What Is a Federal Excise Tax?

by Cynthia Myers

Taxes are the chief way governments raise money. In addition to income taxes, property taxes and sales tax, the United States government collects excise taxes. Excise taxes are taxes levied on the purchase of particular items such as automobiles. You may also pay excise taxes on certain activities, such as highway usage, telephone service or gambling. Some excise taxes, such as the 1898 tax on sugar, are temporary, while others, such as taxes on alcohol, tobacco and gasoline, have been renewed many times over the years. You may be paying excise taxes on items without even realizing it.


Excise taxes were among the first taxes imposed by the United States government. By taxing commonly used items such as liquor in 1791 and tobacco in 1794, the government could raise revenue without enacting unpopular income or sales taxes. Over time, Congress enacted more and more excise taxes, on everything from sugar in 1898 to automobiles in1937. Although excise taxes are often seen as a quick solution to raising needed government funds, such as when excise taxes were enacted to finance the Spanish-American war, sometimes excise taxes are seen as a way to both raise money and deter people from bad habits -- hence the excise taxes on alcohol and tobacco.


Because excise taxes are levied on very specific items, they affect only the people who use those items. Many of the items taxed in this way are considered vices or luxury goods. But one of the most widespread excise taxes, on gasoline, affects almost everyone. Even if you don’t drive a car, you receive goods and services delivered to you by automobile. Gasoline excise taxes increase the cost of a gallon of gas, and businesses may pass some of this cost onto their customers. Federal excise taxes are only one part of the taxes on items such as gasoline. Many states have enacted excise taxes in addition to federal excise taxes. Some of the money from excise taxes goes into the government’s general fund, while other excise tax money, such as funds collected via the excise tax on gasoline, go into special funds dedicated to specific purposes. The federal excise tax on gasoline goes to fund roads.


Most consumers don’t see excise taxes. You may have noticed a sticker on the gas pump that informs you that so many cents of the price of each gallon of gasoline are collected as federal excise tax, but most of the time excise taxes are figured as part of the price of the commodity or service. You pay so many dollars for a bottle of vodka; part of that price is due to the federal excise tax, but unlike sales tax, the excise tax isn’t listed separately. It’s therefore easy to overlook excise taxes. Business owners or product or service vendors are responsible for collecting the excise tax and turning it over to the government.

Tax Returns

If you run a business that’s required to collect an excise tax, such as a tanning salon, you collect the tax and pay the tax to the government each quarter. You’ll file Form 720, Quarterly Federal Excise Tax Return. Form 720 lists the various types of excise taxes in effect. You note which tax you’ve collected and send a payment along with the completed form.


Government organizations, nonprofit educational organization and emergency service providers such as ambulance services, may be exempt from some federal excise taxes, including excise taxes on fuel. You must claim a refund of these taxes at the end of the year on IRS Form 8849. You must keep records and document that the fuel and other items for which excise tax was collected were used only for the exempt purchase. For instance, you would document that the gasoline was used only in an ambulance or a police car, and not in a personal vehicle.

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