How Tax Pros Can Help Businesses Navigate Excise Taxes (Correct)

Tax professionals are indispensable for companies at risk for new excise taxes. They help businesses determine which products and transactions are taxable and which may qualify for exemptions or special treatment (for example, sales to law enforcement or to out-of-state buyers).

Implementing excise taxes may require changes to point-of-sale systems, invoicing, and record-keeping. Tax professionals can advise on needed changes to ensure taxes are calculated and collected accurately.

Because proper record-keeping is vital for excise tax compliance, tax advisers can help design and audit documentation practices so businesses can support their filings in the event of an audit. Where excise taxes could overwhelm the business, tax professionals help model financial scenarios and consider pricing, sourcing, or structural changes.

These taxes are often explained as a means to raise targeted revenue or to discourage behaviors with negative social or economic impacts. While retailers, manufacturers, and importers are responsible for reporting and paying taxes to the government, consumers ultimately bear the cost.

Excise Tax Rationale

Excise taxes are imposed on specific goods, activities, or services—distinguishing them from broad-based taxes such as sales or income taxes. Unlike general sales tax, they’re indirectly incorporated into a product’s price.

When states consider excise taxes on guns and ammunition, for example, their objectives typically blend these rationales. Proponents may point to the need for funding gun violence prevention programs or addressing public safety concerns, as well as discouraging excessive purchases of firearms or ammunition.

California and Colorado have implemented state-level excise taxes on firearms and ammunition to fund violence prevention and victim services. California imposes an 11% tax, effective mid-2024. Colorado voters approved a 6.5% excise tax via Proposition KK, effective April 1, 2025, applying to gun dealers and manufacturers.

Excise taxes can help raise revenue and shape behavior, but only under certain conditions. They tend to work best when applied to products widely recognized as having social costs, such as tobacco and alcohol. In these cases, there is a broad political and social consensus about the need to curb use and offset public health costs.

Dedicated revenue streams—such as fuel taxes that fund highways or tobacco taxes that support health initiatives—help build transparency and public support. When consumers see how their taxes are being used, compliance and acceptance typically rise.

Excise taxes are most effective when it is difficult for consumers to evade them, such as when the taxed good isn’t easily smuggled or substituted with untaxed alternatives. Taxes on fuel, electricity, and certain controlled substances often perform well. Proper administration, with clear rules and effective enforcement, is also essential to minimize the risk of avoidance or evasion.

Bearing the Burden

These taxes may fall short for several reasons. If the taxed product is easily substituted, or if there is a large tax differential between jurisdictions, these taxes can create incentives for illegal activity or cross-border shopping. For example, high cigarette taxes have spurred significant illicit trade.

If taxpayers can easily avoid the tax by buying from illegal markets, crossing state lines, or substituting the goods, the revenue from the excise tax may fall short. For example, California has lost an estimated $14 billion due to smuggling between 2007 and 2023, second only to New York.

Excise taxes have been criticized as regressive, disproportionately affecting lower-income consumers who spend a larger percentage of their income on taxed goods. Tobacco taxes are one of the most regressive taxes because of their impact on lower income earners, compared to other items such as air travel.

When an excise tax lacks broad support or appears punitive—such as on firearms in certain regions—it can provoke strong political resistance, legal challenges, and attempts to circumvent the tax. In California, Second Amendment advocacy groups sued the state’s gun-related excise taxes.

Businesses, especially small businesses, may struggle with the complexity of calculating, collecting, and remitting excise taxes, leading to unintentional noncompliance. Because guns and ammunition are often sold by small, independent retailers, for example, there can be significant compliance and administrative hurdles.

Variations in tax rates and laws across states further complicate matters—especially for retailers that sell across state lines or through e-commerce, much like the challenges small and medium-sized businesses faced with sales tax compliance after the US Supreme Court decision in South Dakota v. Wayfair decision and the rise of economic nexus thresholds.

Common Questions

While there isn’t data available on the number of non-compliant sales tax filers, accounting firms are addressing the issues of sales tax noncompliance on a daily basis. Business leaders should consult their tax professionals regarding questions about excise taxes, asking:

• Which products and transactions are taxable?
• Which may qualify for exemptions or special treatment (such as sales to law enforcement or to out-of-state buyers)?
• Which system changes are necessary to ensure taxes are calculated and collected accurately?

Proper record-keeping is also vital for excise tax compliance, and tax advisers help design and audit documentation practices so businesses can support their filings in case of an audit.

Excise taxes work best with clear objectives, robust administration, and widespread support. Businesses facing new or potential excise taxes on goods such as guns and ammunition should use expert guidance to minimize disruption and risk. Tax professionals can serve as partners in interpreting the law, adapting systems and processes, and defending client interests.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John Bonk is managing director of state and local tax at CBIZ.

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