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An Overview of Excise Taxes for Small Businesses

An Overview of Excise Taxes for Small Businesses

As a small business owner, you want to know the type of taxes you should pay, and an excise tax is one of such taxes. Excise taxes are the extra tax added to particular products or services. These products are peculiar because they are often viewed as being socially damaging or as luxurious goods.


For instance, luxury cars are labeled under excise taxes, and the same applies to alcohol, airline tickets, gas, indoor tanning, etc. Excise tax is also called "Sin tax" because it's on items labeled "Unhealthy" and gives the federal and state governments billions in yearly revenue. 

Excise taxes aids with decreasing the use of potentially dangerous services and products taxed at an advanced rate than non-harmful items. Experts agree that an increase in excise taxes and the prices of tobacco products enables the decrease of total tobacco consumption across the country. 

Some of the items that incur excise tax include: 

  • Ammunition

  • Firearms 

  • Air transportation 

  • Vehicles 

  • Fuel (this includes gas)

  • Sports betting 

  • Gambling 

  • Indoor training 

  • Recreational marijuana 

  • Medical marijuana 

  • Vaping and all kinds of e-cigarettes 

  • Tobacco

  • Alcohol

Remember that there are many more items than this list entails, but this should give you an idea of what to expect. 

All business enterprises that sell these items and services are required to pay excise taxes. But there are also varying state and local excise taxes you will pay in addition to the federal charges. The businesses that sell firearms and alcohol must register with the Alcohol and Tobacco Tax and Trade Bureau (TTB)

The businesses that sell other items and services within the excise tax grouping must work directly with the IRS. Some products that are under excise tax will need to be registered before you can commence sales. If you don't write the items before sales begin, you may face a penalty of up to s$10,000 for every first time. Then you will pay $1,000 daily after that day. The IRS maintains that the fine is in addition to other taxes owed at the default time. 

You can register with the IRS by filing Form 637 and faxing or mailing a hard copy to the IRS office. After the application is confirmed, you will receive a registration letter. You can also check and verify your registration status online at the IRS portal. 

Excise tax is calculated in two ways: it is either ad valorem or specific:

Ad valorem

Here, the tax is pegged at a percentage which means your business needs to pay a particular portion of whatever you make. For example, the excise tax charged for indoor tanning providers is pegged at 10%, and the IRS will collect it when the buyer of the tanning service makes a purchase. 

If the tanning enterprise decides to charge $10 per session, the tax will be $1, and if it moves the cost to the customer, the customer's total bill will be $11. 

  • Specific 

With the specific tax, a set amount in dollars is charged for particular goods. For instance, the federal excise tax on one pack of cigarettes is $1.01. At the state level, there is a different excise tax on cigarettes from the federal tax. Connecticut is the state with the highest excise tax for one pack of cigarettes, and it is at $4.35 a pack. Then there is a federal excise tax that increases it to $5 per pack. 

Excise tax is not the same as a sales tax; yes they are similar, but also vary to an extent. For example, the excise tax is collected on the sale of an item. At the same time, sales tax is added to almost everything the consumer buys or what you sell. Sales tax is also the percentage of the purchase, but it isn't always a percentage of the total investment with an excise tax. 

So now you know the basis of excise taxes and what you can expect as a business owner. The next time you decide on the products to offer your consumers, think about how to relate to excise tax. 



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