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What Are The Major Federal Excise Taxes, And How Much Money Do They Raise?

October 19, 2023
Bill Kimball

There are three main differences between sales tax and excise tax. From a simple definition to calculating excise tax and everything in between, we’ve compiled the ultimate guide to excise tax. Reliance on income taxes versus consumption taxes is one big difference between U.S. revenue sources and those of other countries.

Excise Tax Examples

Excise taxes are type of indirect tax levied on specific goods, services and activities. Products like motor fuel, tobacco, and other heavily regulated goods are subject to excise taxes. Certain activities like highway usage can be subject to excise tax too. Often the cost of the tax is included in the cost of the product, meaning the end consumer doesn’t see the excise tax on their receipt.

Excise Taxes On Retirement Accounts

Individuals don’t directly pay excise taxes to the federal government, but these funds come out of their pockets just the same. The tax is typically included or factored into the retail price of the product or service that’s purchased.

Excise taxes are usually waived or refunded on goods being exported, so as to encourage exports. Smugglers and other tax evaders will often seek to obtain items at a point at which they are not taxed or taxed much lower and then later sell or use them at a price lower than the post-tax price in their jurisdiction. A specific excise tax is one that’s priced per unit instead of being percentage-based. Because this tax applies to a specific unit of a product, such as one container or one gallon, it doesn’t fluctuate with the price of the product. For example, beer has an excise tax of $18 per barrel , paid by the manufacturer. Other examples of specific excise taxes include gasoline and cigarettes.

How To Calculate Excise Tax

In the days before steamboats, canals, railroads, etc. bulky cargo could not economically be shipped far. The whiskey excise tax collected so little and was so despised that it was abolished by President Thomas Jefferson in 1802.

  • Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site.
  • Hamilton thought it was important to start the U.S. federal government out on a sound financial basis with good credit and a regular, easily collected source of revenue.
  • The IRS and Congress abolished and reinstate excise taxes on whiskey and other goods at various times.
  • Bankrate.com does not include all companies or all available products.
  • At Bankrate we strive to help you make smarter financial decisions.
  • A federal excise tax is usually collected from motor fuel sales, airline tickets, tobacco, and other goods and services.

GoCardless is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number , for the provision of payment services. Learn more about how you can improve payment processing at your business today. Brought to you by IGEN, your strategic partner for data preparation, compliance & reporting automation, and tax productivity tools & insights. Taxation refers to the act of levying or imposing a tax by a taxing authority. Income taxes began in 1913 with the passage of the 16th Amendment.

Excise Tax

Not to mention the complex rules that are applied to determine if a product is taxable in a jurisdiction and determine the correct product category. A consumption tax is a tax on the purchase of a good or service; or a system taxing people on how much they consume rather than what they add to the economy . Average excise % is calculated by dividing excise revenue by total revenue. On 18 April 2005, Customs and Excise was merged once more with the Inland Revenue to form a new department, HM Revenue and Customs . The enormous contrast between the powers of officers of the Inland Revenue, and those of Customs and Excise, initially caused several difficulties in the early life of the new organisation. Many of the monitoring and inspection functions, and corresponding powers, were later split off to form a new UK Border Agency, while the residual organisation is now merely responsible for the financial aspects of collection.

Who will pay excise taxes?

Excise taxes are primarily taxes that must be paid by businesses, usually increasing prices for consumers indirectly. Excise taxes can be ad valorem (paid by percentage) or specific (cost charged by unit).

All of these taxes lead to avoidance behaviour that had a substantial impact on society and architecture. People deliberately bricked up windows to avoid window tax, used much larger bricks to reduce their liability for brick tax, or bought plain paper and had it filled in later to avoid wallpaper tax. Some poor people even forced themselves to live in cold dark rooms in order to avoid paying these taxes. “An excise tax is hereby imposed on each patron who uses the prostitution services of a prostitute in the amount of $5 for each calendar day or portion thereof that the patron uses the prostitution services of that prostitute.” An excise is typically heavier, accounting for a higher fraction of the retail price of the targeted products. Excise taxes can be classified as either ad valorem or specific, where one is a percentage-based tax and the other is per unit.

Excise Tax Exemptions

This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products. The Affordable Care Act legislation passed in 2010 contained several health-related excise taxes.

  • For example, excise taxes on gasoline help pay for new highway construction.
  • Excise tax revenue is either transferred to the general fund or allocated to trust funds dedicated to specified purposes.
  • Sports wagering such as you might enjoy online are subject to federal excise taxes as well.
  • Sometimes the tax rate changes based on those factors, sometimes it’s exempt from the tax.
  • Products like motor fuel, tobacco, and other heavily regulated goods are subject to excise taxes.
  • Samuel Johnson’s A Dictionary of the English Language defined excise in 1755, as “A hateful tax levied upon commodities, and adjudged not by the common judges of property, but wretches hired by those to whom excise is paid.”

