What is excise tax? A guide for small businesses

Published Thursday 23 July 2026

Table of contents

• What is excise tax?
• Types of excise taxes
• Common examples of excise tax
• Who pays excise tax?
• How excise tax is calculated
• Excise tax vs sales tax
• Why excise taxes exist
• How excise tax affects small businesses
• Excise tax vs excise duty
• Manage your tax obligations with confidence
• FAQs on excise tax

Key takeaways

• Excise taxes are federal or state taxes applied to specific goods and activities, including fuel, tobacco, alcohol, and certain financial transactions
• Unlike sales tax, excise tax is typically charged at a fixed rate per unit or as a percentage of price, and it's usually included in the shelf price you see
• If your business manufactures, imports, or sells taxed products, you may need to file IRS Form 720 and make semimonthly deposits
• Recent legislation has introduced new excise taxes on corporate stock repurchases and international remittance transfers, expanding the scope of businesses affected

What is excise tax?

Excise tax is a tax charged on specific goods, services, or activities rather than on general purchases. If your business deals in taxed products, understanding how excise tax works can help you stay compliant and plan your finances effectively.

The federal government and most state governments impose excise taxes. These taxes are built into the price of goods at the point of production or importation, which means consumers often pay them without realizing it. That's why excise taxes are sometimes called "hidden taxes."

Excise taxes differ from broader taxes like income tax or general sales tax because they target particular products or behaviors. Common targets include gasoline, cigarettes, alcohol, airline tickets, and certain financial transactions.

Types of excise taxes

Excise taxes fall into 2 main categories, and knowing the difference matters when you're calculating costs for your business.

Specific excise taxes are charged as a fixed dollar amount per unit of a product. The tax stays the same regardless of the product's price. For example, the federal excise tax on gasoline is 18.4 cents per gallon whether gas costs $3.00 or $4.50.

Ad valorem excise taxes are charged as a percentage of the product's price. The tax amount changes based on the sale price. Some state tobacco taxes use this model, charging a percentage of the wholesale or retail price rather than a fixed amount per pack.

Most federal excise taxes in the United States are specific taxes, meaning they're based on quantity rather than price. This distinction matters for your pricing strategy because specific taxes don't automatically adjust with inflation, while ad valorem taxes rise as prices increase.

Common examples of excise tax

Excise taxes apply to a wide range of products and activities across federal and state levels. Here are some of the most common ones you'll encounter.

• Gasoline: 18.4 cents per gallon (federal), with additional state taxes varying by location
• Diesel fuel: 24.4 cents per gallon (federal)
• Cigarettes: approximately $1.01 per pack (federal), plus state taxes that can add $0.17 to over $5.00 per pack
• Distilled spirits: $13.50 per proof gallon (federal)
• Beer: $3.50 to $18.00 per barrel (federal), depending on production volume
• Airline tickets: 7.5% of the ticket price (federal), plus per-segment fees
• Indoor tanning services: 10% of the service price

State and local governments also impose their own excise taxes on these products, and the rates vary significantly. If your business operates across state lines, you'll need to track the applicable rates in each jurisdiction where you sell taxed goods.

Who pays excise tax?

The legal responsibility for paying excise tax typically falls on the manufacturer, importer, or distributor rather than the end consumer. However, the economic burden almost always reaches your customers.

Here's how it works in practice: a fuel distributor pays the federal excise tax on gasoline, then factors that cost into the wholesale price charged to gas stations. The gas station includes it in the pump price. By the time a driver fills up their tank, the excise tax is already baked into the price per gallon.

For small business owners, this means the impact depends on where you sit in the supply chain. If you manufacture or import taxed goods, you're responsible for remitting the tax directly to the IRS. If you're a retailer, the excise tax is already embedded in the wholesale price you pay to your supplier.

How excise tax is calculated

The calculation method depends on whether the excise tax is specific or ad valorem. Both are straightforward once you know which type applies to your product.

Specific tax formula: Tax = Tax rate per unit x Number of units. For example, if you sell 1,000 gallons of gasoline, the federal excise tax is 18.4 cents x 1,000 = $184.00.

Ad valorem tax formula: Tax = Product price x Tax rate (%). For example, if a tanning session costs $50 and the excise tax rate is 10%, the tax is $50 x 0.10 = $5.00.

Keep in mind that federal and state excise taxes can stack. Your total excise tax obligation on a single product may include both a federal rate and one or more state or local rates. Tracking these layered obligations is essential for accurate pricing and cash flow planning.

Excise tax vs sales tax

Excise tax and sales tax are both consumption taxes, but they work differently in ways that matter for your business accounting.

Sales tax is a broad-based tax applied to most retail purchases at the point of sale. It's calculated as a percentage of the total purchase price, and it's visible to the buyer as a separate line item on the receipt. Sales tax rates vary by state and locality.

