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Understanding The Basics of Excise Tax

Understanding The Basics of Excise Tax

Excise taxes can be defined as internal taxes levied on the sale of particular goods and services like fuel, whiskey, alcohol, and tobacco. It is an indirect tax because the customer does not pay it directly. Instead, the supplier or producer pays it and includes it in the product's final price. 

The state, local and federal government imposes excise tax. It can either be a percentage of the entire product cost or a fixed amount. For instance, gasoline and tobacco have their excise tax as a fixed amount, while a car's excise tax is a percentage of the total cost. 


What is Excise Tax?

For people who sell products with the excise tax, the business owner must collect and remit the tax to the right channels, which could be federal or state. Excise taxes are usually applied in two forms:


Percentage of price: The excise taxes with this method are applied as a percent of the total product or service. As of 2018, the domestic flight has an excise tax of 7.5% of the ticket price. 


Per Unit Tax: This method involved charging taxes on every unit of items sold. Every gallon of gasoline sold, for instance, gets an excise tax. 

While this does not negatively affect the seller's profit, it shoots up the overall price, which affects the demand for the product. 


Example of Excise Tax 

Here are some sample excise tax set by the federal government 

  • Diesel and gasoline – per unit excise tax

  • Ammunition and firearm - per unit excise tax

  • Alcohol - per unit excise tax

  • Airline flight ticket - the percentage of price excise tax

The reason behind excess tax varies, although the government uses some to fund future capital projects. For instance, the excise tax on flights helps improve the airport.

Business owners should note that both the federal and state charges excise tax, so checking the requirement with one's condition is essential.


Who pays Excise tax?

Interestingly, many customers neither know nor realize that they pay excise tax. This happens because the final product cost carries the tax – it is not listed separately.

For people with a business where excise tax is mandatory, the business owner is responsible for collecting the tax and remitting it to the government at the appropriate time. Business owners need to file Form 720, which has several types of federal excise taxes.  Business owners must list the various classes they collected in the form. Also, there could be filing requirements with different states.

Excise taxes, however, come with exceptions in some cases. In some situations, religious organizations, nonprofit firms, and emergency services get an exemption from paying the excise tax. 

Organizations in such a category can claim the exemption by having a record of their expenses for which they paid excise taxes. Form 8849 can help to achieve this. 


Excise Tax and Sales Tax: Any Difference

Businesses collect sales tax from customers for the sale of some goods and services and pay the government. Excise tax and sales tax differs in two significant ways, as explained below.

  1. The excise tax applies to selected goods and services classified as harmful or primal to specific health challenges. Sales tax, on the other hand, applies to a variety of goods.

  2. Sales tax is calculated as a percentage of the sales price. This explains why you will pay more as sales tax for buying a private jet as compared to buying a utility vehicle. The local and state government in the US sets the percentage of sales tax. 


Excise tax, on the other hand, is classified as a per-unit tax that comes before the sales price for some selected commodities by the local, state, and the federal government. In 2009, for instance, New York's state-imposed $4.39 on every 20 packets of cigarettes no matter the price of a cigarette pack. 

Businesses need to file Form 720 at the end of every quarter to send in their excise tax.


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