applicable tax provision, not a general rule, determines whether the responsible party is a manufacturer, importer, retailer, service provider, purchaser, or another participant in the transaction. 

- Is Excise Tax a Direct or Indirect Tax?

Excise tax is generally considered an indirect tax because the legally liable business may shift its economic cost to another participant in the supply chain. 

For example, a producer may recover the expense through the amount charged to a distributor, retailer, or customer.

Passing along the cost does not transfer the legal obligation. The party designated by the governing rule remains responsible even when pricing shifts the financial burden to another party.

- Is Excise Tax Included in the Price?

Excise tax may be incorporated into the advertised or final price, but it is not always presented the same way. 

A business may include the cost in its selling price, display it as a separate charge, or collect it directly when the applicable rule requires collection.

A customer may therefore bear the cost without seeing “excise tax” as a separate receipt item. Whether that happens depends on the tax, transaction, liable party, and jurisdiction.

What are Examples of Excise Taxes and Why are They Imposed?

Common federal excise taxes apply to highway transportation, aviation, tobacco, alcohol, environmental substances, stock repurchases, communications, and wagering.

These categories do not follow one uniform tax rule. Each category has its own taxable products, activities, exclusions, and administrative requirements.

The major categories if include:

These are not marginal categories. 

In 2025, highway-related taxes, aviation taxes, tobacco and alcohol taxes, and the corporate stock repurchase tax produced 88% of federal excise-tax revenue, according to the Congressional Budget Office’s analysis of federal excise-tax sources.

Businesses and tax professionals can review additional categories and tax-specific provisions in the IRS’s current Publication 510, Excise Taxes.

Why Do Governments Impose Excise Taxes?

Governments use excise taxes mainly to raise revenue, finance programs related to a taxed activity, or support a specific policy objective. The intended use depends on how the governing legislation directs the receipts.

Some revenue is dedicated to federal trust funds. 

In 2025, approximately 70% of federal excise-tax revenue went to trust funds rather than the Treasury’s general fund. Highway-related receipts supported the Highway Trust Fund, while aviation-related receipts supported the Airport and Airway Trust Fund. Taxes on certain petroleum products and chemicals contributed to the Superfund Trust Fund, according to the Congressional Budget Office.

Revenue that is not dedicated to a trust fund generally enters the Treasury’s general fund. It can then support federal activities without being reserved for a program directly connected with the taxed item.

A narrower group of excise taxes also serves a behavioral or public-health purpose. Tobacco taxes are one example. 

The Centers for Disease Control and Prevention explains that increases in tobacco excise taxes can influence smoking behavior while raising government revenue. This behavioral rationale should not be applied automatically to fuel, aviation, financial, or other excise taxes.

Is Excise Tax the Same as a Sin Tax?

No. A sin tax is a limited type of excise tax associated with products or activities that policymakers seek to discourage, such as tobacco use.

Excise tax is the broader category and includes revenue sources connected with transportation, environmental programs, financial transactions, and other activities that are not normally described as “sins.”

What Are the Types of Excise Taxes and How are they Calculated?

Excise tax is generally calculated in one of two ways: as a fixed amount per taxable unit or as a percentage of the taxable value.

Some tax provisions combine both methods or use a maximum, minimum, or alternative calculation. The correct amount depends on matching the applicable rate with the tax base established by the governing rule.

1. Specific or Per-Unit Excise Tax

A specific excise tax applies a fixed amount to each taxable unit. Depending on the tax, units may be measured in gallons, pounds, tons, items, vehicle segments, or another defined quantity.

The basic formula is:

Taxable units × rate per unit=excise tax
For example, suppose a hypothetical tax applies at $0.20 per gallon and a transaction includes 100 taxable gallons:
100×$0.20=$20
The excise tax would be $20.

This is an illustrative calculation, not a current federal or state tax rate. An actual calculation must use the unit, rate, and taxable event specified by the applicable tax provision.

