In the United States (US), most businesses are familiar with sales tax and their obligations to comply. However, certain businesses will also have to contend with excise taxes based on the types of products and services that they offer.

We’ll cover what you need to know about excise tax, including when it is charged, examples of excise tax and how it differs from sales tax.

What’s in this article?

• What is excise tax?
  
• When is excise tax charged?
  
• Examples of excise tax
  
• Sales tax vs excise tax
  

When is excise tax charged?

Unlike sales tax, which applies to all taxable sales, excise tax targets a certain product or service, such as petrol, alcohol, cigarettes or airline tickets. Excise tax is charged when a product or service has an unintended consequence that should be accounted for but is not reflected in the price of the item. For example, an excise tax on petrol is an attempt to decrease traffic congestion.

When is excise tax charged?

Unlike sales tax, which applies to all taxable sales, excise tax targets a certain product or service, such as petrol, alcohol, cigarettes or airline tickets. Excise tax is charged when a product or service has an unintended consequence that should be accounted for but is not reflected in the price of the item. For example, an excise tax on petrol is an attempt to decrease traffic congestion.

Examples of excise tax

Excise tax appears in a few different industries. Here are some common examples of excise tax:

1. Transportation excise taxes
   The Federal Aviation Administration (FAA) has an excise tax in place for the air transportation of passengers and the transportation of property. Transportation excise taxes also apply to petrol purchases, with each state setting their own tax rate.
   Other transportation-related products and services subject to federal and/or state excise taxes include diesel, other types of fuels, lorries, caravans and tyres. Funds collected through transportation excise taxes are often used to maintain roads and motorways.

2. Sin taxes
   These are taxes on products that may be considered harmful, such as alcohol, cigarettes, and more recently, vaping products. These can be set at either the federal or state level. For example, in the US, there is a federal excise tax on cigarettes. States can also add additional excise taxes to the federal excise tax.

States tend to use these types of sin taxes to discourage behaviours. States like Colorado and Oregon have used high excise taxes to make cigarettes prohibitively expensive and discourage smoking among state residents.

1. Ad valorem excise taxes
   While most sin taxes are a flat rate, such as the tax on cigarettes listed above, some are ad valorem. Ad valorem means "according to value" or by percentage.
   

For instance, the IRS levies a 10% ad valorem tax on tanning services. Rather than charging a set amount for services, they require that tanning salons pay 10% of the cost of services that they provide in excise tax.

1. Consumer excise taxes
   In most cases, a retailer pays the excise tax directly to the government. However, there are scenarios when an individual might find themselves paying excise tax directly to the government. For example, if an individual contributes too much to an individual retirement account (IRA) or withdraws funds too early, they may have to pay excise tax on the amount that they contributed or withdrew.
   

Sales tax vs excise tax

"Excise tax" and "sales tax" are terms that are often used interchangeably, but they are two separate taxes. Excise duty and sales tax can be applied to the same purchase, or excise duty can be applied when sales tax is not. In addition, excise tax is generally a flat rate (except ad valorem), while sales tax is a percentage of the sale.

VAT vs. excise tax

While both excise tax and value-added tax (VAT) are types of consumption taxes, they differ significantly in their scope, how they are collected, and why they are applied. The primary distinction lies in what is being taxed:

• Excise tax: A specific levy on particular goods (most commonly fuel, alcohol, tobacco, and luxury items) at production, import, or sale. It is a narrow tax designed to target specific industries or behaviors.

• VAT: A broad-based consumption tax. Rather than targeting specific products, it is applied to nearly all goods and services. While excise taxes are often calculated per unit, VAT is typically a percentage of the sale price. VAT is also levied at each stage of production based on the value added.

It is common for a single transaction to be subject to both taxes. For businesses, this requires precise accounting to ensure both the specific industry levies and the broad consumption taxes are accurately filed and remitted.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US and manage filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and GST on:

• Digital goods and services in all US states and over 100 countries
  
• Physical goods in all US states and 42 countries
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You’ll benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.