What are Excise Taxes?

TL/DR version

• Excise taxes target specific goods or activities rather than overall income or purchases. They are like special fees imposed on certain items or behaviors.
• Excise taxes serve various purposes, including revenue generation, discouraging undesirable behavior, promoting environmental conservation, economic regulation, public safety and infrastructure funding, and social equality.
• Activities subject to excise taxes can include gasoline, alcohol, tobacco, airline tickets, and luxury goods. However, the specific items and rates can vary depending on jurisdiction.
• Federal excise tax applies to goods and products nationwide while local governments may have varying excise taxes imposed
• The responsibility for paying excise tax can fall on manufacturers or producers, distributors or importers, and sometimes even retailers, sellers, or consumers depending on local laws and regulations.
• Excise tax and sales tax differ in terms of scope of application, point of collection, tax calculation, revenue allocation, and consumer awareness.
• Excise taxes can be deducted as a business expense, and non-compliance with excise tax regulations can lead to penalties, fines, and legal consequences.

Excise tax defintion

Excise taxes are imposed on specific goods, services, or activities. They are different from general sales taxes or income taxes because they target specific items or behaviors rather than overall income or purchases.

Excise tax FAQs

Do service-based businesses pay excise taxes?

It’s unlikely a service-based business will be subject to excise taxes. Excise taxes are usually paid by manufacturers, producers, distributors, importers, or retailers depending on the goods or products.

Do states have excise taxes?

Yes – there are federal excise taxes but state and local governments can also impose excise taxes

Are excise taxes a deduction on my business tax return?

Yes, excise taxes paid can be deducted as a business expense.

What happens if I don’t file or pay excise taxes?

Similar to failing to file and pay on other tax obligations, non-compliance with excise tax regulations can result in penalties, fines, interest charges, or legal consequences.

Types of excise taxes

Even if you don’t hear about excise taxes in your day-to-day life, they are present in everyday things. Here are a few examples of activities that may be subject to federal excise taxes:

• Gasoline: When you buy gasoline for your car, you pay an excise tax on it. The government imposes excise tax to discourage excessive fuel consumption and to help fund road construction and maintenance.
• Alcohol and Tobacco: Excise taxes are also applied to products like alcohol and tobacco. Excise taxes serve multiple purposes, including discouraging excessive consumption, promoting public health, and generating revenue for government programs.
• Airline Tickets: When you purchase an airline ticket, there might be an excise tax included. The excise tax helps fund airport infrastructure and security measures.
• Luxury Goods: Some governments impose excise taxes on luxury goods like high-end cars, jewelry, or expensive perfumes. Excise taxes are often intended to target wealthy individuals and generate revenue for the government.

Excise taxes aren’t the same in every state and they can vary from one country or jurisdiction to another. The rates and specific items subject to excise taxes also differ depending on local laws and policies.

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How do excise taxes work?

Excise taxes are implemented for a variety of reasons, but here’s a simple way to think about it: Excise taxes are like special fees that you pay when you buy or use certain things. Excise taxes are added on top of the regular price of the product or service.

Excise taxes may be imposed at the time of entry into the United States, sale or use after being imported into the United States, sale or use by the manufacturer, sale or use by the retailer, or sale or use by the consumer.

Its purpose varies on the specific goods, services, or activities being taxed and the goals of the government implementing them. Here are some common purposes for imposing excise taxes:

Revenue generation

Excise taxes are a source of revenue for governments. By imposing taxes on specific goods or activities, governments can generate funds to finance public programs, infrastructure development, healthcare, education, or other government expenditures.

Discouraging undesirable behavior

Excise taxes are often used as a tool to discourage or reduce certain behaviors or consumption patterns. By increasing the cost of goods, services, or activities that are considered harmful, socially undesirable, or pose health risks, governments aim to deter excessive consumption. For example, excise taxes on cigarettes and alcohol seek to reduce smoking and excessive drinking, promoting public health and reducing associated societal costs.

Environmental conservation

Excise taxes can be implemented to encourage environmentally friendly practices and reduce negative environmental impacts. Excise taxes on fossil fuels, for instance, aim to discourage carbon emissions, promote energy conservation, and incentivize the use of cleaner and renewable energy sources.

Economic regulation

Governments may use excise taxes as a regulatory tool to influence market behavior or to protect domestic industries. For example, excise taxes on imported goods can provide a competitive advantage to domestic producers by increasing the price of imported products,  stimulating local production and safeguarding domestic jobs.