2. Ad Valorem or Percentage-Based Excise Tax

An ad valorem excise tax applies a percentage rate to a defined taxable value. The tax base may be the amount paid, the statutory sales price, or another value established by the applicable provision.

The basic formula is:

Taxable value × percentage rate=excise tax
Suppose a hypothetical taxable service costs $200 and carries an 8% excise-tax rate:
$200×8%=$16
The excise tax would be $16.

This calculation assumes that the entire $200 forms part of the taxable base. A charge should not be included merely because it appears on the same invoice. The governing rule determines whether fees, discounts, bundled services, or other amounts are included.

Can an Excise Tax Use More Than One Calculation Method?

Yes. A tax provision may combine a percentage-based charge with a fixed charge.

Suppose a hypothetical transaction has:

• A taxable value of $300

• A percentage rate of 5%

• Two taxable units

• A fixed charge of $4 per unit

The combined calculation would be:

($300×5%)+(2×$4) $15+$8=$23

The total excise tax would be $23.

This example demonstrates a mixed calculation method. It does not represent the rate or structure of a specific federal, state, or local tax.

What Determines the Taxable Amount?

The taxable base is the quantity or value to which the applicable rate is applied. Depending on the tax provision, it may be determined by:

• The number of taxable units

• Weight, volume, or rated capacity

• The amount paid for a taxable service

• The defined sales price

• Charges included in or excluded from that price

• The product’s classification

• The product’s intended use

• The number of taxable components in a transaction

• A maximum, minimum, reduced, or alternative calculation

The rate and tax base must come from the same provision. A correct rate applied to the wrong quantity or value will still produce an incorrect liability.

Who Pays Excise Tax in United States?

The person who pays an excise tax depends on the taxable event and the law governing that particular tax.

Federal liability may fall on a manufacturer, producer, importer, seller, service provider, vehicle or vessel operator, purchaser, or another designated party. A business’s position in the supply chain alone does not determine responsibility.

Common federal arrangements include:

This table summarizes common arrangements rather than establishing liability for every transaction. 

The applicable tax provision must be reviewed because responsibility can change based on registration status, product movement, intended use, or transaction documentation.

Who Collects and Remits Excise Tax?

For collection-based taxes, one person pays the charge while another collects and transfers it to the government. The collector is responsible for handling the amount according to the applicable rule.

For example:

• An airline generally collects applicable air transportation tax from the passenger.

• An indoor tanning provider collects the applicable tax from the person purchasing the service.

• A provider of taxable communications services collects the tax from its customer.

The current IRS Instructions for Form 720 state that the person receiving payment for taxable air transportation must collect and submit the tax. 

The instructions separately require the recipient of payment for taxable indoor tanning services to collect and remit that tax.

Collection responsibility can create exposure even when the customer is intended to pay. Under the indoor tanning rules, for example, the collector can become liable if it fails to collect the required amount.

Can a Customer Pay Excise Tax Without Paying the Government Directly?

Yes. A customer may bear the cost through the purchase price even when another party has the legal obligation to pay the government. Alternatively, the customer may pay a separately stated charge that the business collects and remits.

These arrangements should not be treated as interchangeable:

• Statutory liability identifies who owes the tax under the law.

• Collection responsibility identifies who must receive and transfer the amount.

• Economic burden identifies who ultimately absorbs the cost.

Identifying those roles resolves who pays the tax, but it does not show how excise tax differs from other transaction taxes. The next section compares excise tax with sales tax, use tax, tariffs, and property tax.

Excise Tax vs. Sales Tax: What is the Difference?

Excise tax applies to specifically designated products, services, transactions, or activities, while general sales tax applies to a broad range of retail sales.

Excise tax may arise before, during, or after a retail transaction. Sales tax normally arises when taxable property or a taxable service is sold to the final customer.

The IRS definition of general sales tax describes it as a tax imposed at one rate on retail sales of a broad range of items. By contrast, the IRS defines an excise tax as a tax on the sale or use of specified products or transactions.

- Can Excise Tax and Sales Tax Apply to the Same Purchase?

