What Is an Excise Tax?
Excise taxes are internal taxes that are levied on the sale of specific goods and services, such as alcohol, fuel and tobacco. An excise tax is an indirect tax that is not paid by the customers directly — instead, the IRS imposes excise tax on the supplier or the producer, who then includes it in the product price.
The excise taxes are imposed by the federal state and local governments. The taxes can either be applied as a percentage of the total cost of a product or service or as a fixed amount. For example, the excise tax on a vehicle is a percentage of the total cost while the excise tax on a tobacco and gasoline is a fixed amount.
What this article covers:
- What Is Meant by Excise Tax?
- Which Is an Example of an Excise Tax?
- Who Pays the Excise Tax?
- What Is the Difference Between an Excise Tax and a Sales Tax?
What Is Meant by Excise Tax?
Also known as a sin tax, an excise tax is charged on products and services that the government considers harmful to the consumers and the environment such as tobacco, alcohol or gasoline.
If you sell any products that are subject to excise tax, it’s your responsibility as a business owner to collect and pay the taxes to appropriate authorities, federal and state.
The excise taxes are divided into two categories, specific and ad valorem.
- Ad valorem means “according to value”. It’s a method of charging tax according to the value of goods and services. In this method, a fixed percentage is charged on a particular good or service.
- In contrast, specific tax refers to the fixed dollar amount that is imposed based on the number of goods and products purchased. For example, if a bottle of wine costs $20, it may have a fixed excise amount of $5 imposed on it.
This may not have an impact on the profit margins of the seller, but it does increases the price of the product and reduces its demand, which in turn can affect the seller’s balance sheet.
Which Is an Example of an Excise Tax?
The reason why only certain products are subject to excise tax is to discourage customers from purchasing products that can cause health issues and environmental damage. For example, the consumption of gasoline causes pollution. This is why the state and federal governments levy an excise tax on top of regular sales tax.
Here’s a list of the products and services that are subject to excise tax:
- Telephone services
- Motors for boats
- Fishing equipment
- Cruise and airline tickets and jet fuel
- Indoor tanning services
- Foreign insurance taxes
Who Pays the Excise Tax?
Most customers don’t realize that they are paying excise taxes. This is because the taxes are factored into the product cost, rather than listing it separately like sales tax.
If you run a business that’s required to collect excise taxes, it’s your responsibility to collect the tax from the customer and pay it to the government every quarter. To do that, business owners must file Form 720, Quarterly Federal Excise Tax Return which lists the various types of excise taxes. In the form, business owners must list the types of taxes that they’ve collected and reported it to the government.
There are certain exemptions to paying excise taxes. Non-profit organizations, government organizations and emergency service providers are exempt from certain excise taxes, such as the tax on fuel.
By keeping a record of these expenditures for which excise taxes were collected, these organizations can claim a refund of the taxes on IRS Form 8849 at the end of the year.
What Is the Difference Between an Excise Tax and a Sales Tax?
Sales tax is the tax that businesses usually collect from the consumer at the point of purchase and pay to the government for the sale of certain goods and services. There are two basic differences between sales tax and excise tax.
While excise tax is levied only on certain goods and services that are considered harmful or linked to specific health issues, sales tax is applied to just about everything.
Also, sales tax is calculated a percentage of the sale price. For example, if you buy a luxury vehicle as opposed to a cheaper utility vehicle, you would need to pay more sales tax. The percentage of tax applied is set by the local and state governments in the United.
On the other hand, an excise tax is often a flat tax imposed before the purchase price for specific items by the state, local and federal governments. For example, a tax of $4.35 is imposed on each pack of cigarette by the New York State regardless of the base price of the pack
To pay excise taxes, businesses must file Form 720 a month after the end of each quarter.
The form can be filed through the IRS EFTPS system or sent by mail.