Guide to excise taxes: 5 things every business should know
Often to their detriment, many businesses do not focus on excise taxes—and, in fact, may be unaware of them entirely. The truth is that excise taxes may have a serious financial impact on companies, and in some cases, excise tax exposure may be material to a business. In the current uncertain economy, reducing excise tax liability and identifying excise tax credits can enhance a company’s bottom line and liquidity. Moreover, evaluating excise taxes and planning opportunities can improve a company’s EBITDA, as excise taxes are treated as an above-the-line cost of goods sold.
1. What are excise taxes?
Excise taxes are taxes imposed on commodities or activities, such as fuel, tobacco or wagering, and are typically reflected in the final price of such products and services. Excise taxes are passed on to the consumer, who is often unaware of them.1
The excise taxes companies pay are enacted by legislatures to serve as user fees with various purposes: to discourage certain behavior, to promote certain activities or simply to raise revenue. Businesses can benefit from excise taxes: For example, taxes imposed on fuels and heavy vehicles fund highway improvements; taxes imposed on air transportation fund airport and airway systems. Similarly, certain environmental excise taxes were enacted to discourage the use of CFCs and other chemicals that harm the ozone layer. Use of biodiesel or alternative fuel over petroleum-based products has been encouraged by renewable fuel credits. Taxes on alcohol and tobacco raise revenue for the Treasury General Fund.
The federal government collects over $100 billion of excise taxes per year.2 Two agencies under the U.S. Treasury Department administer all existing excise taxes: the Internal Revenue Service (IRS) and the Alcohol and Tobacco Tax and Trade Bureau (TTB). The major taxes IRS administers relate to:
- Petroleum-based fuel (including gasoline, diesel fuel, kerosene, and crude oil)
- Alternative fuel
- Heavy vehicles
- Sporting goods (sport fishing equipment, bows and arrows)
- Air transportation
- Environmental taxes
- Affordable Care Act taxes and fees
- Foreign insurance
TTB administers taxes related to:
- Alcohol (beer, wine, distilled spirits)
It is important to note that each excise tax has its own rules for imposition, rate, tax base, exemptions and credits. Compliance obligations for excise taxes can often be quite complex. In most cases, excise taxes are reported quarterly, and semi-monthly deposits are due. Additionally, some companies must file inventory reports or other reporting obligations, even if they are not liable for the tax.
2. Which industries are affected by excise taxes?
Many more than one would think. The primary sectors affected by excise taxes include energy, transportation (ground, air and water), industrial manufacturing, food and beverage, certain consumer goods and life science. Importers and exporters may also be subject to certain excise taxes. Even banks, insurance companies and credit card issuers may encounter excise taxes.
Furthermore, end users in industries such as building, construction, power and utilities, aerospace and defense, farming and logistics may claim certain refundable excise tax credits. For example, users of taxed fuel in off-highway businesses or in farming can claim fuel credits of up to $0.243 per gallon.3 Users of propane in forklifts, such as those used in manufacturing facilities or distributors, may be eligible for alternative fuel credits of up to $0.50 per gallon equivalent of propane, which equates to roughly $1,000 per year per forklift.4 Manufacturers of non-beverage products such as perfumes, food products or medicines that use taxed alcohol in production may qualify for a drawback of the tax paid, up to $13.50 per gallon. Nonprofit entities or state and local governments often qualify for exemptions from excise tax or credits on the purchase of taxed articles such as fuel, tires, and firearms.
3. When are excise taxes material to businesses?
Excise taxes may present a material issue to businesses that are liable for the tax, whether known or unknown. While some businesses have immaterial or no excise tax liabilities, some companies’ excise tax liability can soar to millions of dollars per quarter. For example, fuel marketers, distributors, and blenders may be liable for excise tax on the gallons of fuel in a terminal or blended in their tanker trucks. Air transportation providers, including charter companies and freight operators, must collect and pay significant air transportation excise taxes.5
Even small, thriving companies may face large IRS-proposed excise tax assessments. Some companies have encountered excise tax bills so significant it could bankrupt them.
Some companies are unaware that they should be reporting excise taxes. For example, importers of used highway tractors, trailers or specialized mobile job site equipment are often surprised when the IRS initiates an examination asserting a 12% excise tax is due on vehicles they used in their business in the United States. Similarly, importers of electronic articles containing circuit boards (including computers, monitors, cars, trucks, cameras, and other digital items) may face exposure for the ozone-depleting chemicals excise tax.
Additionally, excise tax-specific registrations and penalties can apply to companies unaware of excise tax responsibilities. Certain fuel owners and petroleum marketers and traders who run afoul of the excise tax registration rules may not only face unexpected tax on their fuel trades, but could also potentially be subject to a penalty of $10,000 plus $1,000 per day for failure to register where required.6 Even taxpayers you wouldn't think of being subject to excise taxes can find themselves on the receiving end of an excise tax—such as a bank that owns fuel. Companies that should collect excise but fail to collect or remit may face trust fund recovery penalties and personal liabilities for corporate officers.7 With respect to fuel tax credit claims, the government has the power to assert a 100% penalty on any claims that are excessive.8
4. How can evaluating excise taxes improve a company’s profitability and liquidity?
In these uncertain times, businesses are looking for ways to reduce risk, improve profitability and generate liquidity. Evaluating excise tax positions and credit opportunities could improve a company’s bottom line. Excise taxes are generally recorded as a cost of goods sold, so finding ways to reduce a company’s excise tax liability and identifying credit opportunities can improve a company’s operational efficiency margins. These savings can enhance a company’s earnings before interest, tax, depreciation and amortization (EBITDA). In addition, many excise tax credits are refundable and may provide cash to companies with net operating losses or in situations where income tax credits cannot be utilized. With private equity, identifying ways to reduce excise tax or increase credits for operating companies can increase margins across similarly situated companies in the fund.
5. Which next steps should my company consider?
All companies can benefit from a fresh look at excise taxes. Consider performing a rapid assessment for excise taxes. This assessment includes:
- Reviewing whether the business faces any excise tax exposure
- Evaluating opportunities for reducing existing excise tax liabilities
- Identifying credit opportunities
- Reviewing compliance operations for improving efficiency
- Identifying excise tax costs passed on by vendors and reviewing whether tax has been properly determined
Should an area of risk be identified, the company can take a deeper dive into remediating the problem. If a credit or savings opportunity is uncovered, this may ultimately improve the company’s profitability and operational efficiency.
First published in Tax Executive magazine, November/December 2020 issue.
1 For the purposes of this article (unless otherwise noted), the term ‘excise tax’ refers to federal excise taxes under Title 26 of the United States Code.
2 Excise Tax Statistics
3 IRC 6427
4 IRC 6426
5 Note that the CARES Act provides for an excise tax aviation holiday through the end of 2020.
6 IRC 6719
8 IRC 6675