Yes. The same purchase can be subject to both excise tax and sales tax when separate laws impose each tax. One tax does not automatically replace the other.

Fuel provides a practical example. 

California’s guidance for gas station operators explains that gasoline prices generally include federal and state excise taxes as well as applicable sales tax. The state applies its sales-tax rules after accounting for specified fuel taxes in the taxable price.

Whether both taxes apply and whether an excise-tax amount becomes part of the sales-tax base depends on the jurisdiction and product. Businesses should not assume that treatment used for fuel, tobacco, alcohol, or another regulated product applies to unrelated transactions.

- Excise Tax vs. Use Tax

Excise tax targets a designated product, service, transaction, or activity. Use tax generally applies when taxable property or services are used in a state and the required sales tax was not collected.

For example, a purchaser may owe use tax after buying a taxable item from an out-of-state seller that did not collect the destination state’s sales tax. 

The New York State Department of Taxation and Finance describes use tax as applying to taxable items and services used in the state when sales tax has not been paid.

Use tax complements a state’s sales-tax system. It is not a substitute name for a federal or state excise tax.

- Excise Tax vs. Tariff

An excise tax is tied to a specified domestic sale, use, product, service, or activity, whereas a tariff or customs duty applies when goods cross an international border.

The U.S. Department of Commerce describes a tariff or duty as a tax on imported products. The amount and treatment depend on the product classification, country, customs value, and applicable trade rules.

An imported product can encounter both charges. Customs authorities may assess a tariff because the merchandise enters the country, while a separate excise-tax provision may apply because of the type of product imported. U.S. Customs and Border Protection confirms that imports such as alcoholic beverages and tobacco products may also be subject to federal excise tax.

- Excise Tax vs. Property Tax

Excise tax is generally connected with a selected transaction, product, service, or use. Property tax is a recurring levy based on ownership and the assessed value of real or personal property.

On the other hand, property tax is often called an ad valorem tax, meaning “according to value.” However, ad valorem describes how a tax is measured; it does not mean that property tax and excise tax are the same category. A percentage-based excise tax can also use value as its tax base without becoming a property tax.

These distinctions help identify the correct tax system. The next step is determining how a business reports and pays an applicable excise-tax obligation.

How Do Businesses Report and Pay Excise Tax?

A business reports excise tax by identifying the correct jurisdiction, completing any required registration, filing the return assigned to the taxable activity, and making payments or deposits by the applicable deadlines.

Not every federal excise tax is reported on Form 720, and federal filing does not satisfy a separate state or local obligation.

A business should confirm four points before filing:

1. Which government imposes the tax?

2. Does the activity require advance registration?

3. Which return covers the liability?

4. Is payment due with the return or through earlier deposits?

When is Form 720 Required?

A person generally files Form 720, Quarterly Federal Excise Tax Return, when liable for or responsible for collecting. One of the federal excise taxes listed in Parts I or II of the form.

The filer must match the liability with the correct IRS number and determine whether an attachment or schedule is required. Form 720 should not be used merely because a transaction is described as subject to excise tax.

What Other Federal Excise Tax Forms May Apply?

The applicable form may require a separate schedule or attachment. Filing a return also does not replace registration when the governing provision requires registration before conducting the activity.

When are Form 720 Returns and Deposits Due?

Form 720 is generally due on the following schedule:

If the deadline falls on a Saturday, Sunday, or legal holiday, the return is generally due on the next business day.

A return deadline and a deposit deadline are not necessarily the same. The current IRS Instructions for Form 720 generally require semimonthly deposits for Part I taxes, although exceptions apply. For example, no deposit is generally required when the net Part I liability does not exceed $2,500 for the quarter; the amount is then payable with the return.

Other forms follow their own filing cycles. Form 730 is monthly, while Form 2290 generally depends on when a taxable heavy highway vehicle is first used on a public highway.

Do State and Local Excise Taxes Use Form 720?

No. Form 720 reports specified federal liabilities only. State and local governments may require separate registrations, returns, deposits, and documentation.