Excise tax targets specific products and is typically charged earlier in the supply chain, at the manufacturer or distributor level. It's usually already included in the price when the product reaches the consumer, so it's not listed separately at checkout.

Another key difference: excise taxes are charged in addition to sales tax. If you buy a pack of cigarettes, you're paying the federal excise tax, the state excise tax, and the state or local sales tax, all layered on top of each other. For businesses selling taxed products, this means you need to account for both types in your financial records.

Why excise taxes exist

Governments impose excise taxes for several reasons, and understanding the rationale can help you anticipate where new taxes might emerge.

Discouraging harmful behavior. Excise taxes on tobacco, alcohol, and gambling are often called "sin taxes" because they're designed to reduce consumption of products considered harmful to public health or society. By raising the cost, governments aim to lower demand.

Funding related infrastructure. Some excise taxes function as user fees. Federal and state fuel taxes, for example, fund highway construction and maintenance through the Highway Trust Fund. Airline ticket excise taxes support the Airport and Airway Trust Fund. The logic is that the people using the infrastructure should help pay for it.

Generating revenue. Excise taxes produce significant federal revenue. In 2022, federal excise taxes generated approximately $90 billion, accounting for about 1.8% of total federal receipts. While that share has declined from roughly 20% in the 1950s, excise taxes remain an important funding source for specific government programs.

How excise tax affects small businesses

Even if you don't manufacture taxed products directly, excise taxes can still affect your bottom line. Here's what to keep in mind as a small business owner.

Filing requirements. If your business manufactures, produces, or imports goods subject to federal excise tax, you'll likely need to file IRS Form 720 (Quarterly Federal Excise Tax Return). Depending on your tax liability, you may also need to make semimonthly deposits using the Electronic Federal Tax Payment System (EFTPS).

Cash flow planning. Excise taxes are due on a regular schedule, and the amounts can be substantial. Planning for these payments helps you avoid penalties and maintain healthy cash flow. Semimonthly deposit deadlines mean you'll need to set aside funds more frequently than with quarterly tax obligations.

Record-keeping. Accurate records of production volumes, purchases, and sales are essential for calculating your excise tax liability and supporting your filings. Using accounting software to track taxable transactions can simplify compliance and reduce the risk of errors.

Recent legislative changes. New excise taxes have expanded the scope of businesses affected. The Inflation Reduction Act introduced a 1% excise tax on corporate stock repurchases, effective from January 1, 2023. The One Big Beautiful Bill Act added a 1% excise tax on certain international remittance transfers, effective from January 1, 2026. Check whether these changes apply to your business operations.

Excise tax vs excise duty

You might see the terms "excise tax" and "excise duty" used interchangeably, but their meaning varies by country.

In some regions, excise duty is simply another name for excise tax. In others, the distinction relates to where the product was made. A domestically produced good may be subject to excise tax, while an imported equivalent may be subject to excise duty. The purpose of both is the same: to tax specific goods at the point of production or importation.

In the United States, the term "excise tax" is the standard. If your business imports goods from countries that use "excise duty" terminology, it's worth understanding the local distinctions so you can factor the correct costs into your import pricing.

Manage your tax obligations with confidence

Staying on top of excise tax requirements doesn't have to be complicated. With clear records, consistent tracking, and the right tools, you can handle your obligations without the stress.

Xero's accounting software helps you organize your financial data, track expenses by category, and generate reports that make tax time easier. Whether you're filing Form 720 or simply keeping tabs on how excise taxes affect your costs, having your finances in one place gives you a clearer picture of your business. Get one month free.

FAQs on excise tax

Here are answers to some frequently asked questions about excise tax and how it applies to your business.

How do you report excise tax?

Businesses report federal excise taxes by filing IRS Form 720 each quarter. If your quarterly liability exceeds $2,500, you're also required to make semimonthly tax deposits through the Electronic Federal Tax Payment System.

Is excise tax deductible?

Federal excise taxes you pay as part of your business operations are generally deductible as a business expense on your federal income tax return. Keep detailed records of all excise tax payments to support your deduction at tax time.

What is the current federal gas tax rate?

The federal excise tax on gasoline is 18.4 cents per gallon, and diesel is taxed at 24.4 cents per gallon. State fuel taxes are charged on top of the federal rate and vary widely by state.

Are there excise tax exemptions?

Certain organizations and uses qualify for excise tax exemptions, including some government entities, nonprofit organizations, and specific fuel uses like farming or export. Check IRS guidelines or consult your accountant to determine whether any exemptions apply to your situation.

What's the difference between excise tax and a tariff?

Excise taxes apply to specific domestic goods and activities regardless of where they're produced. Tariffs are taxes imposed specifically on goods imported from other countries, and they're typically used as trade policy tools rather than consumption-based revenue measures.