Loading the player...

What is an 'Excise Tax'

An excise tax is an indirect tax on the sale of a particular good or service such as fuel, tobacco and alcohol. 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 it onto the consumer by including it in the product's price.

BREAKING DOWN 'Excise Tax'

Excise taxes are imposed by all levels of government — federal, state and municipal. These 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

An excise tax also refers to penalty taxation for ineligible transactions in retirement accounts.

According to data supplied by the IRS, almost $102 billion was collected in 2016 in excise tax collections. 

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 percent excise tax on indoor tanning services. This means that if a tanning salon 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, since 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 of $1.50, driving the total tax up to $5.85 for every pack of cigarettes.

This means if one pack of cigarettes costs $2 and another pack costs $4, the first pack costs $7.85, while the second pack costs $9.85. 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 percent excise tax applies to excess IRA contributions that are not corrected by the applicable deadline. Similarly, a 10 percent 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 percent 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 509: Tax Calendars

    IRS Publication 509: Tax Calendars is an IRS document that provides ...
  2. Tobacco Tax / Cigarette Tax

    A tobacco or cigarette tax is imposed on all tobacco products ...
  3. Ad Valorem Tax

    An ad valorem tax is a tax derived from the value of real estate ...
  4. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  5. Special Tax Bond

    A special tax bond is a type of bond that is repaid with revenues ...
  6. Tax Expense

    A tax expense is a liability owed to federal, state/provincial ...
Related Articles
  1. 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.
  2. Taxes

    "Temporary" Taxes That Stuck

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

    Tax-Saving Advice for IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  4. Investing

    What India’s Tax Change Means for Consumer Giants

    In response, Unilever's Hindustan boosts production while P&G prepares for the worst-case scenario.
  5. Taxes

    What All the Candidates’ Tax Plans Are Missing

    The presidential candidates have starkly different tax-reform proposals – but none of them gets to the real problem of America's tax system.
  6. Insights

    How The IRS Works: Functions & Audits

    Even the most enlightened citizen curses taxes, possibly while simultaneously acknowledging that they're the price of a civilized society.
  7. Taxes

    Did a Beer-Loving ‘Bro’ Write the New Tax Bill?

    Beer, wine and liquor producers emerged as remarkably big winners in the new tax law. But were their tax breaks the result of real economic need?
  8. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  9. Taxes

    Do U.S. High Corporate Tax Rates Hurt Americans?

    The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD).
  10. Financial Advisor

    An Overview Of Retirement Plan RMDs

    Make your deadlines for required minimum distributions and save more of your nest egg.
RELATED FAQS
  1. 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. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center