What is an excise tax?

A consumption tax or excise taxis a tax on specific goods or services in the purchase, such as fuel, tobacco and alcohol.

Excise taxes are national taxes that are imposed within a government infrastructure, rather than international taxes that are imposed across a country’s borders. A federal excise tax is typically collected from the sale of fuel, airline tickets, tobacco, and other goods and services.

Consumption taxes go mainly to businesses. Consumers may or may not see the cost of excise duties.

Many consumption taxes are paid by merchants, who then pass them on to consumers through higher prices. The merchants pay the special taxes or excise tax wholesalers and take them into account when calculating product prices, which increases the retail price.

How does an excise tax or special consumption tax work?

Federal, state and local governments have the authority to institute excise taxes. But income tax is the main revenue generator for the federal and state governments.

Consumption taxes are primarily a business taxseparate from other taxes that businesses must pay, such as income taxes.

Companies that collect and receive excise taxes must file Federal Excise Tax Return Form 720 quarterly and also include quarterly payments.

Excise tax collectors must maintain their obligations to pass through excise taxes to state and local governments as needed.

Merchants are allowed to make deductions on their annual income tax returns that are related to excise tax payments.

Key information:

  • Excise taxes are taxes required on specific goods or services such as fuel, tobacco and alcohol.
  • They are mainly taxes that must be paid by companiesusually by indirectly increasing prices for consumers.
  • The excise taxes can be ad valorem (paid by percentage) or specific (cost charged per unit).
  • Some excise tax can be demanded directly from the consumersuch as property taxes and excise penalties on certain retirement account activities.

The excise tax or special taxes can be of two categories: ad valorem and specific..

Ad valorem excise taxes are fixed percentage rates that are applied to certain goods or services. Excise taxes are flat dollar amounts that apply to certain purchases.

In some cases, governments apply special taxes on goods that have a high social cost, such as cigarettes and alcohol, and for this reason, these taxes are sometimes called sin taxes.

The largest revenue-producing excise taxes in the US come from motor fuel, airline tickets, tobacco, alcohol, and health-related goods and services.

In 2017, excise taxes represented $83.8 billion of federal government revenue and 2.5% of total federal tax revenue.

Excise tax Ad Valorem

Ad valorem is a Latin phrase that literally means “according to value.” An ad valorem tax is charged by percentage. This results in a special tax or excise tax that is based on the value of the product or service.

For example, him I.R.S. (Internal Revenue Service) charges a 10% excise tax on tanning booth services. This means that if a tanning salon charges $100 for a session, you must pay the I.R.S. $10 consumption tax. Similarly, if the company charges $200 for tanning, it must pay an excise tax of $20.

Other types of ad valorem excise taxes include firearms (10%), airline tickets (7.5%), and heavy trucks (12%). Property taxes can also be considered a type of special ad valorem tax.

Excise specific taxes

Specific excise taxes are a fixed tax or fee that is added to a certain product per unit.

Some examples of federal excise taxes include cigarettes ($1.01 per pack of 20), pipe tobacco ($2.83 per pound), beer ($7 for the first 60,000 barrels), cruise ship passengers ($3 per passenger), and gasoline ($0.183 per gallon).

Taxes on “sin” like beer and alcohol will often be taxed at the federal level and also heavily taxed by the statemaking the cost of these items higher.

For example, New York has an excise tax of $4.35 per pack of 20.6 cigarettes. If you combine this with the federal tax of $1.01, the excise tax is $5.36. These taxes have a considerable impact on the consumer.

Excise tax on retirement accounts

Excise tax is also levied on some retirement account activities. Some people know these taxes as penalties.

A special tax is applied 6% excess contributions of individual retirement accounts (GO TO or Individual Retirement Account) that are not corrected by the applicable due date. A penalty of 10% tax consumption applies to distributions from certain IRAs and other qualified plans when an investor makes withdrawals before the age of 59.5.

In addition, there is a charge 50% excise tax penalty when investors fail to take required mandatory minimum distributions from certain retirement accounts. Required minimum distributions are required after age 70.5 for traditional IRAs and other tax-deferred retirement savings plans.

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