Excise Tax Tips for Manufacturers
Excise taxes can be a terribly confusing area of tax law due to a misunderstanding of what they actually are, how they are assessed, and what it means to manufacturers.
In comparison to general taxes, which are direct based on income or consumption, excise taxes are an indirect type of taxation imposed on the manufacture, sale, or use of certain types of goods and products. They are usually included in the final price of products and services and are hidden to consumers. Often, Federal and state governments use excise taxes as a means to raise additional revenue needed for large projects such as social programs. Excise taxes are assessed in one of two ways:
- Ad Valorem – meaning that a fixed percentage is charged on a particular good or product. This administration of the tax is less common.
- Specific – meaning that a fixed currency amount may be imposed depending on the quantity of the goods or products that are purchased. Specific is the most common type.
As an example, a product that normally costs $10 may have a specific excise tax of $2 imposed on it. As per the intent of the excise tax, the additional cost of the product is passed on to the consumer, making the retail cost of the product $12. While this seemingly does not affect the manufacturer of the product who still gains $10 in revenue, an increase in price does reduce quantity demanded, which would definitely affect the balance sheet of the manufacturer and should raise concerns.
In spite of the fact that excise taxes are unavoidable, there is, however, tax benefits that eligible manufacturers may claim in the form of an income tax credit or tax refund.
Below, Hanson & Co. outlines the details regarding excise taxes and how to obtain a credit or refund.
What items are manufacturers responsible for paying taxes on?
The following items are taxable:
- Sport fishing equipment (tax based on the sale price of the item)
- Bows (tax based on the sale price of the item)
- Arrow components (tax based on the sale price of the item)
- Coal (tax based on either sale price of the item or weight of the item)
- Tires (tax based on the weight of the item)
- Gas guzzler automobiles (tax is based on the fuel economy rating of the automobile)
- Vaccines (tax is based per dose)
The term “manufacturer” includes both producers and importers and both must report and pay taxes.
A producer is a manufacturer who makes a taxable article from new or raw material, or from scrap, salvage, or junk material by processing or changing the form of an article, or by combining or assembling two or more articles. If you furnish the materials and keep title to those materials, and to the finished article, you are considered a manufacturer even though another person actually manufacturers the taxable article.
An importer is the person who brings an article into the United States or withdraws an article from a customs bonded warehouse for sale or use in the United States.
What constitutes a sale?
A sale is defined as the transfer of title to, or the substantial incidents of ownership in, an article distributed to a buyer for consideration, which may involve the receipt of money, services, or other things. A sale can include both use and lease of an item.
A manufacturer who uses taxable items is liable for the tax in the same manner as it were sold.
The lease of an article (including any renewal or extension of the lease) by the manufacturer is generally considered a taxable sale. However, for the gas guzzler tax, only the first lease (excluding any renewal or extensions) of the automobile by the manufacturer is considered a sale.
How to get a credit or refund
A credit or refund of the manufacturers taxes may be allowable if the tax paid item is, by any person:
- Used or sold for use as supplies for vessels (except for coal and vaccines)
- Sold to a state or local government for its exclusive use (except for coal, gas guzzlers, and vaccines)
- Sold to a nonprofit educational organization for its exclusive use (except for coal, gas guzzlers, and vaccines)
Additionally, a credit or refund of manufacturer's taxes may be allowable for the following special cases:
- Taxable articles in which the price is readjusted by reason of return or repossession of the article
- Tax paid articles for further manufacture of another article subject to the manufacturers taxes (except for coal)
If you are a manufacturer, you may be able to benefit from a tax credit or refund. For questions and to learn more, please contact us at (303) 388-1010 or click here to contact us. We are here to help.