Businesses should consult the relevant department of revenue or use the federal directory of state and local tax agencies. A federal filing does not establish compliance with another jurisdiction’s rules.

What Excise Tax Records Should a Business Keep?

A business should retain records connecting each return to its taxable transactions, including invoices, quantities, classifications, exemption documents, calculations, deposit confirmations, and filed returns.

Under the Form 720 recordkeeping requirements, records supporting claims and exemptions generally must be kept for at least four years from the latest date the tax became due, the tax was paid, or the claim was filed.

After establishing the correct filing and payment process, a business can determine whether an exemption, credit, refund, or deduction affects its final tax treatment.

Are Excise Tax Exemptions, Refunds, or Deductions Available?

Yes, but an exemption, credit, refund, and deduction produce different tax results. Eligibility depends on the specific tax, product or service, use, claimant, and required documentation. A taxpayer should not treat these terms as interchangeable.

What is an Excise tax Exemption?

An exemption prevents an otherwise covered transaction or use from being taxed when all statutory conditions are satisfied. Depending on the provision, eligibility may be based on:

• The purchaser’s tax status

• The product’s intended use

• An export transaction

• A sale to a government or qualifying organization

• The seller’s or buyer’s registration

• A properly completed exemption certificate

An exemption does not apply merely because the purchaser states that a transaction is tax-free. The responsible business may need a certificate, registration number, invoice, proof of use, or export record to support the treatment. 

How Do Excise Tax Credits and Refunds Work?

A credit reduces a tax liability, while a refund returns an eligible amount that has already been paid. The same tax amount generally cannot be recovered more than once.

Depending on the claim, a taxpayer may use:

• Schedule C of Form 720 to reduce qualifying liability

• Form 8849 to request certain excise-tax refunds

• Another form expressly assigned to the credit or claim

Eligibility may depend on who paid the tax, how the product was used, whether the claimant is registered, and whether another party waived the right to claim the same amount. Records should establish the transaction, tax paid, qualifying use, and claimant’s authority.

Receiving a refund may also affect income-tax reporting. 

Is Excise Tax Deductible?

A business may deduct an excise tax when it is an ordinary and necessary cost of carrying on that business. However, the tax is not always reported as a separate deduction.

The IRS provides the following treatment in its current Tax Guide for Small Business:

• Qualifying business excise taxes may be deducted as business expenses.

• Motor-fuel taxes used in a business are usually included in the cost of the fuel rather than deducted separately.

• Tax connected with merchandise may affect the cost of goods sold.

• Tax connected with depreciable property may become part of the property’s cost or basis.

• A credit or refund can reduce the amount otherwise treated as an expense or cost.

Personal, living, and family expenses are generally not deductible as business expenses. The appropriate treatment therefore depends on why the excise tax was incurred and how the underlying product, service, or property is used.

FAQs About Excise Tax

Do You Need an EIN to File an Excise Tax Return?

Yes. A business generally uses an Employer Identification Number to register, file federal excise-tax returns, and identify payments. An EIN may be required even when the business has no employees.

Can Federal Excise Tax Returns Be Filed Electronically?

Yes. Eligible businesses can electronically file Forms 720, 2290, and 8849 through an approved provider. E-filing provides submission confirmation, while form-specific rules determine whether electronic filing is optional or required.

What Happens If a Business Files or Pays Excise Tax Late?

Late filing, payment, or deposits may trigger penalties and interest. The IRS calculates each charge according to the failure, unpaid amount, and delay. Reasonable-cause relief may apply when the taxpayer meets its requirements.

Do Online and Interstate Sales Create Excise Tax Obligations?

They can. An online or interstate transaction may trigger excise tax when the product, buyer, destination, delivery, or use meets a jurisdiction’s rules. Sellers must evaluate federal, origin-state, and destination-state requirements separately.

How Often Do Excise Tax Rates Change?

Excise-tax rates change when legislation, inflation adjustments, or state and local rules modify them. Businesses should verify the effective rate for the transaction date instead of relying on a prior return or historical rate table.