How is an excise tax different from a sales tax?
You are probably already familiar with sales tax, but you may be less familiar with excise taxes. This article will review the difference between sales and excise taxes to help you better understand where your money is going.
What is sales tax?
Sales taxes are levied on most retail sales, or the goods and services you buy day-to-day. This includes things like a cup of coffee, your car, and your clothes. It also includes services like repairs and dry cleaning. Certain “essential” goods and services are exempt from sales tax, such as rent, utilities, groceries, and medicine.
Where does the money from sales tax go?
States usually levy sales tax, and the money funds state agencies and services. Depending on your jurisdiction, there may also be a local sales tax that goes to fund services in your municipality. There is no federal sales tax.
Different states have different sales tax rates. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) don’t levy a state-wide sales tax at all.
How are sales tax calculated?
To calculate sales tax, you simply multiply the state (and local) sales tax rate by the retail price of the goods. For instance, if you live in Massachusetts, where the state sales tax is 6.25%, and you bought a t-shirt for $10.00, you would pay 62.5 cents in tax. This means you would pay a total of $10.62.
Who pays excise taxes?
Purchasers are responsible for paying the tax to sellers, while sellers are responsible for collecting and paying the tax to the state or local government. How often sellers file sales tax depends on the volume of commerce; you may need to file monthly, quarterly, or annually.
What is excise tax?
Unlike sales tax, which applies to most retail sales, excise taxes (excise duties) apply only to certain purchases. The federal, state, and local government can all levy excise taxes. However, in general they apply to gasoline, alcohol, and tobacco. Other common examples include:
- airline tickets
- cruise ship passages
- short-term car rentals
- firearms and ammunition
- indoor tanning
- administrative processes, like vehicle registration
How is excise tax calculated?
Often, excise taxes are included in the price of a good or service, meaning that the customer doesn’t see it on the receipt.
Also unlike sales tax, excise taxes can be levied either per unit good or as a percentage. For instance, airline ticket excise tax is usually calculated as a percentage of the overall ticket price. Meanwhile, gasoline is often taxed per gallon. To calculate the excise tax for a particular good, you have to factor in both federal and state excise tax rates for that good.
Where does the money from excise tax go?
Excise taxes often go to certain projects or funding pools. For instance, the gas tax funds highway maintenance, while tobacco excise taxes go to fund cancer research. State and local excise taxes may go to fund specific projects or services.
Who pays excise taxes?
Often, it is the importer, manufacturer, or retailer who has to pay the excise tax, although they can pass the cost of the excise tax along to consumers. Businesses that are subject to certain federal excise taxes must pay the excise tax to the IRS and file Form 720 every quarter. They may also need to file state and local excise taxes, usually every month.
Recap: how is an excise tax different from a sales tax?
- applies to most goods and services (except essentials)
- levied by state and sometimes local governments
- levied as a flat-rate percentage of the retail price
- can be seen on the customer receipt
- applies to only specific goods and services
- can be levied by federal, state, and local governments
- calculated either as a percentage or per unit
- often included in the price (not visible on the receipt)