What Is an Excise Tax?

An excise tax is a specific type of tax that is levied on certain goods or services at the time of their purchase. Unlike international taxes, excise taxes are applied within the boundaries of a specific government. 

For example, in the United States, common goods subject to excise taxes include motor fuel, tobacco, and airline tickets. These taxes are usually imposed at the federal level but can also be applied by state and local governments.

How an Excise Tax Works

Excise taxes are primarily intended for businesses. Most businesses that sell products subject to excise taxes are responsible for paying the tax to the government. They typically incorporate this tax into the price of the product, passing the cost onto the consumer. As such, consumers may not directly see the cost of most excise taxes. However, some excise taxes are paid directly by consumers, including 澳洲幸运5官方开奖结果体彩网:property taxes and leviꦬes on certain retir꧒ement account activities.

Federal, state, and local governments have the authority to institute excise taxes. While income tax is the primary revenue generator for federal and state governments, excise tax revenue also makes up a small portion of total revenue.

Excise taxes are primarily business taxes. They are separate from other taxes that corporations must pay, such as 澳洲幸运5官方开奖结果体彩网:income taxes. Businesses charging and receiving excise taxes are required to file Form 720 Federal Excise Tax Return on a quarterly basis and include quarterly payments. Business collectors of excise taxes must also maintain their obligations to pass on excise taxes to state and local governments as required. Merchants may be allowed 澳洲幸运5官方开奖结果体彩网:deductions or credits on their annual income tax returns related to excise tax payments.

Excise taxes can fall into on🐎e of two ꩵcategories:

• Ad Valorem Taxes: Excise taxes that are fixed percentage rates assessed on particular goods or services
• Specific Taxes: Excise taxes of a fixed dollar amount applied to certain purchases

In some cases, governments levy excise taxes on goods that have a high social cost, such as cigarettes and alcohol. These types of excise taxes are sometimes called 澳洲幸运5官方开奖结果体彩网:sin taxes because the good being taxed has a reputation for being "sinful" or with negative consequences associated with it.

Ad Valorem Excise Taxes

Ad valorem is a Latin phrase that 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 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (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%). Property taxes can a🔜lso be considered a type of ad vജalorem excise tax.

Specific Excise Taxes

Specific excise taxes are a set tax or fee added to a certain product on a per-unit basis. Some examples of federal, specific excise taxes as of Feb🌸. 2025 include

• 澳洲幸运5官方开奖结果体彩网:Small cigarettes ($1.01 per pack of 20)
• Pipe tobacco ($2.83 per pound)
• Beer ($3.50 for the first 60,000 barrels)
• Cruise ship passengers ($3 per passenger)
• Gasoline ($0.183 per gallon).

Sin taxes on targeted goods like beer and alcohol will often be taxed at the federal level and also taxed again by the state, making the cost of these items higher. For example, New York has a specific excise tax of $5.35 per cigarette pack of 20. Combining this with the federal tax of $1.01 makes the excise taxes alone $6.36. These tax🅘es have a considerable impact on the consumer.

Excise Taxes on Retirement Accounts

Excise taxes are also charged on some retirement account activities. Many people are familiar with these taxes as penalties. A 6% excise tax is applied to excess 澳洲幸运5官方开奖结果体彩网:individual retirement account (IRಌA) contributions that are not corrected by the applicable deadline. A 10% excise tax penalty applies to distributions from certain IRAs and other qualified plans when an investor makes 澳洲幸运5官方开奖结果体彩网:withdrawals before age 59½.

Also, a 25% excise tax penalty is charged when investors do not take the mandatory 澳洲幸运5官方开奖结果♔体彩网:require🍨d minimum distributions (RMDs) from certain retirement accounts, though this tax is reduced to 10% if the missed distribution is taken before the end of the "correction window." The correction window starts on the date the penalty is imposed, usually January 1st after the year you missed the distribution. The window ends on the earliest of:

• The date the penalty is assessed by the IRS
• The date the IRS sends a notice of deficiency
  
• The last day of the second taxable year after the penalty is imposed

The Bottom Line

Excise taxes are assessed by federal and state governments on certain goods and services. They are paid by the merchants that sell them. Excise taxes can be a flat tax amount, known as a specific excise tax, or a percentage of the cost of the good, known as an ad valorem excise tax. They may also be limited only to 澳洲幸运5官方开奖结果体彩网:goods sold within the state of the taxing authority.

Businesses often add the cost of an excise tax directly onto the price of the taxed good, so the tax is passed onto the customer. Customers may or may not know they are paying the cost of the excise tax on top of the price of the good or service. Some companies are transparent about excise taxes, though, like fuel companies. Next time you go to fill up your gas tank, take a look at the pump. The company may break down how much of the price at the pump goes toward the fuel itself versus how much you pay in taxes.