What Is an Excise Tax?
An excise tax is a legislated tax on specific goods or services at purchase such as fuel, tobacco, and alcohol. Excise taxes are intranational taxes imposed within a government infrastructure rather than international taxes imposed across country borders. A federal excise tax is usually collected from motor fuel sales, airline tickets, tobacco, and other goods and services.
- Excise taxes are taxes required on specific goods or services like fuel, tobacco, and alcohol.
- Excise taxes are primarily taxes that must be paid by businesses, usually increasing prices for consumers indirectly.
- Excise taxes can be ad valorem (paid by percentage) or specific (cost charged by unit).
- Some excise taxes can be required directly from the consumer like property taxes and excise tax penalties on certain retirement account activities.
How an Excise Tax Works
Excise taxes are primarily for businesses. Consumers may or may not see the cost of excise taxes directly. Many excise taxes are paid by merchants who then pass the tax on to consumers through higher prices. Merchants pay excise taxes to wholesalers and consider excise taxes in product pricing which increases the retail price overall. There are some excise taxes however that are paid directly by a consumer including property taxes and excise taxes on certain retirement account activities.
Federal, state, and local governments have the authority to institute excise taxes. While income tax is the primary revenue generator for federal and state governments, excise tax revenue also makes up a small portion of total revenue.
Excise taxes are primarily a business tax, separate from other taxes a business must pay, like income taxes. Businesses charging and receiving excise taxes are required to file Form 720 Federal Excise Tax Return on a quarterly basis and include quarterly payments. Business collectors of excise taxes must also maintain their obligations for passing on excise taxes to state and local governments as required. Merchants may be allowed deductions or credits on their annual income tax returns related to excise tax payments.
Excise taxes can 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. Overall, the largest revenue-producing excise taxes in the U.S. come from motor fuel, airline tickets, tobacco, alcohol, health-related goods, and health-related services.
In 2017, excise taxes accounted for $83.8 billion of the federal government's revenue and 2.5% of total federal tax receipts.
The Internal Revenue Service provides guidance on excise taxes in Publication 510.
Ad Valorem Excise Taxes
Ad valorem is a Latin phrase that literally means "according to value." An ad valorem tax is charged by percentage. This results in an excise tax that is based on the value of the product or service. For example, the IRS levies a 10% 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. Other types of ad valorem excise taxes include firearms (10%), airline tickets (7.5%), and heavy trucks (12%). Property taxes can also be considered a type of ad valorem excise tax.
Specific Excise Taxes
Specific excise taxes are a set tax or fee added to a certain product on a per-unit basis. Some examples of federal, specific excise taxes include cigarettes ($1.01 per pack of 20), pipe tobacco ($2.83 per pound), beer ($7 for the first 60,000 barrels), cruise ship passengers ($3 per passenger), and gasoline ($0.183 per gallon).
Often sin taxes on targeted goods like beer and alcohol will be taxed at the federal level and also taxed heavily by the state, making the cost of these items higher. For example, New York has a specific excise tax of $4.35 per cigarette pack of 20. Combining this with the federal tax of $1.01 makes the excise taxes alone $5.36. These taxes have a considerable impact on the consumer.
Excise Taxes on Retirement Accounts
Excise taxes are also charged on some retirement account activities. Many people are familiar with these taxes as penalties. A 6% excise tax is applied to excess individual retirement account (IRA) contributions that are not corrected by the applicable deadline. A 10% excise tax penalty applies to distributions from certain IRAs and other qualified plans when an investor makes withdrawals before age 59.5.
Also, a 50% excise tax penalty is charged when investors do not take the mandatory required minimum distributions from certain retirement accounts. Required minimum distributions are mandatory after age 72 (for anyone who reaches age 70.5 in 2020 or later) for traditional IRA accounts and several other tax-deferred retirement savings plans.