In case you haven't noticed, federal and state governments use taxation for more than the simple collection of revenues.
Legislators are keenly aware of the power of taxation to influence consumer or business behaviors and they sometimes use taxation as an alternative to other legislative restrictions.
One of the ways they accomplish this is through the application of excise taxes. Excise taxes are taxes that are imposed on businesses with the assumption that the tax will be passed on to consumers through increases in the price of goods and services.
This form of taxation usually targets products and behaviors the government wants to discourage, but is unwilling or unable to restrict through other means. For example, cigarettes and tobacco products are an easy target for excise taxes. Why? Because even though consumers have the right to smoke, the government can discourage the activity by indirectly increasing the cost to consumers.
As a business owner, it's in your best interest to understand excise taxes. In some cases, you may even be entitled to a refund of the amount excise taxes if you meet certain criteria.
Excise Tax Basics
An excise is an indirect tax. It's indirect because even though it is assessed on business owners, its ultimate target is the consumer. Although excise taxes are commonly applied to products that have negative connotations (e.g. tobacco and alcohol), excise taxes are applied to many different kinds of products and business activities. Manufacturing, retailing, environmental impacts, investments, group health plans and various other business activities may all be subject to one or more excise taxes.
Complicating the issue of excise taxes for small business owners is the fact that your company's products and activities are subject to both federal and state taxation. Federal excise taxes apply to all companies doing business in the U.S., regardless of where they are located. But since state excise taxes vary according to your state of residence, you'll need to perform state-specific research to fully comply with the excise taxes that apply in your area.
The truly frustrating part of excise taxes is that they represent a portion of product price that is completely beyond your control. If your state legislature decides to raise the excise tax on your product by 25%, the price of your product just increased, making it harder for your business to compete on price against competitors located in other states.
Occasionally, it's possible to receive an excise tax refund for specific taxes. Refunds are more of an exception than a rule and conditions always apply, so be sure to do your research before you count on recouping any taxes you have paid.