Posted by Dennis Jao

Understanding the Federal Excise Tax & Its Effect on Taxpayers

Understanding the Federal Excise Tax & Its Effect on Taxpayers

Excise tax has to do with selected goods and services. The tax applies to businesses that manufacture or distribute chosen goods and services. While a consumer will not be billed for excise tax, you will pay much if you buy any goods or services subject to excise tax. Such excise tax cost is usually factored in the prices charged.

 

What is Excise Tax?

Excise tax can be imposed by any of the local, state or federal taxing authorities. Such tax, in American, is levied at the production time or time service is rendered. As a result, consumers don't see such tax as separate but factored into the cost of production. 

Excise and state taxes are the same, with some subtle differences. 

  • An excise tax applies specifically to some goods and services, while sales tax applies to all transactions, and the exception is limited. 

  • Sales tax also comes in at the point of sales while excise tax manifests at the production point. This explains why your receipt will always reflect separate sales tax, but excise tax will be factored into the price.


Example of Excise Taxes 

While not many items are subjected to the federal excise tax, it takes care of some essential expenses for consumers and businesses. At the national level, excise taxes generate the biggest revenue: fuel, airline tickets, alcohol, tobacco, health-related goods and services.

Other items and activities bearing federal excise taxes are:

  • Telephone service

  • Firearms

  • Gasoline 

  • Tanning stations, 

  • Fishing gears

  • Wagers

  • Jet fuel

  • Boat motors, etc


Sin Taxes 

A particular category of products that the government wishes to discourage its use will have excise tax. Examples are alcohol, tobacco, gambling and firearms. When an excise tax is levied in this regard, it is known as sin taxes. 

Also, excise taxes might be directed to take care of costs related to such taxed items. As a result, the excise tax on gasoline will be directed to the payment of a new highway. 

Excise tax might also be directed to activities that benefit the environment. 


Excise Taxes levied on Consumers. 

Such taxes can be classified as silent taxes, which consumers hardly realize they pay. There are times, however, that consumers pay such tax directly. Bills for your tire and telephone service, for instance, have a line for excise tax. 

At times, Uncle Sam makes retirement savers pay excise, even though they are popularly called penalties. When a retirement saver contributes more than allowed, the person pays a 6% tax. There is also a 10% penalty (or tax) on IRAs for withdrawals before 59.5 years of age. 

Individual property owners will pay excise tax on vehicles, real estate and other assets to the local and state government. Such tax, like the retirement account penalty, is known by another name.

 

Calculating Excise Taxes 

The government calculates excise tax in two ways: a fixed amount or the percentage of an exact value. 

The fixed value per item applies to items like gasoline and tobacco. For gasoline, the excise tax is placed at 18.4 cents for each gallon, no matter the price. 

The percentage approach puts the tax as a percentage of the transaction amount or value of such property.

 

Conclusion 

The three levels of government - local, state and federal government all collect an excise tax on selected goods and services. Typically high priced products like cigarettes and alcohol have excise taxes. Consumers usually do not realize they pay excise taxes since producers factor them into the price. 


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Dennis Jao
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