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How Is An Excise Tax Different From A Sales Tax
Both excise tax and sales tax are “consumption taxes” that are levied on goods and services you buy.
According to the Institute of Taxation and Economic Policy, close to half of all state tax revenues come from sales and excise taxes.
Most of the government’s income comes from the sales tax and a small portion of government revenues comes from excise tax.
Before we look at how excise taxes are different from sales taxes, let’s first understand what they are.
What Is An Excise Tax
Excise tax is a type of tax that is levied on specific goods, products, services, or activities.
For example, if you purchase tobacco, you will likely have to pay excise tax as it’s a tax that is levied on tobacco products.
Depending on the type of goods or services that are taxed, the federal government or state governments will have jurisdiction to determine how the excise tax will be applied.
For example, the excise tax on motor fuel is charged by the gallon whereas, for air travel it’s charged as a percentage of the airline ticket cost.
Excise taxes are collected:
- Allowing the government to generate revenues without increasing income taxes or sales taxes (these taxes can be applied for political reasons)
- Allows the government to maintain the system, process, or infrastructure used by the items purchased (for example, excise taxes on gasoline will be used to maintain highways and roads)
- Allows the government to deter consumers from purchasing certain goods by making them more expensive (like excise taxes on tobacco or environmental products)
What Is A Sales Tax
Sales tax is a type of tax that is levied on nearly everything you purchase.
For example, if you buy furniture for your home, you’ll pay sales taxes on what you purchase.
In most cases, the sales tax is calculated as a percentage of the cost of what you’re purchasing.
Typically, sales taxes are established by the state and local governments who can choose to exempt certain goods and services.
For example, many “essential” goods or services are exempt from taxes such as rent, medicine, utilities, and groceries.
What are the main differences between excise tax and sales tax?
The first important difference between excise tax and sales tax is that excise tax is levied against specific goods or services whereas sales tax applies to nearly everything you purchase.
In most cases, sales taxes will be charged as a percentage of what you are buying whereas excise tax is applied on a per-unit basis.
Also, when you buy something, you’ll see the salex tax on your receipt at the point of purchase whereas excise taxes are indirectly passed on to consumers in the form of higher prices.
Excise taxes are generally not itemized on your receipt and so you will not even notice that you paid for it (it’s often a “hidden tax”).
Another difference is that excise taxes can exist at the federal level, state level, or even local level.
Sales taxes on the other hand are governed at the state level and can be quite different from one state to another.
Some states have adopted a state-wide sales tax while other states allow cities, towns, and counties to charge their own sales taxes.
How Is An Excise Tax Different From A Sales Tax Takeaways
How is a sales tax different from an excise tax?
What are the key differences?
In essence, you pay sales taxes on things you purchase on a day-to-day basis like automobiles, furniture, cleaning services, car repair, movie tickets, and so on.
You can consider that you’ll pay sales taxes on most of your retail transactions except for certain goods that are exempt from sales taxes like groceries and medicine.
On the other hand, excise taxes are taxes that apply to particular products.
For example, you are going to see excise taxes applied to specific products like:
- Air travel
- Indoor tanning
- Telephone services
- Health insurance
- Airplane fuel
In most cases and unlike sales taxes, excise taxes are applied on a “per-unit” basis (or per-unit tax) as opposed to a percentage of the purchase price.
The cost of the excise tax is usually passed on to the consumer who may not even be aware that they are paying for the excise tax as part of the price of the product they are purchasing.
I hope I was able to answer your question on how are excise taxes different from sales taxes.
If you need legal advice or have questions relating to sales tax and excise tax, remember to consult a tax attorney or a tax professional.
This article is intended to give you general information to get you started in your investigation.
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How Is An Excise Tax Different From A Sales Tax?
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