What Is Excise Tax?
An excise tax is a government-imposed fee on specific goods, services, or activities—unlike sales tax, which applies broadly. These taxes often target:
Luxury items (jewelry, private jets)
Sin products (tobacco, alcohol)
Environmental impacts (gasoline, plastic bags)
Healthcare-related items (medical devices)
Excise taxes can be:
- Ad valorem (% of price, 10% on airline tickets)
- Specific (fixed fee per unit, $0.50 per gallon of gas)
How Excise Tax Works?
Who Pays Excise Tax?
| Party | Responsibility | Example |
|---|---|---|
| Manufacturers | Usually pay first | Cigarette producers |
| Distributors | May pass costs down | Fuel suppliers |
| Consumers | Ultimately bear cost | Alcohol buyers |
Indirect tax: Often “hidden” in product prices
Regulatory tool: Used to discourage certain behaviors (e.g., smoking)
Federal/state variations: Rates differ by jurisdiction
Common Excise Tax Examples
1. Federal Excise Taxes (U.S.)
Gasoline: $0.184/gallon (federal) + state fees
Tobacco: $1.01 per pack of cigarettes
Airfare: 7.5% of ticket price
2. State/Local Excise Taxes
Plastic bags: $0.10/bag (e.g., California)
Marijuana: 15-37% (legalized states)
Soda/sugar: $0.01-0.02 per ounce (e.g., Philadelphia)
Excise Tax vs. Sales Tax
| Feature | Excise Tax | Sales Tax |
|---|---|---|
| Scope | Targets specific items | Applies to most retail goods |
| Visibility | Often embedded in price | Added at checkout |
| Purpose | Discourage use/fund programs | General revenue |
| Collection Point | Usually at production | At sale to consumer |
How to Calculate Excise Tax
Ad Valorem Example
Product: Luxury car priced at $100,000
TaxRate: 10%
Calculation:100,000 × 10% = $10,000 tax
Specific Tax Example
Product: 100 gallons of diesel fuel
Tax Rate: 0.244/gallon(federal)
Calculation:0.244 = $24.40 tax
FAQs
Rarely. Businesses typically include it in product prices (e.g., gas stations bake taxes into fuel costs).
Businesses: Yes, as operational expenses
Individuals: Only for business-related purchasesFor tax purposes: Not always - the IRS and other tax authorities typically require itemized receipts.
Depends on the product:
Monthly/quarterly for high-volume items (fuel)
Annually for low-frequency sales (private jets)
Penalties include:
Fines (up to 100% of owed tax)
License suspension (for businesses)
Legal action
