What is excise tax?

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  1. Introduction
  2. What is excise tax?
  3. When is excise tax charged?
  4. Examples of excise tax
  5. Sales tax vs excise tax

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

What is excise tax?

Excise tax is a tax on a specific good or service in the US. These taxes can be imposed at the state and/or federal level.

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.

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