For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline. The first federal budget was about $4.6 million and the population in the 1790 U.S. Census was about four million, so that the average federal tax was about $1/person per year. At that time, tradesmen earned about $0.25 a day for a 10- to 12-hour day so federal taxes could be paid with about four days work. Paying even this was usually optional, as taxed imports listed on the tariff lists could usually be avoided by buying domestic products if desired.

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Unlike sales taxes, excise taxes only apply to specific items or services. Sales taxes generally apply to all transactions, with limited exceptions. Also, sales tax is always at the point of sale, whereas excise taxes are more often at the point of production.

Excise Tax Examples

When businesses e-file, they get confirmation that the IRS received their form. To electronically file, business taxpayers will have to pay the provider’s fee for online submission. Excise taxes on tobacco raised $14.5 billion in fiscal year 2015. Historically, these were collected by the Board of Excise, which was subsequently combined with the Inland Revenue . In this combined form, Customs and Excise was responsible for managing the import and export of goods and services into the UK, and its officers wielded greater powers of access, arrest, and seizure, than the Police.

The first excise tax levied in the U.S. was on the manufacture of whiskey in 1791. In the early years of the Republic, excise taxes served as a revenue tool related to wars and economic downturns. During the Great Depression in 1934, excise tax revenues made up almost half of the federal government’s total revenue and three times more than the individual income tax. Today, there are federal excise taxes on motor fuel, tobacco, and alcohol, among other goods, services, and activities, in addition to a wide range of state excise taxes. In contrast, excise taxes are sales taxes applied to particular products.

What is VAT example?


Let us take an example to understand the calculation of VAT properly. Assume that Raju is the owner of a hotel. He bought raw materials worth ₹ 1, 00,000 and an input tax of 10% was imposed on raw materials.

Compared with other taxes, excise taxes make up a fairly small amount of state revenues, because they lack a broad base and are levied instead on only a few specific items like tobacco, alcohol and gasoline. In part because of its narrow base, the tobacco tax in particular has become a popular source of revenue. Unlike a general sales tax, excise taxes are applied usually on a per-unit basis rather than as a percentage of the purchase price. Both the federal and state governments levy excise taxes on goods such as alcohol, motor fuel, and tobacco products. The laws of the federal government and of some state governments impose excises known as the income tax. Even though federal excise taxes are geographically uniform, state excise taxes vary considerably. Taxation constitutes a substantial proportion of the retail prices on alcohol and tobacco products.

And after a 2018 Supreme Court ruling repealed the federal sports gambling ban the IRS emphasized that sports wagers, like other bets, are subject to federal excise taxation. Likewise, they may be applied as a specific amount per item rather than as a percentage of the selling price. Excise taxes may go by other names, such as selective sales taxes or differential commodity taxes. Excise and sales taxes also have a very different purpose for governments. Sales taxes are a major source of revenue for state governments. In fact, after intergovernmental transfers from the federal government, sales taxes make up the next largest source of state government revenue. Health-related excise tax revenue totaled $12.0 billion in 2019, 12 percent of total excise receipts.

These taxes are usually included in the price of the item, not listed separately like sales taxes usually are. To minimize tax accounting complications, the excise tax is usually imposed on quantities like gallons of fuel, gallons of wine or drinking alcohol, packets of cigarettes, etc. and are usually paid initially by the manufacturer or retailer. The federal government collects all this money and deposits about 40% of it into its general fund. Taxes on alcohol, tobacco products, indoor tanning, and health insurance are a few of the taxes that go to the general fund. The other roughly 60% goes toward trust funds dedicated to paying for transportation, including highway and airport improvements and maintenance, and health-related spending. Some of these taxes are levied per unit, such as a flat fee per gallon of gas or a pack of cigarettes, but others are “ad valorem” excise taxes. They charge a percentage of what you spend rather than a flat fee.

Affordable Care Act Excise Taxes

The cost of excise taxes is usually factored into the cost of the product. So the end-consumer might be paying for excise taxes but they won’t see it on the receipt. Excise taxes can be levied by a variety of entities including federal, state and local jurisdictions. That means you may have to pay excise taxes to both federal and state agencies but also to your county or city. All levels of government – federal, state and municipal – use excise taxes as an additional means to collect taxes from consumers. Also, a 50% excise tax penalty is charged when investors do not take the mandatory required minimum distributions from certain retirement accounts. Required minimum distributions are mandatory after age 72 (for anyone who reaches age 70.5 in 2020 or later) for traditional IRA accounts and several other tax-deferred retirement savings plans.