What is excise tax and how does it work?

An excise tax is an indirect tax on the consumption, manufacture, or sale of specific goods, services, or activities. Alcoholic beverages, tobacco, communications, fuel, and sports betting are some of the goods and services subject to excise tax.

Like sales tax, excise tax is imposed by state and local governments. Unlike sales tax, excise tax is also imposed by the federal government.

• Excise taxes are imposed on specific products, services, and activities.
• There are federal, state, and local excise taxes.
• Excise taxes are paid and reported by the distributor, manufacturer, and/or wholesaler at the point of sale.
• Excise tax usually isn’t listed on the end consumer’s receipt.

As an indirect tax, excise tax is levied on goods and services. Distributors, manufacturers, wholesalers, and importers typically collect excise tax from customers at the point of sale and remit it to the appropriate taxing authority.

Income tax, by contrast, is a direct tax. That means taxpayers remit income tax directly to the taxing authority.

Many excise taxes are imposed on activities, goods, or services deemed to have a negative impact on consumers or the environment, like certain chemicals. The theory behind such sin taxes, as these are often called, is that the higher price tag will reduce consumption — for the greater good.

Excise tax revenue often funds projects related to the product or service taxed. For example, fuel taxes contribute to road maintenance and public transportation projects. 

Excise taxes also fund programs designed to curb the negative impacts of the goods or services: Alcohol and tobacco taxes often help pay for health services or support programs.

Excise tax targets specific goods or services. The tax rates vary depending on the goods or services as well as the location of the transaction. While federal excise tax rates apply nationwide regardless of the location, state and local excise taxes are jurisdiction specific.

Goods subject to excise taxes include:

• Alcoholic beverages
• Coal
• Fuel
• Heavy trucks and highway tractors
• Tires
• Tobacco and tobacco products

Services subject to excise taxes include:

• Communications
• Energy
• Transportation (e.g., airline tickets) 

Activities subject to excise taxes include:

• Entertainment or recreational activities
• Gambling and sports betting
• Indoor tanning services

Excise tax is often a per-unit tax, but like sales tax, it can also be based on a percentage of the sales price.

The distributor, manufacturer, and/or wholesaler usually pay excise taxes when they sell taxed items. The final retailer generally isn’t responsible for calculating and collecting excise tax. However, the consumer usually bears the cost because businesses typically pass excise taxes on to end consumers in the form of higher prices. 

Passing on the tax itself is not allowed with the Maryland digital advertising tax. “Maryland prohibits digital companies from listing the state’s digital advertising tax on the customer’s invoice,” observes Scott Peterson, VP of Government Relations at Avalara. “Like other aspects of the law, the pass-through prohibition is being challenged.”

There are two types of excise taxes: 

• Ad valorem excise taxes 
• Specific (per-unit) excise taxes

“Ad valorem” means “according to value,” so an ad valorem excise tax is based on a percentage of the value of the good or service. Property tax is an example of an ad valorem tax; it’s imposed on the value of the property, which is typically determined by the selling price.   

By contrast, specific excise taxes are based on the unit sold.

The method for calculating excise tax depends on whether it’s an ad valorem excise tax or a specific per-unit excise tax.

An ad valorem excise tax is based on a percentage of the purchase price. The 7.5% federal excise tax on the price of domestic airline tickets is an example of an ad valorem excise tax. The federal indoor tanning tax is another example; it’s 10% of the amount paid for indoor tanning services.

A per-unit excise tax is product specific and levied on items like alcoholic beverages, cigarettes, and fuel. 

For instance, California imposes a per-gallon excise tax on the sale, distribution, or importation of alcoholic beverages in the state. Tax rates vary by alcohol type and content. New York cigarette excise taxes are another example: Each package of 20 cigarettes is subject to a state excise tax of $5.35; in New York City, there is a city excise tax of $1.50 as well.

Excise tax reporting requirements vary by the taxing jurisdiction (federal, state, or local government) and the product or service taxed. For example:

• California alcoholic beverage tax returns must be filed online. The tax is due on or before the 15th of the month following the reporting period.
• Reporting requirements for New York cigarette excise tax returns vary and are too numerous to list here. See the New York State Department of Taxation and Finance for more details.
• The indoor tanning tax is reported quarterly on IRS Form 720, the Quarterly Federal Excise Tax Return. It’s due by the last day of the first month following the quarter in which the sales are made.

It can be challenging for a business to manage excise tax as well as sales tax. Using one solution for excise tax and sales tax can help simplify compliance.

Avalara helps businesses comply with excise tax and sales requirements nationwide. To learn more about Avalara and our tax compliance software for businesses, including our combined excise and sales and use tax solutions, visit Avalara AvaTax for Energy and Avalara AvaTax for Tobacco. You can also schedule time to talk to our team at your convenience.

Is excise tax deductible? 

Tax deductions can help lessen tax burdens for both businesses and individuals. Businesses can often deduct excise taxes that are “ordinary and necessary expenses of carrying on your trade or business.” However, individuals generally cannot deduct excise taxes incurred as a personal expense. 

See the IRS or your state and local government websites for specifics.

When is excise tax due?

It depends on the type of excise tax, the taxing jurisdiction, and the filing schedule. 

The Washington state business and occupation (B&O) tax, which is reported and paid on the excise tax return or by electronic filing, is reported on a monthly, quarterly, or annual basis. The Washington State Department of Revenue decides how frequently a taxpayer must file excise tax returns.

• Monthly returns are due on the 25th of the following month 
• Quarterly returns are due by the end of the month following the close of the quarter
• Annual returns are due on April 15 (formerly January 31)

Is excise tax different from sales tax?

Excise tax is different from sales tax, though they two tax types are similar. 

There are goods and services that are subject to excise tax but not sales tax, sales tax but not excise tax, both sales tax and excise tax, or neither sales tax nor excise tax.

Excise tax vs. sales tax

• Both excise tax and sales tax are indirect taxes. 
• There are federal excise taxes, but there’s no federal sales tax.
• All 50 states have some type of excise tax, but five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no general sales tax. (Alaska allows local sales taxes).
• Excise tax can be either an ad valorem tax or a flat, per-unit tax. Sales tax is always an ad valorem tax; it’s a percentage of the retail sales price.
• Excise tax often isn’t listed on invoices and receipts; sales tax usually is.
• Excise tax targets specific goods or services. Sales tax is broad; it usually applies to most tangible personal property, with some exceptions (e.g., clothing, diapers, food for home consumption); some states also apply sales tax to services.