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What is excise tax?

Federal excise tax definition, types and examples

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Written by Amelia York
Edited by Justin Martino
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What is excise tax?

An excise tax is typically a duty levied by governments on products that risk public health or the environment, such as gasoline, alcohol and cigarettes. The tax is paid by retailers and manufacturers of the products and not directly by consumers.

According to the Tax Policy Center, federal excise tax revenue is primarily collected from sales of gasoline, airline tickets, cigarettes and alcohol. Excise taxes accounted for almost $100 billion last year, or just less than 3% of total federal tax receipts.

However, that isn’t the only kind of excise tax you may encounter. Excess contributions to IRAs are also subject to an excise tax. In some states, homeowners pay a real estate excise tax (REET) during the sale of a property.

Types of excise taxes

There are two ways excise tax might be charged on goods and services: ad valorem or specific taxes.

  • Ad valorem: Latin for “according to value,” ad valorem tax is applied as a fixed percent. In other words, the amount of the tax is determined by the value or the product or service. Property tax is a common example of this.
  • Specific: Specific tax is levied per unit sold and based on quantity. For example, a bottle of wine might be taxed at 7 cents per bottle, regardless of its cost.

Even though both types of excise taxes are levied against businesses, the cost is often passed down to consumers. Many business owners increase their prices to compensate for the IRS bill.

Excise tax examples

Most commonly, excise taxes are applied to goods and services that the government wants to discourage. Excise is similar to a “sin tax,” which governments apply to balance out the cost of dealing with harmful side effects caused by unhealthy items. Here are some current examples of excise tax rates at the time of publication. Keep in mind that rates can change.

  • Cigarettes excise tax: Each pack of cigarettes includes a federal excise tax of around a dollar. State and local governments may impose taxes ranging from 17 cents in Missouri to as high as $4.50 in Washington, D.C.
  • Gas excise tax: Gasoline is federally taxed around 18 cents per gallon. States tax an additional 15 cents to 61 cents per gallon.
  • Alcohol excise tax: These taxes vary depending on the type of beverage, its alcohol content and the production capacity of the brewery, winery or distillery.
  • IRA excise tax: Excess contributions to your IRA are taxed at 6%.
  • Real estate excise tax: These taxes are based on the sale value of your home and may range from 1.10% to 3%

Excise tax FAQ

How is an excise tax different from a sales tax?
Excise taxes are often applied to goods and services that are harmful to health or the environment. Sales taxes are applied to a variety of purchases. Additionally, excise taxes are paid by the retailer or producer of the item, while sales taxes are added to the customer’s purchase price.
Who pays excise tax?
Retailers or manufacturers of goods subject to an excise tax will pay that cost. If you’re required to pay an excise tax on your property or IRA, you will pay that cost directly.
How much is excise tax?
This depends on the type of product. Ad valorem excise taxes tend to be between 1% and 10%. Specific excise taxes range from a few cents to several dollars or more. Excise tax may be applied as a percentage of the product’s value or a fixed cost.
What goods are subject to excise tax?
Goods that are harmful to the purchaser’s health or the environment are typically subject to this tax. This includes alcohol, cigarettes and gasoline.
Is there a difference between federal and state excise taxes?
The federal, state and local governments may all charge different excise taxes on products. The funds from this tax may flow to different sources, but that is the only difference between them.

Bottom line

Since the excise tax burden is on businesses, most people don’t have to worry too much about them. If you own a company that is subject to excise taxes and are worried about your IRS bill, consider contacting a tax relief company.

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