An excise tax is a tax sometimes levied on certain products, such as gasoline, cigarettes, and alcohol, by federal, state, and municipal governments. This tax is used to finance various government programs and projects.
Understanding Excise Tax
An excise tax is a tax that different levels of government (federal, state, and municipal) decide to levy on certain goods and services. Different governments themselves determine which goods are subject to taxation, such as gasoline and tobacco products. They also set the amount of this tax.
It is important to note that excise taxes are often included in the total cost of a good or service, rather than allocated separately. This makes them hidden and many consumers may not be aware of their impact on the prices of certain goods.
What is the purpose of excise tax?
Basically, government agencies use excise taxes to generate additional revenue. For example, the fees that transportation companies pay to use the National Highway System help finance regular road maintenance and repairs in the United States.
The same can be said for the excise tax that regular drivers pay on gasoline. Revenue from this tax can also be used to maintain public roads.
In addition to generating additional funds, some government agencies use excise taxes as a means of restricting certain activities. For example, excise tax on tobacco products can serve as an example. Various fees associated with the price of a pack of cigarettes can make tobacco unaffordable for certain smokers.
Authorities hope such spending might persuade certain smokers to quit or at least reduce their tobacco use. As the number of smokers decreases, the government may receive less revenue from cigarette sales. However, some health authorities believe the loss of revenue is relatively small compared to the nation’s savings on health care costs.
When an excise tax is used to curb undesirable behavior such as smoking or gambling, it is often called a “sin tax.” Such taxes may also be levied on other goods and services associated with risky habits, such as firearms and alcohol.
There are supporters and opponents of this idea. Opponents of sin taxes cite various studies that support their view. They argue that such taxes do not always achieve their intended goals and do not always have the expected impact on people’s behavior. They also point out that such taxes may have an uneven impact on low-income people.
How do excise taxes work?
Excise taxes are primarily business taxes, as governments levy them primarily on companies.
For example, producers of alcoholic beverages are required to pay excise tax. However, this does not mean that companies bear this fee entirely. They usually pass this cost on to consumers by increasing the price of the product. And since the tax is paid by the population, although not directly, but through producers, it is called an indirect tax.
Most consumers do not realize that excise taxes are imposed on goods. Let’s say the item costs $1.30. Few shoppers are likely aware that there is a $0.30 tax on this item. If the tax was listed separately on the receipt, it could cause resentment due to the additional charge. However, typically the excise tax is included in the price of the product, and consumers only see the $1.30 cost of the product.
However, there are also excise taxes that consumers pay directly. For example, when purchasing car tires, you may see the excise tax on the itemized receipt. Some telephone services are also subject to excise tax.
There are other types of taxes that consumers pay, but they are called differently. For example, the penalty for withdrawing money early from a retirement account is actually an excise tax.
In addition, the annual property tax and transportation tax, which are paid to local governments, also fall under the category of excise taxes.
How much is the federal excise tax?
The list of products and services subject to federal excise taxes is extensive. However, let’s take a quick look at a few of the most prominent ones and their corresponding tax rates as of now, that is, in 2023.
Cars that consume gasoline and natural gas motor fuel
Gasoline prices include an excise tax of $0.184 per gallon. The federal government uses an excise tax to penalize car manufacturers that get less than 22.5 mpg. Manufacturers can expect to pay between $1,000 and $7,700 per vehicle depending on its fuel efficiency.
Alcohol
The alcohol tax rate varies depending on the type of alcohol and the quantity of the drink produced.
Domestic beer costs $3.50 per barrel for the first 60,000 barrels. All volumes that are greater than this value are taxed at $16 per barrel.
The alcohol subject to the most significant tax is distilled spirits. The first 100,000 gallons will be charged $2.70 per gallon. The tax jumps to $13.34 per gallon between 100,001 and 22.230 million gallons. After 22.230 million gallons, the tax increases to $13.50 per gallon.
Tobacco
In the United States, tobacco was one of the first products to be subject to a federal excise tax. Nowadays, for every pack of 20 small cigarettes or cigars, a tax of $1.01 is levied. And if we are talking about a pack of large cigarettes of the same size, then the excise tax is already $2.11.
Firearms and ammunition
The excise tax on handguns is 10%, while the excise tax on other types of weapons and ammunition is 11%.
Air travel and air transport
When purchasing your airline ticket to travel to your dream destination, you will have to take into account the 7.5% excise tax. And if you transport goods by cargo planes, then a 6.25% tax is imposed on it.
Sports gambling
The player is required to pay a tax of 0.25% of the amount he bets, if the bet is allowed by the state. If the state does not allow such a bet, the player will have to pay a tax of 2% of the amount of his bet.
A person accepting bets that are permitted by the state is required to pay an annual tax of $50. Those who accept bets not allowed by the state will have to pay an annual fee of $500.
How to calculate excise taxes?
Some excise taxes are defined as a fixed amount per unit of goods. For example, the federal government sets a flat rate of 0.184 cents per gallon of gasoline. Even if two gas stations in the same city sell gasoline at different prices, the excise tax remains the same at 0.184 cents per gallon. To determine the amount of excise tax you pay, simply multiply $0.184 by the number of gallons you purchased.
In other cases, excise taxes are calculated as a percentage of the cost of the goods. For example, the price of an airline ticket is subject to a 7.5% federal excise tax. As the ticket price increases, the amount of tax paid also increases. To determine this amount, multiply the excise tax rate by the base price of the ticket.
How to report and pay excise taxes for a business?
Some excise taxes have a fixed amount per unit of goods. For example, when selling goods subject to excise duty, you should note that you must register your business with the relevant department before it begins to operate. If your business involves the sale of alcohol, tobacco or firearms, you are required to register with the Alcohol and Tobacco Tax and Trade Bureau (TTB). If your business includes products or services that are also subject to excise taxes in other industries, you must register with the Internal Revenue Service (IRS) for this purpose.
Failure to register before starting your business can have significant consequences. You can expect an initial fine of $10,000, plus daily additional fines of $1,000 for each day you fail to register.
Depending on the size of your business, you may need to pay taxes to the TTB on an annual, quarterly, or even bi-annual basis. With the IRS, you’ll have to file your taxes quarterly and make payments twice a month.