An excise tax is a particular kind of tax imposed on certain products or services when they are bought. Unlike international taxes, excise taxes are enforced within the limits of a specific government.
For instance, in the U.S., typical items that face excise taxes are motor fuel, tobacco products, and airline tickets. These taxes are generally set at the federal level, but state and local governments can also impose them.
How Excise Works
Excise taxes mainly target businesses. Most companies that sell products subject to these taxes are the ones responsible for paying them to the government. They usually add this tax into the product’s price, which means consumers end up covering the cost. Because of this, most consumers might not notice the impact of excise taxes directly. However, there are some excise taxes that consumers pay directly, like property taxes and fees on certain retirement account transactions.
Federal, state, and local governments can impose excise taxes. While income tax is the main source of revenue for federal and state governments, excise tax income also contributes a small part to the overall revenue.
Excise taxes are mainly considered business taxes. They are distinct from other taxes that companies have to pay, such as income taxes. Businesses that charge and collect excise taxes need to file Form 720 Federal Excise Tax Return every quarter and make quarterly payments. Those businesses that collect excise taxes also have to ensure they pass these taxes on to state and local governments as required. Merchants might be eligible for deductions or credits on their annual income tax returns related to the excise tax payments they make.
Excise taxes can be classified into two main types:
- Ad Valorem Taxes
- Specific Taxes
Sometimes, governments impose excise taxes on products that come with a high social cost, like cigarettes and alcohol. These excise taxes are often referred to as sin taxes since the items being taxed are seen as ‘sinful’ or linked to negative outcomes.
Conclusion
Excise taxes are imposed by both federal and state governments on specific goods and services. Merchants who sell these items are the ones responsible for paying these taxes. There are two types of excise taxes: a flat rate, called a specific excise tax, and a percentage of the item’s price, known as an ad valorem excise tax. Sometimes, these taxes only apply to goods sold within the state where the tax is enforced.
Businesses typically include the excise tax cost in the price of the taxed item, meaning customers end up paying for it. Customers might not always realize that the excise tax is included in the price of the good or service. However, some companies, like fuel providers, are open about these taxes. The next time you fill up your gas tank, check the pump. You might see a breakdown of how much of the total price is for the fuel itself and how much is going toward taxes.