Often to their detriment, many businesses are not focused on excise taxes and in fact may be unaware of them entirely. The truth is, excise taxes may have serious financial impacts on companies. 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 earnings before interest, taxes, depreciation, and amortization (EBITDA), since excise taxes are treated as an above-the-line cost of goods sold.
Question: Why should my business pay attention to excise taxes?
Excise taxes are imposed on commodities or activities, such as fuel, tobacco, or wagering. Excise taxes are often passed on in the final price of products and services to consumers, who are often unaware of them.1
Legislatures enact the excise taxes companies pay, for several reasons: to serve as user fees, to discourage certain behaviors, 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, and taxes imposed on air transportation fund airport and airway systems. Certain environmental excise taxes were enacted to discourage the use of CFCs and other chemicals that harm the ozone layer. Renewable fuel credits encourage the use of biodiesel or alternative fuel over petroleum-based products. Taxes on alcohol and tobacco raise revenue for the Treasury General Fund.
The federal government collects over $100 billion in excise taxes per year.2 Two agencies under the US Treasury Department administer all excise taxes: the Internal Revenue Service (IRS) and the Alcohol and Tobacco Tax and Trade Bureau (TTB). The major taxes the IRS administers relate to petroleum-based fuel (including gasoline, diesel fuel, kerosene, and crude oil); alternative fuel; heavy vehicles; coal; sporting goods (sport fishing equipment; bows and arrows); air transportation; environmental taxes; Affordable Care Act taxes and fees; wagering; and foreign insurance.
TTB administers taxes related to alcohol (beer, wine, distilled spirits); tobacco; firearms; and ammunition. It is important to note that each excise tax has its own rules on 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 semimonthly deposits are due. Moreover, some companies must file inventory reports or other reporting obligations, even if they are not liable for the tax.
Industries 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, certain consumer goods, food and beverage, 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 in their business.
Moreover, certain refundable excise tax credits may be claimed by end users in industries such as building, construction, aerospace and defense, farming, power and utilities, and logistics. For example, users of taxed fuel in off-highway business use or in farming can claim fuel credits of up to $.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 $.50 per gallon equivalent of propane, which can equate 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, which can be up to $13.50 per gallon. And nonprofit entities or state and local governments often qualify for exemptions from excise tax or for credits on the purchase of taxed articles such as fuel, tires, and firearms.
Excise taxes may present a material issue to businesses that are liable for the tax, whether they are aware of it or not. Whereas some businesses have immaterial or no excise tax liabilities, for other companies, excise tax liability can be in the 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. Providers of air transportation, including charter companies and freight operators, must collect and pay significant air transportation excise taxes.5
Even small companies could face large IRS-proposed excise tax assessments. I’ve represented thriving truck and trailer manufacturing clients that have encountered excise tax bills so significant they could bankrupt the company. Fortunately, we were able to resolve their tax issues favorably. But this worry is not uncommon among many of my clients.
Some companies may be unaware that they should be reporting excise taxes. For example, importers of used highway tractors, trailers, or specialized mobile jobsite equipment are often surprised when the IRS initiates an examination asserting that a twelve percent excise tax is due on vehicles they used in their business in the United States. Similarly, importers of electronic articles containing circuit boards (articles including computers, monitors, cars, trucks, cameras, and other digital items) may face exposure for the excise tax on ozone-depleting chemicals.
Additionally, excise tax-specific registrations and penalties can apply to companies unaware of excise tax responsibilities. Some examples: certain owners of fuel, petroleum marketers, and traders that run afoul of the excise tax registration rules may not only face unexpected tax on their fuel trades but also could be subject to a penalty of $10,000 plus $1,000 per day for failure to register where required.6 Even taxpayers you would not think of as being subject to excise taxes can find themselves on the receiving end of an excise tax exam—such as a bank that owns fuel. Companies that should collect excise taxes 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 percent penalty on any claims that are excessive.8
Evaluating Excise Taxes to Improve Profitability and Liquidity
In these uncertain times, businesses seek 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, and 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 improve a company’s EBITDA. Furthermore, 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 used. 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.
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 to reduce existing excise tax liabilities;
- identifying credit opportunities;
- reviewing compliance operations for improving efficiency; and
- identifying excise tax costs passed on by vendors and reviewing whether tax has been properly determined.
Should you identify an area of risk, the company can dive into remediating the problem. And if you uncover a credit or savings opportunity, it may ultimately improve the company’s profitability and operational efficiency.
Debbie Gordon is a principal in RSM US LLP’s Washington National Tax office. She leads the firm’s excise tax practice.
- “Excise Taxes,” Tax Foundation, accessed September 9, 2020, https://taxfoundation.org/individual-and-consumption-taxes/excise-taxes/#. 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.
- “SOI Tax Stats – Excise Tax Statistics,” Internal Revenue Service, accessed September 9, 2020, www.irs.gov/statistics/soi-tax-stats-excise-tax-statistics.
- Internal Revenue Code (hereafter IRC) 6427.
- IRC 6426.
- Note that the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for an excise tax aviation holiday through the end of 2020.
- IRC 6719.
- IRC 6672.
- IRC 6675.