What is an excise tax?
An excise tax is a levy placed on specific goods, services, activities, or transactions (rather than on all sales or on income). Excise taxes may be imposed by federal, state, and local governments. They can be charged as a fixed amount per unit (specific excise tax) or as a percentage of value (ad valorem excise tax). Common U.S. examples include taxes on motor fuel, tobacco, alcohol, airline tickets, and certain health-related goods and services. (Source: Investopedia; IRS Pub. 510)
Key takeaways
– Excise taxes target particular goods, services, or activities (not broad-based like sales taxes).
– They are usually collected by the seller/manufacturer, who generally passes the cost on to consumers through higher prices.
– Two main forms: specific (per unit) and ad valorem (percentage of value).
– Some excise taxes are imposed as penalties on retirement-account mistakes (excess contributions, early withdrawals, missed RMDs).
– Businesses that collect federal excise taxes typically file IRS Form 720 quarterly. (Investopedia; IRS Pub. 510; Form 720)
How excise taxes work (step-by-step)
1. Identify the taxable item/activity.
– Determine whether the product or service is subject to federal, state, or local excise rules (e.g., fuel, tobacco, alcohol, airline tickets, tanning). See IRS Publication 510 for federal guidance.
2. Determine the tax type and rate.
– Specific excise tax: fixed dollar amount per unit (e.g., $X per pack of cigarettes).
– Ad valorem excise tax: percentage of the sale price (e.g., 10% of indoor tanning charges).
3. Collect and remit.
– The seller/manufacturer usually collects the tax (may be built into the listed price) and remits it to the taxing authority at required intervals.
4. File required returns.
– Federal excise taxes are commonly reported on Form 720 (filed quarterly). State/local filing rules vary.
5. Keep records and claim credits/deductions if eligible.
– Maintain documentation of excise taxes collected and paid; some business income-tax filings allow credits or deductions for excise taxes paid.
Types of excise taxes
– Specific excise tax (per-unit): A set fee added per unit (e.g., cents per gallon of gasoline, dollars per pack of cigarettes). This tax does not change with price.
– Ad valorem excise tax (percentage): Tax based on the value of the good or service (e.g., a 10% tax on indoor tanning services). (Investopedia)
Examples
– Federal: excise taxes on fuel, airline tickets, tobacco, alcoholic beverages; indoor tanning is taxed at 10%. (IRS; Investopedia)
– State: many states add their own excise taxes (e.g., New York’s cigarette tax added to the federal per-pack tax; combined excise cost can significantly raise retail price). (Investopedia)
– Point of sale: for fuel, pump prices commonly show a breakdown that includes excise taxes; other merchants may or may not show excise components separately.
Who actually pays the tax?
– Legal payor: usually the business (manufacturer/wholesaler/retailer) is legally responsible to remit the excise tax to the government.
– Economic incidence: businesses generally pass the tax to consumers by raising prices. Some excise taxes (retirement-account penalties) are paid directly by individuals. (Investopedia)
Federal excise tax vs. sales tax
– Excise tax: levied on specific items or activities; may be specific (per-unit) or ad valorem (percentage). Usually remitted by the seller; often included in the posted price.
– Sales tax: broad-based percentage applied at retail sales on most goods/services (varies by jurisdiction), explicitly collected from the buyer at the point of sale and remitted by the seller. (Investopedia)
Excise taxes on retirement accounts (penalty-type excise taxes)
– Excess contributions to an IRA: generally subject to a 6% excise tax each year until corrected.
– Early distributions: a 10% additional tax may apply to certain withdrawals before age 59½ (exceptions exist).
– Missed required minimum distributions (RMDs): the excise tax was reduced by statute (recent laws) from historically higher rates and can be further reduced if the missed amount is corrected within an IRS correction window. Note changes in RMD rules (RMD starting ages and penalty amounts) have occurred in recent years—check current IRS guidance (Publication 590 series and IRS announcements) for up-to-date details. (Investopedia; IRS Pub. 590)
Practical steps — for businesses that sell excise-taxed goods or services
1. Confirm taxable products and applicable jurisdictions.
– Check federal, state, and local lists to determine which goods/activities are taxable.
