Let’s talk about a tax most small business owners never think about until they get a scary letter from the IRS. This isn’t your income tax or your payroll tax. This is the federal excise tax. It’s a special tax slapped on specific goods, services, and activities. If your business touches any of these areas, you’re on the hook to collect this tax and mail it to the IRS every single quarter using Form 720.
Think of it like a sin tax or a use tax. The government uses it to regulate or pay for things. You’re essentially the tax collector for these specific items.
What Kinds of Things Get Hit with This Tax?
The list is weirdly specific. It’s not everything, but if you’re in these industries, you need to pay attention.
The Big Categories:
- Transportation & Trucking: This is a huge one.
- Heavy Highway Vehicle Use Tax: If you own or lease a truck, truck tractor, or bus with a taxable gross weight of 55,000 pounds or more, you owe an annual tax. You report it on Form 720, but it’s due by the end of August for the period starting July 1.
- Tires: If you sell tires for highway use (especially heavy vehicles), there’s a tax per pound on tires over a certain weight. As a seller, you collect this.
- Fuel: While most fuel taxes are handled at the state level, there are some specific federal fuel taxes (like tax on certain fuels used in commercial transportation on inland waterways).
- Environmental Taxes:
- Ozone-Depleting Chemicals (ODCs): If you manufacture or import certain chemicals used in refrigeration and air conditioning (like HCFC-22, aka R-22), you pay tax per pound. This is to phase out their use.
- Gas Guzzler Tax: Manufacturers and importers of passenger cars that fail to meet fuel economy standards pay this. It’s the reason you don’t see many new cars getting 15 MPG.
- Manufacturers Taxes on Specific Items:
- Sport Fishing Equipment: A percentage tax on fishing rods, reels, creels, etc. The money funds sport fish restoration.
- Bow and Arrow Components: Tax on arrow shafts.
- Firearms & Ammunition: A 10-11% tax on pistols, revolvers, firearms, shells, and cartridges. This funds wildlife restoration (Pittman-Robertson Act).
- Vaccines: A fixed fee per dose on common childhood vaccines (like MMR, DTaP). This goes into a trust fund to compensate individuals injured by vaccines.
- Other Weird Stuff:
- Air Transportation: A percentage of the fare for domestic air travel (you see it as a separate charge on your ticket).
- Indoor Tanning Services: A 10% tax on amounts paid for indoor tanning services. The salon collects and remits this.
How This Actually Works for Your Business
You are not just paying tax; you are collecting and remitting it.
Example 1: You own a trucking company with three semi-trucks over 55,000 lbs. Every year, you calculate the Heavy Highway Use Tax for each truck based on its weight. You file and pay it with your Quarter 3 (August) Form 720.
Example 2: You own a sporting goods store. You buy fishing rods from a manufacturer. The manufacturer pays the federal excise tax when they sell it to you (the tax is usually built into your wholesale price). You then sell it to a customer. You do not charge an additional federal excise tax to the customer. Your responsibility as the retailer is typically over.
Example 3: You own an HVAC supply company. You import cylinders of R-22 refrigerant. When you bring that chemical into the U.S., you owe the IRS x dollars per pound of ODC. You calculate that tax and pay it with your next Form 720.
The Filing Process
This is a quarterly return, even if you only have one annual tax (like the highway use tax). You must file by the last day of the month following the end of the quarter.
- Q1 (Jan-Mar): Due April 30
- Q2 (Apr-Jun): Due July 31
- Q3 (Jul-Sep): Due October 31
- Q4 (Oct-Dec): Due January 31
You file on paper. You can’t e-file Form 720 for most taxpayers. You mail it to the IRS in Ogden, Utah.
The form is organized by “Part,” each corresponding to a different type of excise tax. You only fill out the parts that apply to you. You list each type of transaction and the total tax due. It’s tedious, but straightforward if you know what you owe.
The IRS does not play around with excise taxes. These are “trust fund” taxes, meaning you collected money that belongs to the government.
- Failure-to-File Penalty: 5% of the tax due per month (up to 25%).
- Failure-to-Pay Penalty: 0.5% of the tax due per month (up to 25%).
- Interest: Charged on the unpaid tax from the due date.
If you collected the tax from customers (like tanning salons do) and didn’t send it in, that’s a serious offense. The IRS can pursue trust fund recovery penalties, which allow them to go after the personal assets of the business owners or officers responsible for the finances.
Frequently Asked Questions (FAQ)
I run a small farm and use diesel in my tractors. Do I pay this tax?
Probably not directly. There’s a federal excise tax on diesel, but it’s usually paid at the terminal rack when fuel is removed. As an end-user, you might buy “undyed” diesel that already had the tax paid. However, if you use fuel for off-highway purposes (like farming), you may be eligible to claim a refund of the federal tax. That’s done on Form 4136, not Form 720.
We sold a truck that was subject to the Heavy Highway Use Tax mid-year. What do we do?
You file Form 2290 for that vehicle (the specific form for that tax) to report the sale and claim a credit for the unused portion of the tax if it was sold before July. You then reflect that credit on your Form 720 for Q3 when you file the annual summary.
We own a small brewery. Are there excise taxes on beer?
Yes, but not on Form 720. Alcohol, tobacco, and firearms (for manufacturers) have their own, separate excise tax returns (Forms 5000, 5200, 5300 series). Form 720 is for the other excise taxes. Don’t mix them up.
We think we might owe an environmental tax. How do we even know the rate?
The IRS publishes the rates for things like Ozone-Depleting Chemicals in the instructions for Form 720 and in specific IRS Notices. The rate is usually per pound of chemical. You need to know the exact chemical and its weight. If you’re importing, your customs paperwork is critical.
Can our regular bookkeeper handle this?
Only if they have specific experience with excise taxes. This is a niche area. Most bookkeepers have never seen a Form 720. A mistake—like filing the highway use tax in the wrong quarter or misclassifying a taxable chemical—will lead to penalties. For initial setup and filing, it’s worth paying a tax professional who has filed these before. Once the process is set, a competent bookkeeper can follow the system.
What if we haven’t filed for a few years?
You need to get compliant, and fast. The penalties add up. You’ll need to file delinquent returns for each quarter you missed. You should work with a tax pro to do this, as they can help prepare a “reasonable cause” statement to try and get penalties abated. Don’t wait for the IRS to find you; they audit industries known for these taxes.
The Bottom Line:
Form 720 is a specialized form for specialized industries. If you’re in trucking, sell certain sporting goods, import chemicals, or run a tanning salon, this is part of your cost of doing business. Ignorance isn’t an excuse. The best move is to sit down with the IRS instructions for Form 720, see if any of the dozens of listed taxes apply to your operations, and if they do, set up a quarterly calendar reminder. Getting it wrong is an expensive headache you don’t need.