An excise tax is a tax placed on the manufacture or sale of particular goods or on certain activities. Excise tax is commonly referred to as a “luxury tax” because many expensive goods include an excise tax. As an example, cars and expensive jewelry are charged an excise tax.
Besides being a tax on goods, excise taxes are also charged for specific activities, such as gambling and freight hauling on the highways.
A federal excise tax is usually collected from motor fuel sales, airline tickets, tobacco, and other goods and services. Certain goods, such as gasoline, diesel fuel, alcohol, and tobacco products are taxed by multiple governments (federal, state, city, and/or county) simultaneously.
Generally, excise taxes are charged to businesses, not individuals. They are separate from other taxes that corporations must pay (such as income taxes) because the tax is not based on how much money the business earns overall but rather directly on the sales of one or more of the company’s products.
Although excise taxes are not charged directly to individuals, companies typically raise the price of their products to cover the tax bill, and thus the cost of the excise tax is often rolled on to the consumer.
Excise taxes are meant to be motivational. They are charged on some products to dissuade people from buying them. For example, one of the most common excise taxes is the cigarette tax imposed by both federal and state governments. The federal excise tax is $1.01 for a standard pack of 20 cigarettes. On top of the federal tax, all 50 states levy a different cigarette tax. In fact, excise taxes constitute most of the retail cost of cigarettes. These taxes are imposed specifically to raise the price of cigarettes so that smokers will quit.
How Does an Excise Tax Differ from Other Taxes?
Excise taxes seem like a sales tax, but they are not. Excise taxes and sales taxes are two different types of tax. An excise tax is imposed only on specific goods and it is the responsibility of the merchant to pay it to the government. A sales tax, on the other hand, is charged to the consumer on almost everything that is sold. The merchant does not pay the sales tax, but rather merely collects it and passes it along to the government.
In addition, excise taxes can be employed as a user fee to generate tax revenue from people who use certain government services, such as driving on the highways. The revenue from the excise tax is supposed to be used to maintain that government service, such as highway maintenance.
The role of excise taxes as a user fee is best understood in the context of a gas tax. The more you drive, the more you use government-funded roads. The federal gas tax acts as an estimation of how much a person is using these roads, and charges them a user fee according to the amount of gasoline they consume. Contact a lawyer if you have questions about any tax laws.
Why Are Excise Taxes Imposed?
The primary objective of excise taxes is to raise revenue for the government while supporting public policy objectives, such as reducing smoking or promoting environmentally friendly products.
The first U.S. excise taxes were imposed to provide the federal government with some additional money to pay for operating expenses and to help pay debts the states had accumulated during the American Revolutionary War. One of the early excise taxes was on whiskey. This tax was so despised by western farmers that it led to the Whiskey Rebellion. After this, excise taxes were imposed more sparingly.
During the Great Depression, President Roosevelt and Congress started reintroducing excise taxes to increase federal income, which had dropped because the income tax was no longer enough to pay government obligations since people had far less income to tax. The excise tax on alcoholic beverages paid about one-third of all federal taxes during the Great Depression.
Today, excise taxes have become an established part of the general budget and they are the source of funds for various trusts. For example, the federal government uses taxes on fuel, airplane tickets, coal, oil, vaccines, and more to generate trust money for highways, airports, vaccine development, and oil spills.
How Are Excise Taxes Imposed and Collected?
Excise taxes are imposed on certain goods and services, such as gasoline and alcohol. As mentioned, these taxes are paid directly by businesses but the cost is often passed on to the consumer, who may or may not be aware that they’re paying it to the merchant because it’s included in the price. This is common in the fuel industry, where companies charge excise taxes through the price you pay at the pump.
There are two methods that the government can use to determine the amount of excise tax to collect. One method is “ad valorem.” Ad valorem is a Latin phrase that literally means “according to value.” An ad valorem tax is charged on a percentage basis. 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. Other types of ad valorem excise taxes include firearms (10%), airline tickets (7.5%), and heavy trucks (12%).
The second way for the government to calculate the dollar amount of excise taxes is to impose “specific taxes.” Specific excise taxes are a set tax or fee added to a certain product on a per-unit basis. Examples include cigarettes ($1.01 per pack of 20), pipe tobacco, beer, cruise ship passengers, and gasoline.
What Products Contain Excise Taxes?
Various products contain excise taxes, and the list of taxable items varies from state to state.
Some examples of the most common goods whose prices include excise taxes are:
- Gasoline
- Wine and other alcoholic beverages
- Tobacco
- Heavy trucks and highway tractors
- Indoor tanning
- Ozone-depleting products
- Telephone service
- Hazardous chemicals and substances
- Tires
- Luxury goods
Excise taxes are also levied on some retirement account activities. A 6% excise tax is applied to excess individual retirement account (IRA) contributions that are not rectified by the applicable deadline. A 10% excise tax penalty applies to distributions from particular IRAs and other qualified plans when an investor withdraws before age 59 ½.
Furthermore, a 50% excise tax penalty is levied when investors do not take the mandatory required minimum distributions from specific retirement accounts.
How Can a Lawyer Help?
If you have any questions or issues associated with excise tax, a local tax attorney can help.
A local tax lawyer will ensure that you understand your legal rights, obligations, and options according to your state’s specific excise tax laws. If you think you owe excise taxes but are unsure whether you must pay and on which items, you should consult a local tax attorney who can help you navigate the tax laws and determine which taxes apply to your business.
Additionally, an experienced attorney will also be able to represent you in court or before the IRS, as needed, should legal action become necessary.
