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What Is Excise Tax (Explained: All You Need To Know)

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What does excise tax mean?

What’s important to know about it?

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Let me explain to you what excise tax means and why it’s important!

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What Is Excise Tax

Excise tax is a type of tax that is imposed on various goods, services, and activities by the government, such as fuel, tobacco, airline tickets, firearms, heavy trucks, and others.

Generally, excise taxes are paid by companies and businesses directly to the government.

As such, excise tax will not appear on a consumer’s invoice or receipt.

However, businesses will include the excise tax in the cost of their products and services in such a way that consumers end up paying more for the product.

There are some excise taxes that may be directly charged to consumers such as property taxes or excise tax penalties on certain retirement account activities.

The federal government, state governments, and local governments have the ability to levy excise taxes on different products, services, or activities.

The government may choose to levy excise tax as a percentage of the goods sold or based on a fixed rate per unit.

Keep reading as I will break down the notion of excise tax further and tell you how it works.

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Who Pays Excise Tax

Excise tax is generally paid by businesses directly to the government.

Companies and businesses selling goods and services subject to excise tax are required to collect this tax and remit it to the government.

Such businesses will file Form 720 with the IRS on a quarterly basis.

In some cases, companies will have the right to make certain deductions on their corporate annual taxes to take into account the excise tax paid.

Take note that excise tax is not the same thing as corporate business taxes.

Companies are required to pay corporate taxes on their earnings and whenever they sell goods subject to excise tax, they must collect the tax and remit it to the government.

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What Goods Are Subject To Excise Tax

The federal, state, and local governments can charge an excise tax on specific goods and activities.

Here are some goods and activities that are subject to excise tax:

  • Cigarettes
  • Alcoholic beverages
  • Soda
  • Gasoline
  • Insurance premiums
  • Amusement activities 
  • Betting 
  • Motor fuel
  • Airline tickets
  • Heavy trucks 
  • Cruise ship passengers
  • Tanning services
  • Firearms
  • Telephone services 
  • Medical devices 
  • Jet fuel 
  • Cannabis 

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Excise Tax Categories

There are essentially two categories of excise tax: ad valorem taxes and specific taxes.

Ad Valorem excise tax refers to the excise tax that is charged as a function of the value of the goods or services sold.

Ad Valorem excise tax is essentially charged as a percentage of the sales price.

For example, if you purchase something for $1,000 and the excise tax is 5%, you will have to pay $50 in excise tax.

Specific excise tax refers to a category of excise tax that is charged at a fixed price per unit sold, regardless of the unit price.

In other words, when the merchant sells a unit, it must charge a fixed excise tax on the unit sold.

In the United States, cigarettes, pipe tobacco, beer, and gasoline have a specific cost per unit sold.

For example, when a pack of cigarettes is sold, the merchant must charge $1.01 of excise tax for each pack of 20.

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Excise Tax Example

Let’s look at an example of excise tax to see how it works.

Example 1

Let’s look at an example of excise tax charged on an ad valorem basis.

In the United States, the sale of firearms is subject to a 10% excise tax.

This means that if you purchase a firearm costing you $500, then you must pay $50 in excise tax.

This tax is charged based on the cost of the firearm.

Example 2

Now, let’s look at excise tax which is charged at a flat rate per unit.

For example, cruise ship passengers are required to pay $3 of excise tax per passenger.

A family of four will need to pay $12.

This tax is charged for every ticket sold.

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Excise Tax vs Sales Tax

Excise tax and sales tax are two different types of taxes.

Excise tax is generally charged on specific products and services, such as motor fuel, tobacco, alcohol, airline tickets, heavy trucks, and others.

The excise tax charged on the sale of a product is paid by the merchant to the government and so consumers will not see this tax on their receipt.

However, merchants tend to pass on the excise tax cost to consumers in the form of higher prices.

Excise tax can be either charged as a percentage of the sales price or at a fixed rate per unit sold.

On the other hand, sales tax is a type of tax charged on nearly every product or service sold by companies.

Sales tax is generally charged at the point of sale and it is assumed by the consumer.

Consumers will therefore see the cost of their products and services along with the sales tax paid on their purchase.

Sales tax is charged as a percentage of the sales price.

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Takeaways 

So there you have it folks!

What does excise tax mean?

In a nutshell, excise tax is a tax that is charged on very specific goods and activities, such as cigarettes, alcohol, soda, gasoline, insurance premiums, amusement activities, betting, and others.

In the United States, excise tax is typically charged at the time of the production of the goods or when a service is rendered.

As a result, excise tax represents an indirect tax for consumers as merchants will pass on the applicable taxes to them in the form of higher prices.

In some cases, the excise tax is charged by the government to discourage consumers from adopting unhealthy behaviors or purchasing things that are not good for the environment.

For example, the excise tax on tobacco products is largely aimed at discouraging consumers from purchasing them or excise tax on gasoline is to have consumers assume the negative consequence of the pollution they are causing.

The government has the authority to impose an excise tax on any goods or services and so businesses must be careful to ensure they are aware of when and how much excise tax they must collect.

Now that you know what excise tax is all about and how it works, good luck with your research!

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Author

Editorial Staffhttps://lawyer.zone
Hello Nation! I'm a lawyer and passionate about law. I've practiced law in a boutique law firm, worked in a multi-national organization and as in-house counsel. I've been around the block! On this blog, I provide you with golden nuggets of information about lawyers, attorneys, the law and legal theories. Enjoy!

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