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 510

    A document published by the Internal Revenue Service that details ...
  2. Sales Tax

    A sales tax is a consumption tax imposed by the government on ...
  3. Transfer Tax

    Any kind of tax that is levied on the transfer of official documents ...
  4. Vehicle Excise Duty

    Vehicle excise duty (VED) refers to the tax which must be paid ...
  5. Ad Valorem Tax

    An ad valorem tax is a tax derived from the value of real estate ...
  6. Inland Revenue

    The Inland Revenue was the department of the British government ...
Related Articles
  1. 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.
  2. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  3. 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.
  4. Taxes

    "Temporary" Taxes That Stuck

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

    New Taxes Under The Affordable Care Act

    Find out what you need to know about the 21 new tax changes linked to the ACA.
  6. Financial Advisor

    An Overview Of Retirement Plan RMDs

    Make your deadlines for required minimum distributions and save more of your nest egg.
  7. 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.
  8. Financial Advisor

    6 Hidden Government Revenue Streams

    You may be well aware of the tax dollars the government withholds from your paycheck, but this isn't the only way your income is being tapped.
  9. 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?
  10. 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).
RELATED FAQS
  1. How are real estate taxes calculated?

    Find out how real estate taxes are calculated; failure to pay these taxes that can be a substantial annual expense can lead ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center