how an excise tax works
excise taxes are primarily for businesses many of them are paid by merchants who then pass the tax on to consumers through higher prices merchants pay excise taxes to wholesalers and consider them in product pricing which increases the retail price overall 2 as such consumers may or may not see the cost of most excise taxes directly but there are some excise taxes that are paid directly by consumers including property taxes and levies on certain retirement account activities federal state and local governments have the authority to institute excise taxes while income tax is the primary revenue generator for federal and state governments excise tax revenue also makes up a small portion of total revenue 34excise taxes are primarily business taxes they are separate from other taxes that corporations must pay such as income taxes businesses charging and receiving excise taxes are required to file form 720 federal excise tax return on a quarterly basis and include quarterly payments business collectors of excise taxes must also maintain their obligations for passing on excise taxes to state and local governments as required merchants may be allowed deductions or credits on their annual income tax returns related to excise tax payments 5excise taxes can fall into one of two categories in some cases governments levy excise taxes on goods that have a high social cost such as cigarettes and alcohol these types of excise these taxes are sometimes called sin taxes because the good being taxed has a reputation for being sinful or with negative consequences associated with it 1the largest revenue producing excise taxes in the u s come from motor fuel airline tickets tobacco alcohol health related goods and health related services 2ad valorem excise taxesad valorem is a latin phrase that literally means according to value 6 an ad valorem tax is charged on a percentage basis this results in an excise tax that is based on the value of the product or service for example the internal revenue service irs levies a 10 excise tax on indoor tanning services 7 this means that if a tanning salon charges 100 for a tanning session it must pay the irs 10 in excise tax other types of ad valorem excise taxes include firearms 10 airline tickets 7 5 and heavy trucks 12 8 property taxes can also be considered a type of ad valorem excise tax specific excise taxesspecific excise taxes are a set tax or fee added to a certain product on a per unit basis some examples of federal specific excise taxes as of oct 2023 include small cigarettes 1 01 per pack of 20 pipe tobacco 2 83 per pound beer 3 50 for the first 60 000 barrels cruise ship passengers 3 per passenger and gasoline 0 183 per gallon 98sin taxes on targeted goods like beer and alcohol will often be taxed at the federal level and also taxed again by the state making the cost of these items higher for example new york has a specific excise tax of 4 35 per cigarette pack of 20 10 combining this with the federal tax of 1 01 makes the excise taxes alone 5 36 these taxes have a considerable impact on the consumer the irs provides guidance on excise taxes in publication 510 excise taxes on retirement accountsexcise taxes are also charged on some retirement account activities many people are familiar with these taxes as penalties a 6 excise tax is applied to excess individual retirement account ira contributions that are not corrected by the applicable deadline a 10 excise tax penalty applies to distributions from certain iras and other qualified plans when an investor makes withdrawals before age 59 1112also a 25 excise tax penalty is charged when investors do not take the mandatory required minimum distributions rmds from certain retirement accounts though this tax is reduced to 10 if the missed distribution is taken before the end of the correction window the correction window starts on the date the penalty is imposed usually january 1st after the year you missed the distribution 13 the window ends on the earliest of as of january 1 2023 rmds are mandatory starting at age 73 for owners of traditional ira accounts and several other tax deferred retirement savings plans 14who pays excise taxes excise taxes are imposed on certain goods and services such as gasoline and alcohol these taxes are paid directly by businesses this tax is often passed on to the consumer who may or may not be aware that they re paying it to the merchant because it s included in the price this is common in the fuel industry where companies charge excise taxes through the price you pay at the pump 