What Is an Excise Tax?
Let me explain what an excise tax is directly to you: it's a specific type of tax that governments impose on certain goods or services right at the point of purchase. Unlike broader taxes that might apply internationally, excise taxes stay within the borders of the taxing authority. In the U.S., for instance, you'll see them on items like motor fuel, tobacco, and airline tickets, and they're often handled at the federal level, though states and local governments can add their own.
How an Excise Tax Works
You should know that excise taxes mainly target businesses, which pay them to the government and then build the cost into the product's price, so you as the consumer end up covering it indirectly. Some, however, you pay directly, like property taxes or penalties on retirement accounts. Governments at federal, state, and local levels can impose these, and while income taxes are the big revenue drivers, excise taxes contribute a smaller but notable share. Businesses dealing with these must file Form 720 quarterly and handle payments, plus they might get deductions on their income taxes for them. These taxes split into ad valorem, which are percentage-based, or specific, which are fixed dollar amounts per unit. Often, they're applied to high-social-cost items like cigarettes and alcohol, earning the name sin taxes.
Ad Valorem Excise Taxes
Ad valorem means 'according to value,' so these excise taxes hit as a percentage of the item's cost. Take the IRS's 10% tax on indoor tanning services: if you pay $100 for a session, the salon owes $10 to the IRS. You'll find similar ones on firearms at 10%, airline tickets at 7.5%, and heavy trucks at 12%. Property taxes also fit this category as they're based on assessed value.
Specific Excise Taxes
Specific excise taxes are straightforward fixed fees per unit. As of February 2025, federal examples include $1.01 per pack of 20 small cigarettes, $2.83 per pound of pipe tobacco, $3.50 for the first 60,000 barrels of beer, $3 per cruise ship passenger, and $0.183 per gallon of gasoline. States add their own, like New York's $5.35 per pack of cigarettes on top of the federal $1.01, pushing the total excise to $6.36 per pack, which significantly raises what you pay. Check IRS Publication 510 for more details on these.
Excise Taxes on Retirement Accounts
You might encounter excise taxes as penalties in retirement accounts. For example, there's a 6% tax on excess IRA contributions if not fixed by the deadline, a 10% penalty for withdrawals before age 59½, and a 25% penalty for missing required minimum distributions (RMDs), though it drops to 10% if corrected within the window starting usually January 1 after the missed year and ending based on IRS actions. Note that as of 2023, RMDs start at age 73 for traditional IRAs and similar plans.
Frequently Asked Questions
Who pays excise taxes? Businesses usually do, but they pass it to you in the price, like at the gas pump. What is a federal excise tax? It's the government's levy on items like fuel, tickets, tobacco, and alcohol, often hidden in the cost. How does it differ from sales tax? Excise targets specific goods and is paid by merchants who may pass it on, while sales tax applies broadly and you pay it directly as a percentage. These are key distinctions you need to understand.
The Bottom Line
In summary, excise taxes from federal and state governments apply to specific goods and services, paid by sellers but often added to your cost as either a flat specific amount or ad valorem percentage. They're confined to the taxing jurisdiction, and while you might not always notice them, they're there—check your next gas pump receipt to see the breakdown of fuel price versus taxes.
Other articles for you
The sell-side of the financial industry focuses on creating, promoting, and selling financial instruments like stocks and bonds to the buy-side.
UCITS funds are regulated mutual funds under European Commission guidelines for cross-border sales in the EU.
Resistance in technical analysis is a price point or zone where selling pressure halts upward price movement.
Net current asset value per share (NCAVPS) is a Benjamin Graham metric for identifying undervalued stocks by comparing liquidation value to share price.
Value averaging is an investment strategy that adjusts monthly contributions based on portfolio performance to buy more shares when prices are low and fewer when high, aiming for better returns than dollar-cost averaging.
The three sigma limit is a statistical measure where data falls within three standard deviations from the mean, encompassing 99.7% of data for quality control in processes.
Accounts receivable financing lets companies access capital based on their unpaid customer invoices through structures like asset sales or loans.
Monetary policy involves central bank strategies to manage money supply and achieve economic stability.
This page provides resources for analyzing sectors and industries to identify growth opportunities in investments.
A holding company owns and controls subsidiaries without direct involvement in their operations, offering strategic and financial benefits.