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What Is Excise Tax, And Who Pays It?

Dan Rafter6-minute read
September 21, 2020

It can be difficult to keep track of all the terms and jargon thrown your way when it comes to your personal finances. You need to know what everything from compound interest and adjustable-rate mortgages are to how defined contribution plans and capital gains and losses work.

And those are just the more common personal finance terms out there. Some of the jargon you’ll encounter is downright obscure.

You might not now what excise taxes are, but they do have a direct impact on your personal finances and how much you spend each year. Learning about these taxes can be beneficial as you strive to build your savings and cut your spending.

Excise Tax Definition

An excise tax is a federal tax placed on specific goods, like gas and fuel, as well as services and activities like gambling and heavy-truck usage. It’s primarily paid by businesses and merchants, who then apply it to the cost of their product, but there are a few cases where a consumer will pay an excise tax related to real estate or their retirement fund.

The good news about excise taxes? You’ll rarely pay one directly. The bad news? Depending on your spending habits, you might pay them when you make purchases at your local gas station, supermarket or convenience store.

That’s because excise taxes are usually levied on businesses or merchants. These merchants then pass those costs onto consumers in the form of higher prices. A good example? When you fill your car’s gas tank, you pay more for a gallon of gas because of the excise taxes levied on it.

Excise taxes are 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.

Excise taxes might be annoying to consumers, but they’re important for the federal government. In addition to income taxes, excise taxes account for a portion of the revenue on which the federal government relies.

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Types Of Federal Excise Tax

There are three main types of federal excise taxes:

Ad Valorem Excise Tax

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

That might sound complicated, but here’s a simple explanation: 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 IRA.

The federal government also charges a 10% tax on firearms sales. Again, this is an ad valorem excise tax. 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.

As with all excise taxes, merchants might charge customers more – higher session costs for tanning, for instance – to make up for the tax they are paying.

Specific Excise Tax

A specific excise tax is a set fee levied against products on a per-unit-sold basis. Again, this isn’t as complicated as it might seem.

The federal government charges an excise tax of $1.01 on every pack of cigarettes. This helps explain why cigarettes are so expensive today. Merchants increase the price as a way to pass on some of the costs of the excise taxes charged on these products.

The federal excise tax on gasoline is 18.4 cents a gallon and 24.4 cents a gallon for diesel fuel. Again, these taxes typically manifest themselves in higher prices at the pump.

Sin Tax

Products such as cigarettes, tobacco, beer, other forms of alcohol and firearms are often levied with additional taxes, usually on the state level, known as sin taxes. Gambling, too, is often charged these sin taxes.

The goal of these taxes is often to discourage people from using certain products – such as alcohol or cigarettes – in excessive amounts.

The most common example? Cigarettes. This product is often hit by both federal excise taxes and state sin taxes. In New York, the state charges an excise tax of $4.35 on cigarette packs of 20. Combine that with the federal excise tax of $1.01 on a pack of cigarettes and that’s a total excise tax of $5.36 on a single pack of cigarettes, something that sends the cost skyrocketing.

Sin taxes will vary depending on in which state you live. In Virginia, for example, the state only charges a sin tax of 30 cents on every 20-pack of cigarettes.

Excise Tax Examples

You probably buy plenty of items that have been hit with excise taxes. In most cases, though, you aren’t paying these taxes directly. Merchants pay the taxes and then make up these costs by charging you more for your purchases. There are rare cases, though, in which consumers directly pay excise taxes on their own.

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, in an increase in the price of the product. Merchants, who pay these excise taxes directly, pass the tax onto you in the form of a higher purchase price.

Here are some of products that are more expensive because of indirect excise taxes:

  • Fuel, including gas, diesel, jet fuel and coal
  • Alcohol and tobacco products
  • Firearms and ammunition
  • Purchases of heavy trucks and trailers
  • Outdoor sport fishing equipment, including rods, poles and boat motors
  • Airline and cruise tickets
  • Foreign insurance 
  • Telephone services
  • Indoor tanning services
  • Gambling

Direct Excise Taxes

In rare cases, you’ll pay excise taxes directly. The tricky part? They usually aren’t referred to as excise taxes.

Here are some examples of direct excise taxes that you pay out of your own pocket.

  • You’ll be hit with 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, though, if you correct your overpayments by a specific deadline. This type of excise tax is known as a “penalty tax.” 
  • The Affordable Care Act contains several healthcare-related excise taxes, particularly for those without health insurance. You’d pay these excise taxes if you failed to sign up for health insurance coverage. Note, though, that as of the writing of this story many of these penalty taxes have been postponed by the federal government.
  • Your home, vehicles and other assets include direct excise taxes levied by some local and state governments. You probably think of these taxes by their more common name, though: property taxes.

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, then, to consult with your financial advisors before making any decisions based on them.

How Is Excise Tax Different From Sales Tax?

You’re probably more familiar with sales taxes. After all, you pay these directly whenever you make a purchase. How, though, do sales taxes and excise taxes differ? Here’s a quick rundown.

Sales taxes are levied on most retail goods and services you buy. They are added to the price of candy, toys, clothing, food, drinks, hardware, antiques and many other products. You’ll pay more when you purchase these items because of sales taxes.

There are some items, considered be essentials, that are exempt from sales taxes. This includes your apartment rent, utility bills and medicine.

You might pay less in sales taxes depending on where you live. Certain states don’t charge sales taxes at all, and others charge lower rates. States often charge lower sales taxes for different items. For instance, several states charge a lower sales tax on food you purchase at grocery stores.

Excise taxes, though, are only applied to specific goods and services, such as alcohol, gas and cigarettes. Because of this, they make up a smaller potion of state revenues than do the sales taxes states charge.

Can You Pay An Excise Tax Online?

You can’t pay indirect excise taxes online, of course, because merchants, not you, pay these taxes. You can, though, pay direct excise taxes online.

Individuals can pay their direct excise taxes online through the department of revenue website in their home states. Businesses can pay excise taxes on a quarterly basis by filing a Form 720 to the IRS through either the Electronic Federal Tax Payment System – better known as EFTPS – or through the mail.

Bottom Line

Taxes are a way of life in the United States. And while you have little control over excise taxes – especially indirect ones – knowing how they work and being aware of the impact they have on the products you buy can help you save more money and boost your financial health.

But don’t stop there. There are plenty of opportunities on our site to read more about managing your personal finances.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.