What Is an Excise Tax and How Do You Estimate It?
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- What is an excise tax?
- Is excise tax the same as sales tax?
- Do I have to pay excise taxes?
- How to estimate excise tax
For products and services you pay for, there are taxes that you see on the invoice or receipt. There’s tax on your cell phone bill and on the device itself, tax on a new home that you build, and many other things. Excise tax is also imposed on plenty of things you buy or use, whether you know it or not.
What is excise tax, who pays it, and how do you know how much it is? Here’s what you need to know about excise tax.
What is an excise tax?
Like most other taxes, excise tax is levied on goods and services. However, it isn’t applied like other taxes as it’s charged to the business rather than the end consumer. Then the business is required to collect the applicable excise tax amount from the consumer by adding it into the price of the product or service. Typically, you aren’t even aware that the tax has been worked into the price you pay.
Types of excise taxes
There can be excise tax charges at federal, state, and local government levels. There are two ways that excise tax can be charged:
Percentage of total cost. Some services or items you’d purchase are assessed an excise tax based on a percentage of the item price. If the retail price of an item arriving at a store is $10 and the excise tax rate is 5%, the store will charge $10.50.
Fixed rate. Other times, excise taxes are charged at a flat rate per item. For example, a $1 excise tax may need to be collected whether the retailer charges $10 or $20 for the same item.
It’s also possible to use a blend between flat rate and percentages.
Examples of excise tax
What are excise taxes charged on? There are almost innumerable goods and services that are taxed at the time of manufacture rather than at the time of sale.
Some federal excise tax examples include:
- Airline tickets
- Gasoline, diesel, and other vehicle fuels
- Medical devices and services
States can choose which items to assess their own excise tax also, so you could be paying it more than once per product or service.
Is excise tax the same as sales tax?
Sales tax is not the same as excise tax. In fact, you might be paying both types of tax on one item! Excise tax is collected from the business rather than the consumer, whereas sales tax is charged at the point of sale.
Another differentiator is that excise tax is typically only charged on items that are harmful to your health or can be linked to specific health concerns.
Do I have to pay excise taxes?
You may not realize it, but you probably have paid excise taxes rather often. If you own a car, you paid excise tax on the purchase and you pay excise tax on every gallon of gas you buy. If you travel, excise tax is built into the cost of plane ticket, rail travel, and cruise ship costs.
Because you don’t see a separate line item after the sale price, you probably don’t see it detailed on an item other than a vehicle purchase. Rest assured, you’ve paid excise tax.
How to estimate excise tax
When you purchase a vehicle, you may be required to pay excise tax to your state. The tax rate varies depending on your vehicle age and its MSRP, in most cases. You need to check your local DMV to determine the rate at which motor vehicle excise tax is calculated.
For example, Maine uses a prorated system for excise tax on cars that reduces annually from new to the sixth year. Maine charges $24 per $1,000 of vehicle value when it’s in the first year of ownership, then reduces to $4 per $1,000 by the sixth year.