What Is Excise Taxes? How To Pay It In USA?

excise tax

In simple words, an excise tax is a legislated tax on a specific service or good like alcohol, tobacco, fuel, and others. Before, we discussed the sales tax, which is a State tax. That means in the same country. There will be different sales taxes. But here, the excise tax is an international tax that is under a government infrastructure.

And it is totally different from an international tax across country borders. The excise tax is a federal tax, and there are a couple of things that are under the excise taxes. So what are excise taxes? Some examples are airline rockets, fuel sales, tobacco, and other services and goods. You can say federal excise taxes also.


How Excise Tax Works?

How Excise Tax Works

The tax is completely for business people. And mainly merchants pay this tax. But how do they collect this tax amount? Ultimately, the consumers pay these taxes. Let me give you an example. Suppose there is an item that your company sells. Your team has decided that the price of the product will be $5. And if it is $5, then your company can earn a nice profit. 

But after all the taxes, you see that there will be no profit at all, and after selling it, there will be a $1.75 extra payment for one item you need to pay. So, you make the price $10 per item. So, in that case, consumers have to pay a higher price, but the item is the same, and the cost is the same. 

First, the merchants pay the tax to the wholesalers, and ultimately the retail price of the product increases. But, when it comes to the consumers, they have no idea that the price of the product is high. But there are some cases where consumers know that they have to pay excise taxes. One of the most common examples is property taxes. 

All local, state, and federal governments have the authority regarding the institute excise taxes. However, you should also know that the primary source of state and deferral governments is the excise tax. And it also makes a portion of revenue. As you already know that this is a business tax. So, consumers have to pay excise taxes indirectly by buying services and goods.

Two Categories Of Excise Taxes

There are mainly two categories of excise taxes. 

1. Ad Valorem Taxes

Ad Valorem Taxes

When there are fixed percentage rates of taxes on particular services or goods, that is called the Ad Valorem Excise Tax. This is a Latin word it means according to value. So the tax is applied based on the value of a service or product. 

For example, for indoor training services, there is a 10% excise tax by the Internal Revenue Service (IRS). Suppose a tanning salon is valued at $100. So, the excise tax will be $10. And when it is off-season, the company makes the price $200. Then there will be a $20 tax.

2. Specific Excise Taxes

Specific Excise Taxes

This tax is applied to certain products. And also there are products which have per-unite basis. So it’s a little complicated, don’t worry. Here is an example. This tax is applied to products that are numbers or units.

  • Cigarettes- $1.01 (Pack of 20)
  • Pipe Tobacco- $2.83 (Per Pound)
  • Beer- $7 (Per 60,000 barrels)
  • Gasoline- $0.183 (Per gallon)
  • Cruise Ship Passengers- $3 (Per Passenger)

Retirement Accounts And Excise Taxes

Other than goods, products, and services, there is an area where excise taxes are also applied. The tax is applied to retirement account activities. Most retirement accounts come under the excise tax. But most people know about the penalties for taxes. When it comes to IRA (Individual Retirement Account), there is a 6% tax that applies.

And if someone does not pay the excise tax in time, then there will be a 10% tax penalty. Also, there is another scenario when an investor takes all their money from the retirement account before the age of 59 ½. Then this 10% penalty tax is also applied.

Federal Excise Tax

Federal Excise Tax

First of all, the federal government is responsible for charging taxes on products and goods. There is no money involved in the price when it comes to the merchants. It means that the consumers don’t have to think about the taxes by themselves as they are indirectly paying the taxes through the higher price of the products. So, do not think that this tax is like the income tax

Frequently Asked Questions (FAQs):-

Here are some interesting questions and answers.

Q1. Who Pays Excise Taxes?

Ans: The excise tax is a kind of business tax. So, most merchants and businesses pay excise tax. And later, the tax is added to the services or products. There are some cases where consumers pay taxes from the retirement fund or real estate. But there is good news. You don’t need to pay this tax directly.

Q2. How Are Excise Duties Paid?

Ans: There are some people or businesses where there is a need to pay excise duties. One example is when there is an authorized warehouse keeper where goods or products are received, dispatched, stored, processed, or produced. It is just an example. 

Q3. Who And When Should Excise Tax Be Paid?

Ans: There are certain services and goods where excise taxes need to be paid. Some examples are alcohol, gasoline, tobacco, and others. Businesses pay these taxes directly. And businesses increase the goods and product prices, so consumers indirectly pay the taxes indirectly. And most of the time, the taxes are included in the product price.

To Conclude 

I hope now you have understood the excise taxes and how to pay them. Suppose you are running a small business and want to expand the business further. Then you must know everything about this tax. Otherwise, you may have to see your business fall. Because the taxes will tell you how much you should take for your products and goods. 

If you have any more queries, then feel free to ask in the comment section below.

Read Also:

What Are The Types Of Taxes In USA? Full Guide

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Anirban Mallick is passionate about writing since his early age. He comes from Kolkata, which is famous for its rich heritage. This young person loves to write about sports, cryptocurrency, marketing, gaming, and other topics. This is why he loves to call himself the “Jack of all Trades.” He has a PG Diploma in Advertising and Public Relations from IIMC, Delhi. In his free time, he loves to write stories, read books, watch movies and play outdoor games, mostly football.


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