Public safety and infrastructure funding

Excise taxes should be related to the costs the excise tax is internalizing.. For example, excise taxes on gasoline or transportation-related services often go towards funding road construction, maintenance, and public transportation systems. Similarly, excise taxes on firearms or ammunition might be used to support law enforcement efforts or public safety initiatives.

Social equality

Excise taxes can be designed to promote social equity by targeting luxury goods or high-end products. Excise taxes on these products aim to generate revenue from wealthier individuals and redistribute resources or fund social welfare programs.

The effectiveness and impacts of excise taxes can vary and the specific goals of implementing these taxes may differ across jurisdictions. The federal government may have multiple objectives in mind when introducing nationwide excise taxes, and their implementation can be subject to ongoing evaluation and adjustment based on economic, social, and environmental factors.

Who is responsible for paying excise tax?

The responsibility for paying excise tax varies, but in general, there are three main parties that can be responsible for paying excise tax and each maintains an administrative burden to keep records, file an excise tax return and submit excise tax payments.

Manufacturers or producers

In many cases, manufacturers or producers of excisable goods or providers of excisable services are responsible for paying excise tax. They are typically required to calculate the excise tax liability based on the prescribed rates and report and pay the taxes to the federal and state governments.

Distributors or importers

In some cases, distributors or importers of excisable goods or services may have the primary responsibility for paying excise tax. These businesses are responsible for calculating, reporting, and remitting the tax based on their sales, distribution, or import activities. They may be required to obtain licenses or permits and comply with specific reporting and payment deadlines.

Retailers or sellers

Depending on the jurisdiction, retailers or sellers may also have excise tax obligations. In these cases, the responsibility for paying excise tax can shift to the final point of sale. Retailers may be required to collect the tax from customers at the time of sale and remit it to the tax authorities.

Responsibility for paying excise tax can be shared or allocated differently based on local laws and regulations. Some jurisdictions may have specific rules or exemptions that determine who is responsible for paying excise tax in certain situations. 

We recommend consulting with tax professionals or seeking guidance from local tax authorities to understand your responsibility in paying your excise tax on time.

Consumers

Although other parties are responsible for directly paying excise taxes, there are times where the excise tax is passed onto the consumer. Excise tax can be included in the retail price of certain goods or services. 

Excise tax vs. sales tax

Both taxes are forms of consumption taxes, but they differ in several key aspects. Here are some of the main differences between them:

Scope of application

Sales tax is generally a broad-based tax that’s applied to a wide range of goods and services at the point of sale to the end consumer. It’s a tax on the final retail transaction. In contrast, excise taxes are typically imposed on specific goods, activities, or industries, such as gasoline, alcohol, tobacco, or certain services. Excise taxes focus on particular products or behaviors that governments want to regulate, discourage, or tax for specific reasons.

Point of collection

Sales tax is collected from the consumer at the point of sale. The responsibility for collecting and remitting sales tax falls on the seller or retailer. On the other hand, excise tax is often collected from the manufacturer, producer, or importer of the goods or services. It’s usually included in the price of the product and paid by the businesses involved in the supply chain.

Tax calculation

Sales tax is calculated as a percentage of the purchase price of the goods or services. The tax rate may vary depending on the jurisdiction and the type of items being sold. Excise tax, on the other hand, is often calculated based on the quantity or volume of the goods or services. For example, a certain amount of tax per gallon of gasoline or a specific percentage of the price of a luxury item.

Revenue allocation

Revenue from sales tax is generally pooled into the government’s general fund and used for various public services and expenditures. Sales tax revenue is not typically earmarked for specific purposes. 

In contrast, excise taxes often have a designated purpose for revenue allocation. The funds generated from excise taxes may be earmarked for specific programs, projects, or sectors related to the goods or activities being taxed. For example, taxes on gasoline may be used for road maintenance or improvements.

Consumer awareness

Sales tax is transparent and visible to consumers, as it is added to the purchase price and displayed on receipts. Consumers are aware of the amount of sales tax they pay on their purchases. Excise tax, however, is often embedded in the price of the goods or services and may not be explicitly listed. Consumers may not be aware of the specific excise tax amount included in the price they pay.

Both taxes coexist in a tax system and play a role in generating revenue for governments and influencing consumer behavior.