Excise Tax versus Sales Tax

By Robert Dumas on Tue, Oct 05, 2021 @ 11:00 AM

Soon after you start dealing with states’ sales tax, you’re going to also run into another term: excise tax.

What is excise tax? And is it different from sales tax?

A different kind of tax pie

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Excise tax – which in America dates to the nation’s earliest days – is levied on certain goods, products or services at the time of purchase. Your business is responsible for collecting excise taxes and sending them to the proper authorities but, unlike sales tax, the cost of the excise tax is usually passed invisibly on to the consumer in the form of increased prices.

Federal, state, and local governments can all impose excise taxes. Latest estimates are that at the federal level the U.S. collects about 4% of its revenue from excise taxes.

Excise taxes vary widely from state to state, but in recent years states collecting the highest per-capita excise taxes include Vermont, Nevada, Hawaii, Minnesota, and Maryland. The lowest per-capita excise tax states have included South Carolina, Nebraska, Idaho, and Arizona. “Excise tax” can also mean slightly different things in different states: Hawaii's general excise tax (i.e. sales tax), for instance, is a business privilege tax on the gross receipts of virtually any economic activity carried on in the state. 

Politicians often find excise taxes more popular to increase than either sales or income taxes, where hikes are more obvious to consumers (and voters). Collected excise monies usually flow into projects directly used by those paying the tax, such as excise taxes on gasoline being used to maintain roads and highways. Excise taxes can also be levied to deter consumers from using certain products for certain reasons, such as on tobacco or alcohol for health reasons (aka the infamous “sin taxes”).

Excise taxes do resemble sales taxes in that their wide variation can be why prices for some items are higher or lower just over state lines.

Calculating and Charging

Unlike sales tax, excise taxes are charged on specific items either as a percentage of the item’s price or by volume. The percentage method (ad valorem, Latin for “according to value”) can apply to such items as airline tickets, firearms and ammunition, tires, and some bow-hunting and fishing equipment. Invisible per-unit excise taxes might be in the consumer price of a gallon of gasoline, a bottle of alcohol, or a pack of tobacco products.

Insult to injury: Excise taxes are often subject to sales tax.

Who collects excise taxes depends on the product being taxed – though there are exceptions to complicate this process. Collection often depends on who’s buying the product, what it’s being used for, where it’s going, and even how it’s getting there. Sometimes items are exempt; in some states, for instance, fuel is exempt from excise tax if used for aviation.

Even though sales and excise tax may serve similar ends to fill jurisdictions’ tax coffers, the two tax types are very different and often need to be managed separately.

Managing your tax obligations is complex. Let an expert take sales tax off your plate. Contact TaxConnex to learn how we can help alleviate the burden of managing sales tax.  

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2011 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.