The U.S. government imposes a federal excise tax (FET) on certain goods, services, and activities. These excise taxes are calculated, paid, and reported on the IRS Form 720 (Quarterly Federal Excise Tax Return).
Some of the most common federal excise taxes apply to fuel use, coal manufacture, fishing and hunting equipment, indoor tanning services, communications and air transportation taxes, and certain insurance transactions.
Example of FET for Insurance Transaction
A federal excise tax applies to insurance policies issued by foreign insurance companies. The FET rates are a percentage of the gross premium written and vary by policy type.
- 4% FET on Casualty insurance & indemnity bonds
- 1% FET on Life insurance, sickness & accident, and annuity
- 1% FET on reinsurance transactions
For example, Company A is a Florida-based insurance company. Company A wants to purchase reinsurance from Company B, a Bermuda-based reinsurance company. The gross premium on the reinsurance contract is $1,000,000. Because Company B is a foreign reinsurance company, the gross premiums are subject to a 1% FET on the $1 million dollar premium. Company A pays the $1,000,000 premium to Company B, and Company A must prepare Form 720 and pay $10,000 FET (1% times $1,000,000).
More information on federal excise taxes can be found in IRS Publication 510 (Excise Taxes Including Fuel Tax Credits and Refunds).