What Is Excise Tax? A Complete Guide

Although you necessarily don’t directly pay them, excise taxes can have an impact on your financial life. To help you understand excise tax, we break down what it is, how it works, and how you end up paying it. 

Excise Tax Definition 

An excise tax is a federal, state, or local tax placed on specific goods and services, like gas and fuel, gambling and heavy-truck usage. It’s primarily paid by businesses and merchants, and is typically included in the cost of their product or operations. There are a few cases where a consumer will pay an excise tax related to real estate or their retirement fund.

How An Excise Tax Works

Businesses that are subject to excise taxes will typically pay them when an item is imported, or when the business purchases the goods or service. In most cases, businesses will need to pay excise taxes to the IRS, or they are collected by a third party then passed onto the IRS.

Revenue from excise taxes typically goes to various projects that are related to the product or service being taxed. For example, excise taxes collected by an airline are typically used to make airport improvements. Taxes paid by trucking companies may be used to improve road conditions. 

Who Pays Excise Taxes?

While consumers don’t usually pay excise taxes directly, you may when you make purchases at your local gas station, supermarket or convenience store. Since businesses pay them, they may pass these additional costs onto consumers in the form of higher prices. For example, when you fill your car’s gas tank, you might pay more for a gallon of gas because of the excise taxes levied on it.

Excise taxes are also sometimes charged on behaviors. For instance, you might pay more to gamble because of excise taxes charged to casinos. Truck operators pay excise taxes to use federal highways. In other cases, consumers pay them directly. Airlines collect excise taxes in addition to your airfare, and the taxes will be passed onto the IRS. 

Types Of Federal Excise Taxes 

There are several types of excise taxes, including ad valorem excise taxes, and one for specific products. 

Ad Valorem Excise Tax

“Ad valorem” is a Latin phrase meaning “according to value.” An ad valorem excise tax is levied on specific goods by a fixed percent based on the product’s value.

For example, the IRS levies a 10% excise tax on indoor tanning services. If a tanning salon charges $150 a session, it would have to pay the IRS $15 in excise taxes for every session it provides to its customers. If the salon charged $200 a session, it'd pay $20 for each session to the IRS.

The federal government also charges a 10% ad valorem tax on firearms sales. So if a dealer sells you $500 worth of firearms, that dealer will have to pay $50 to the government in the form of an excise tax.

Specific Excise Tax

A specific excise tax is a set fee or amount of taxes levied against products on a per-unit-sold basis. For example, the federal government charges a $1.01 excise tax on every pack of 20 cigarettes. This tax is added to the cost of what businesses charge the consumer. 

Other specific excise taxes, as of late October 2023 include gasoline at $0.183 per gallon, cruise ship passengers at $3 per passenger, and pipe tobacco at $2.83 per pound. 

Sin Tax

Sin tax is a type of excise tax charged for products that are typically thought to be harmful. Products such as cigarettes, tobacco, beer, other forms of alcohol and firearms are often levied with additional taxes, usually on the state and federal level. Gambling, too, is often charged these sin taxes.

The goal of these taxes is often to discourage people from using certain products in excessive amounts. Sin taxes businesses and consumers pay will differ depending on the state and county you purchase these goods and services from. 

Excise Tax Examples

You probably buy plenty of items that have excise taxes. Depending on what your purchases are, you either pay them directly or indirectly when a merchant marks up the cost of their products.

Direct Excise Taxes

Some examples of direct excise taxes you pay directly include ones levied by some local and state governments. Some of the most common ones include property taxes and one imposed on vehicles. 

If you have questions about how these direct excise taxes impact your finances, check with your financial advisor. The rules regarding property taxes and penalty taxes can change. It’s best to consult with your financial advisors before making any decisions.

Retirement Funds Excise Tax

You may be subject to a direct excise tax if you make excess IRA contributions over your annual contribution limit. This tax is levied by the IRS. You can avoid this tax if you correct your overpayments by a specific deadline. This type of excise tax is known as a “penalty tax.”

Indirect Excise Taxes

The most common types of excise taxes are indirect. As the name suggests, you pay for these taxes but in an indirect way like when there is an increase in the price of a product.

Some services, businesses or goods excise taxes are applied to, include:

• Gambling 
• Alcohol and tobacco products
• Firearms and ammunition
• Fuel, including coal, diesel, gasoline and jet fuel
• Outdoor sport fishing equipment
• Indoor tanning services
• Plane tickets
• Cruise tickets
• Purchases of heavy trucks and trailers
• Telephone services

How Is An Excise Tax Different From A Sales Tax?

Excise taxes are applied to specific goods and services while sales tax is a percentage applied to everything you buy. Excise taxes are charged on a “per-unit” basis, so you only pay for the amount you purchase.

More specifically, sales taxes are added to the price of physical products such as candy, toys, clothing, food, drinks, hardware, antiques and footwear. The taxes you paid are based on federal, state and local regulations and are passed onto the applicable government entity. 

Some items are exempt from sales taxes if they’re considered essentials. This includes your apartment rent, utility bills and medicine. Or, some states don’t charge sales taxes at all. Like excise taxes, different items may have different sales tax rates. For instance, several states charge a lower sales tax on groceries and prescription drugs.

Excise taxes are only applied to specific goods and services, such as alcohol, gas and cigarettes. They usually make up a smaller portion of state revenue than income from sales tax.

Excise Tax FAQs

The following are frequently asked questions about excise taxes.

Can I pay an excise tax online?

You can’t necessarily pay indirect excise taxes online, of course, because merchants pay these taxes. Businesses can pay excise taxes on a quarterly basis by filing a Form 720 to the IRS through the Electronic Federal Tax Payment System (EFTPS) or by mail.

If you do need to pay excise taxes directly, it’s also done through the IRS. For example, if you’re paying a penalty for withdrawing funds from an IRA, you typically pay it when you file your income taxes. You can also pay direct excise taxes online through your state’s department of revenue. Follow the directions carefully, or consult a tax professional or tax preparer to ensure you’re paying them correctly. 

What is excise duty?

Duty taxes are a type of excise tax importers pay directly to governments when importing goods for sale. Tax rates may differ depending on the type of the product and its value. It can be on an ad valorem basis — based on value— or a flat rate. 

How are excise taxes and customs duties different?

Customs taxes are levied on items entering a country, while excise taxes are applied within a country. More specifically, import taxes or customs duties are levied when items come from one country to another, when entering customs. Excise taxes are charged by the government at the federal, state, or local level depending on the type of product or service bought and sold.

The Bottom Line

Taxes are a way of life in the United States. Although some are charged to businesses, consumers end up indirectly paying for them through higher cost of goods and services. Some are paid directly, like taxes on airfare and on products like tobacco. 

While you have little control over excise taxes, knowing how they work and being aware of the impact they have on the products you buy can help you save more money, plan out your future purchases, and boost your financial health. To better understand and manage your spending habits, consider signing up for Rocket Money℠ — it’s free to use.