Loading the player...

What is an 'Excise Tax'

An excise tax is an indirect tax charged on the sale of a particular good. Indirect means the tax is not directly paid by an individual consumer; instead, the Internal Revenue Service (IRS) levies the tax on the producer or merchant, who passes the tax onto the consumer by including it in the product's price. It also refers to penalty taxation for ineligible transactions in retirement accounts.

BREAKING DOWN 'Excise Tax'

Excise taxes fall into one of two categories: ad valorem and specific. Ad valorem excise taxes are fixed percentage rates assessed on particular goods or services. Specific taxes are fixed dollar amounts applied to certain purchases. In some cases, governments levy excise taxes on goods that have a high social cost, such as cigarettes and alcohol, and for this reason, these taxes are sometimes called sin taxes.

Ad Valorem Excise Taxes

Ad valorem is a Latin phrase that literally means "according to value." This means the tax varies based on the value of the product or service being taxed. For example, the IRS levies a 10% excise tax on indoor tanning services. This means that if a tanning charges $100 for a tanning session, it must pay the IRS $10 in excise tax. Similarly, if the company charges $200 for tanning, it must pay a $20 excise tax.

Specific Excise Taxes

Specific excise taxes are a set tax or fee added to a certain product. For example, states and many local governments add specific excise taxes to cigarettes. To illustrate, as of 2014, New York State adds a $4.35 tax to each pack of cigarettes, regardless of the base price of the pack. In New York City, the city adds another specific excise tax, driving the total tax up to $6.16 for every pack of cigarettes.

This means if one pack of cigarettes costs $2 and another pack costs $4, the first pack costs $8.16, while the second pack costs $10.16. The price with the excise tax included is the advertised price. It is not added on at the cash register as sales taxes are.

Excise Taxes Levied on Retirement Accounts

There are a number of situations in which excises taxes are charged on transactions related to retirement accounts. A 6% excise tax applies to excess IRA contributions that are not corrected by the applicable deadline. Similarly, a 10% excise tax applies to distributions from an IRA, a qualified plan or a 403(b) account that occur before the participant reaches age 59.5 years of age, and a 50% excise tax, referred to as an excess-accumulation penalty, also applies to required minimum distribution amounts not withdrawn by the applicable deadline.

RELATED TERMS
  1. IRS Publication 510

    A document published by the Internal Revenue Service that details ...
  2. Federal Telephone Excise Tax

    The federal telephone excise tax is a statutory federal tax on ...
  3. Assessment

    Occurs when an asset's value must be determined for the purpose ...
  4. Special Tax Bond

    A type of bond that is repaid by revenues derived from taxation ...
  5. Consumption Tax

    A tax on the purchase of a good or service. Consumption taxes ...
  6. IRS Publication 509: Tax Calendars

    A document published by the Internal Revenue Service that provides ...
Related Articles
  1. Taxes

    Understanding Excise Taxes

    An excise tax is an indirect levy charged for the sale or use of a particular item.
  2. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  3. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  4. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  5. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  6. Managing Wealth

    3 Steps To Take If You Miss Your RMD Deadline

    If you fail to take the required minimum distribution from your retirement account, you need to take proper steps.
  7. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  8. Taxes

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  9. Taxes

    "Temporary" Taxes That Stuck

    Taxpayers should be wary when a new "temporary tax" is introduced. Sometimes these temporary taxes are anything but.
  10. Taxes

    Taxes in Oregon for Small Business: The Basics

    Learn the tax laws for small businesses in Oregon, and understand the different types of taxes small business owners face based on business type.
RELATED FAQS
  1. I overcontributed to my Roth, then lost half of this money to the market. Does the ...

    It depends. If the excess contribution is removed from your Roth IRA by your tax-filing deadline plus any extensions, along ... Read Answer >>
  2. Who first came up with the idea of a progressive tax?

    Learn how the progressive income tax system developed in the United States and became the federal government's primary revenue ... Read Answer >>
  3. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  4. I withdrew funds from my Roth IRA to contribute elsewhere. How will I be taxed?

    If you close the Roth IRA now and withdraw the balance, you will be taxed on the earnings unless the distribution is qualified. ... Read Answer >>
  5. What's the difference between regressive and progressive taxes?

    Learn what a regressive tax is in comparison to a progressive tax, and understand the specific types of taxes that are considered ... Read Answer >>
  6. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center