2. Register and obtain any required IDs.
– You may need an EIN or special registration to report excise taxes.
3. Determine whether the tax is specific or ad valorem and calculate the rate.
4. Price and accounting decisions.
– Decide whether to itemize the excise tax on receipts or include it in the posted price; ensure accounting systems track excise tax liabilities separately.
5. File and remit on time.
– File Form 720 quarterly for many federal excises; state/local filing schedules differ. Late payments and returns can trigger penalties and interest.
6. Keep records and claim available credits/deductions.
– Maintain detailed invoices, stamps (if applicable), and shipping/production records. Check whether you qualify for excise tax credits or refunds.
7. Consult Pub. 510 and a tax professional.
– Use IRS Publication 510 and consult specialists for complex situations. (IRS Pub. 510; Form 720)
Practical steps — for consumers
1. Know which purchases include excise taxes.
– Fuel, airline tickets, tobacco/alcohol, and certain services like indoor tanning may include excise taxes—sometimes shown separately on receipts or tickets.
2. Compare total out-the-door costs.
– Because excise taxes can be embedded in price, compare final prices (including taxes).
3. For retirement accounts:
– Avoid excess contributions (track contribution limits), avoid early withdrawals when possible, and take RMDs on time. If you miss or over-contribute, correct the mistake promptly to reduce excise penalties; consult IRS Pub. 590 or a tax advisor.
4. Ask merchants for breakdowns if unsure.
– Some sellers (e.g., fuel stations) show tax breakdowns on pumps; others will provide tax detail upon request.
Fast facts & context
– Major federal excise revenue sources include motor fuel, airline tickets, tobacco, alcohol, and certain health-related goods/services. These categories produce a meaningful but smaller portion of government revenue compared with income and payroll taxes. (Tax Policy Center; Fiscal Data)
– “Sin taxes” (on alcohol, tobacco, etc.) are often justified both to raise revenue and to discourage consumption of goods with negative public-health externalities. (Investopedia)
Common compliance resources
– IRS Publication 510 — Excise Taxes: federal rules and explanations. (https://www.irs.gov/publications/p510)
– IRS Form 720 — Quarterly Federal Excise Tax Return and instructions. (https://www.irs.gov/forms-pubs/about-form-720)
– Tax Foundation — analyses of excise tax trends and application. (https://taxfoundation.org)
– Tax Policy Center / Fiscal Data — data and analyses on major federal excise taxes and revenue. (https://www.taxpolicycenter.org; https://fiscaldata.treasury.gov)
The bottom line
Excise taxes are targeted levies on particular goods, services, or transactions and can be structured as fixed per-unit charges or ad valorem percentage charges. Businesses usually remit these taxes and generally pass the cost along to consumers, though the tax may be hidden inside the posted price. Compliance requires proper product classification, accurate calculation, timely filing (e.g., Form 720 for many federal excises), and careful recordkeeping. For consumers and retirement-account holders, proactive management (timely RMDs, avoiding excess contributions) and professional advice can reduce the risk of costly excise penalties.
Sources
– Investopedia: “Excise Tax” (https://www.investopedia.com/terms/e/excisetax.asp)
– IRS Publication 510 — Excise Taxes (https://www.irs.gov/publications/p510)
– IRS Form 720 info — Quarterly Federal Excise Tax Return (https://www.irs.gov/forms-pubs/about-form-720)
– Tax Foundation — Excise tax research (https://taxfoundation.org)
– Tax Policy Center — “What Are the Major Federal Excise Taxes, And How Much Money Do They Raise?” (https://www.taxpolicycenter.org)
– Fiscal Data (U.S. Treasury) — excise tax revenue datasets (https://fiscaldata.treasury.gov)
If you want, I can:
– Draft a compliance checklist for a specific product (e.g., fuel distributor, tobacco retailer, or indoor tanning salon).
– Provide sample calculations (per-unit vs percent) for a product you specify.
– Summarize current retirement-account excise penalties with the latest IRS rule changes (I’ll pull current IRS guidance).