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Excise Tax Vs Sales Tas: Definition & Difference



The government at both the federal level and state collects different types of taxes in the United States. Specifically, the excise tax affects consumption of goods or services in particular. It's a tax that's very specific, often geared to a specific product, and you pay it without realizing it. Second, there is a sales tax, which applies universally to all products or services. In this guide, we will look at excise tax vs sales tax.

What Is An Excise Tax? 

A tax imposed on specific goods, services and activities is called an excise tax. There is an excise tax on goods such as motor fuel, tobacco, and other heavily regulated goods. Excise taxes can also apply to certain activities like highway usage. As a result, the consumer does not see the excise tax on their receipt since the tax is often included in the price of the product.

Taxes on excise are either assessed per unit or as a percentage of the price. In contrast to the gallon-based taxation of motor fuel, air travel is taxed based on the percentage of the ticket price. The excise tax rate is determined by both federal and state governments.

What Is The Difference Between State And Federal Excise Taxes?

Let’s look at federal excise tax vs sales tax. Various authorities impose excise taxes, including the federal government, state, and local governments. It means that, besides the federal and state governments, your county or city may also require you to pay excise taxes. 

Moreover, it should be noted that excise taxes are filed much more frequently than individual income tax returns. Every jurisdiction sets its own due dates, often every month or every quarter depending on the jurisdiction.

Form 720 can be used to report federal excise taxes on motor fuel. Taxes relating to tobacco and cigarettes are reported on Form 5000.24. Depending on the product, location, and other factors, state excise taxes must be reported in a variety of forms. State sales taxes tend to be simple, since they are levied on most purchases

What's The Difference Between Sales Tax And Excise Tax? 

Is excise tax the same as sales tax? There are two fundamental differences between excise tax and sales tax. Firstly, the excise tax applies only to specific goods. 

Unlike sales tax, which is applicable to most goods (except unprepared food and clothing), specific items that are subject to excise taxes including cigarettes, alcohol, airline tickets, tanning salons, and luxury goods are some of the most common examples.

Secondly, sales taxes take a percentage of the sale price into account. For example, if you buy a luxurious Cadillac Escalade, you will pay more sales tax than if you buy a Toyota Corolla. 45 states have a sales tax, and the percentage of tax is set by the local government. On the other hand, excise tax is a flat tax that is applied to specific items before the purchase price, some of which are imposed by state governments and others by the federal government.

Sales tax and excise tax differ in three main ways.

  • Taxes on sales are applicable to virtually everything you purchase, whereas taxes on excise are only charged on certain items.
  • Excise tax is typically applied per unit whereas sales tax is applied as a percentage.
  • On your receipt, you'll notice sales tax, whereas excise tax appears before the amount of the sale. 

Who Pays Excise Taxes?

Usually, excise taxes are included in the product's price. Consequently, the end-user might be paying excise taxes although it will not be displayed on their receipt that they are paying it.

In other words, whose responsibility is it to collect excise taxes? According to the product being taxed, it will vary. For example, distributors, wholesalers, and retailers collect tobacco excise taxes.

Usually, there is always an exception to this rule. It depends upon who is purchasing the product, what it is being used for, and where it will end up. Sometimes the tax rate changes accordingly, and sometimes it is completely exempt. It's common for fuel used in aviation to be exempt from excise tax in some states.

What Excise Tax are You Paying?

It's hard to know how much excise taxes you are paying since the cost is included in the price of the goods. Moreover, statutory excise taxes differ from state to state, which explains why taxes on gasoline and cigarettes vary so widely. In Virginia, cigarettes are subject to a statutory excise tax of $0.30 whereas they are subject to a tax of $4.35 in New York. All packs are subject to that rule. There can be significant variations in excise taxes on gasoline.

You can best find out what you are paying by searching for your state's excise tax. Each state will publish information about its excise taxes on its website or in documentation, while the IRS posts federal excise taxes online. You can keep a close eye on what you're actually paying if you know what items are affected by the shifts.

TFX's Certified Tax Accountants assist US tax filers in minimizing their excise tax payments and devise strategies to maximize their tax benefits.

Ines Zemelman, EA
Founder of TFX