Excise Tax vs. Sale Tax: How the Two Taxes Work

excise tax vs. sales tax on left, right is a dollar bill on top of a shopping cart with a versus in between

Excise taxes often take the form of so-called “sin taxes” on products such as alcohol, cigarettes, and fuel, though they also apply to a host of other goods and services. Governments use excise taxes to regulate and discourage consumption of these products, but also to generate revenue.

Some states generate revenue from sales tax, which may be imposed on top of excise taxes for certain items. The patchwork of rules can get complex, but it’s crucial small business owners be aware of the difference between excise taxes and sales taxes, because it’s their responsibility to collect and remit those taxes.

消费税是什么?

Excise taxesare imposed by governments on certain goods and services, particularly those considered detrimental to individuals or society at large—chiefly alcohol, tobacco, and fuel.

Excise tax revenue can supply funds that governments spend on state or community programs. Gas taxes, for example, help maintain existing roads and build new ones. Federal excise tax can also help account for an economic impact known as externality: People who smoke may develop illnesses that push up health care prices for everyone. Excise cigarette taxes sometimes are used to fund those increased costs for government health programs like Medicare.

In contrast to other parts of the US tax code, which is full of loopholes and breaks, excise tax is fairly straightforward. All businesses (and ultimately consumers) have to pay federal excise taxes on certain goods and services.

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How excise tax is calculated and collected

消费税通常期间实施production or at the wholesale level, though it can also be collected at the point of sale from the end consumer. In these cases, the merchant is responsible for collecting excise taxes and remitting those funds to the Internal Revenue Service (IRS) or other federal government agency. Businesses may also have to contend with excise tax levied by state and local governments.

Excise taxes come in two main forms: a fixed amount per unit, such as the 18.4¢ federal tax on a gallon of gas, and ad valorem taxes, which are a percentage of the value—for example, 10% of the cost of a pack of cigarettes. Collecting ad valorem taxes (ad valorem is Latin for “according to value”) is complex for business owners, because they vary based on the price of the product or service.

Businesses usually pass this cost directly to consumers by adding it to the prices they charge. For example, the federal excise tax on gas is 18.4¢ per gallon, and a business that wants to charge $3 per gallon may charge about $3.18 from the consumer.

Navigating state, county, and municipal excise tax is more complex for small business owners than the federal tax because each government has specific excise tax rules. Some locales charge no excise tax; others levy higher or lower rates on different items. Some use specific fixed amounts, while others impose ad valorem percentages. And still others tax items such as hotel rooms, amusement park tickets, and tanning services.

Different locations apply different definitions of a business’s “economic nexus,” meaning some type of a connection that results in a local tax liability. Often this connection includes operating physically in the state with headquarters or warehouses, but some places build their rules around details such as the number of transactions in the locale in a year. Consulting a tax professional can help you keep track of the rules and avoid penalties.

What is sales tax?

Sales tax is a consumption tax that’s typically imposed by state and local governments as a percentage of the price paid for a product or service. The US doesn’t have a federal sales tax.

How sales tax is calculated and collected

与消费税,销售税率不同states, counties, and cities. The range is 0% to 9.5%, according to theSales Tax Institute. Typically businesses pass these costs to consumers and collect sales tax at the time of purchase.

Howecommerce companiesshould handle sales tax is complicated and hotly debated. Since a 2018 Supreme Court ruling, ecommerce businesses are explicitly liable for collecting and remitting sales tax, even in locations where they lack a physical presence but have aneconomic nexus, and the definition of an “economic nexus” varies from state to state.

Like the excise tax, sales tax generates revenue for the government and all businesses must collect it. However, collection and compliance are complex for small businesses because of the patchwork of regulations and tax rate differences.


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Excise tax vs. sales tax: What are the similarities and differences?

While excise tax and sale tax are both taxes added to the price of goods, there are differences business owners should know if they are to properly collect them.

Similarities between excise and sales tax

Excise taxes and sales taxes both fall on specific goods or services. Businesses later send these payments to the government, which record them as tax revenue to fund various programs.

The rules for both sales tax and excise tax can vary widely across states, counties, and municipalities, which may make it complex for ecommerce businesses to stay in compliance and avoid penalties.

Differences between excise and sales tax

  • When they apply.Excise taxes apply to specific goods or services, particularly those deemed harmful to society, such as alcohol, tobacco, and fuels. Sales tax is typically applied to all individual transactions, regardless of the goods sold, meaning it applies to many different types of goods. (There are some exceptions to this depending on the state. In New York, for example, grocery items are exempt from sales tax.)
  • How they are calculated.消费税通常是一个具体的数量,这样的s an 18.4¢ per gallon tax on gasoline (though sometimes they are a percentage), and sales tax is almost always a percentage of the purchase price.
  • How they are collected.Excise taxes are collected at the point of manufacturing or wholesale, while sales taxes are typically collected at the point of sale to the end customer.
  • Why do they exist?Sometimes excise taxes are called sin taxes because part of their purpose is to discourage behaviors detrimental to individuals or society or to offset the consequences of that behavior (though they also generate revenue). Sales tax is chiefly designed to raise funds for municipal and state governments.
  • Who charges them?The US federal government and many state and local governments collect excise taxes. While state and local governments also impose sales tax, there is no US national sales tax.

Excise tax vs. sales tax FAQ

Are there any exemptions to excise tax?

Yes. Exemptions can vary across localities, as well as across the categories of products and services in question. However, some common exemptions apply to fuels used in machinery for farming and fishing; certain groceries such as milk, bread, fruits, and vegetables; and some medicines and medical equipment.

Exemption from some excise taxes may apply to certain groups or organizations, including veterans, low-income households, and charitable organizations.

Can excise tax and sales tax be combined on the same purchase?

Yes, excise and sales taxes may apply to a single purchase, depending on the type of product and the location of the purchase. Alcohol, tobacco, and gasoline incur a federal excise tax, while many state and local governments also collect sales taxes on purchases.

That said, excise taxes can apply to some purchases but not sales tax, and vice versa, depending on the item and location in question.

What are the two types of excise tax?

Excise taxes come in two basic forms: specific and ad valorem, meaning based on value. The 18.4¢ federal tax on a gallon of gasoline is a specific excise tax. A percentage rate tax—say 10% of the cost of a pack of cigarettes—is an ad valorem tax.

Which 3 items generally have an excise tax collected on them?

  1. Alcohol
  2. Tobacco products
  3. Fuels
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