An excise tax is an indirect tax, usually paid by the manufacturer or retailer of the product, then passed along in the price of the product to the consumer. For instance, goods such as cigarettes and alcohol are often taxed by the state or local authority, at a flat rate per item. This tax is added into the retail price, making it somewhat of a hidden tax, ultimately paid by the end user of the product. To explore this concept, consider the following excise tax definition.
Definition of Excise Tax
- A tax on certain things that are made, sold, or used within a country.
- A tax, similar to a sales tax, imposed on some goods, especially luxuries and cars.
17th century England
What is Excise Tax
In the United States, excise taxes are levied at the federal, state, and local levels of government. Such taxes are determined individually, both according to the jurisdiction imposing the tax, and by the item, or class of items, to be taxed. Consumers do not pay excise taxes directly to the government. Rather, the manufacturer, distributor, or retailer of the item is taxed, and that tax amount is built into the retail price.
As an example of excise tax, a state may impose a $2.00 tax on each bottle of wine sold in the state. If the retail price of the wine is $10.00, consumers will be charged $12.00 per bottle, without listing the extra $2.00 as a tax. This is separate from any sales tax due on the purchase, which is calculated as a percentage of the total retail price, which includes the excise tax.
History of Excise Tax in the U.S.
Excise taxes imposed by the British monarch were but one catalyst to the revolution that spawned a new nation. Although the American colonists had been riled to great anger regarding taxes, the new leaders understood the need to start the new nation off on a secure financial footing. The first federal taxes imposed by the newly elected United States Congress were tariffs and excise taxes on imported goods, approved by the Tariff Act of July 4, 1789.
In an effort to encourage consumers to buy domestic products, Congress set low excise taxes on certain imported goods, such as rum, whiskey, tobacco, and refined sugar. These taxes accounted for the largest portion of federal income, even though they could generally be avoided by simply buying the same products produced domestically.
Although the issue of taxes has been debated throughout the years, the right to tax the people is granted by the U.S. Constitution, Article I, Section 8, which reads:
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…”
Types of Excise Tax
While excise taxes are passed on to consumers, they are imposed in such a way that the price for the item when it is sold to consumers is not considered in calculating the amount of tax. Most commonly, excise taxes in the U.S. are attached to the sales of large quantities of specified items, such as hundreds of gallons of gasoline or diesel fuel, and large quantities of liquor, beer, wine, and cigarettes. Excise taxes may also be imposed on such items as airline tickets.
The tax imposed is calculated on the large quantity purchased by the retailer, who then calculates how much each unit needs to be sold for in order to make a profit.
Alan’s Gas & Shop purchases 1,000 gallons of regular unleaded gasoline, to be delivered by truck, and pumped into its underground tanks. The distributor charges Alan $2.00 per gallon, and Alan will charge customers $2.90 per gallon in order to make a profit.
There is a federal excise tax on the fuel of $50 per 1,000 gallons, which is charged to Alan on the bulk purchase. The tax averages out to $0.05 per gallon, which Alan adds to his retail sales price. In this example of excise tax, customers who arrive at the pumps will be charged $2.95 per gallon.
Certain types of taxes that are technically excise taxes, are not necessarily considered so in the U.S. These include value added taxes, transfer taxes, and income taxes.
Difference Between Sales Tax and Excise Tax
The difference between sales tax and excise tax is primarily in the way they are administered. An excise tax applies only to certain specific goods, and, because the tax is included in the retail price, most consumers don’t even realize they are paying it. Sales tax, on the other hand, applies to nearly everything consumers purchase in the U.S., and the amount of tax is calculated as a percentage of the purchase price. Sales tax is clearly listed on the receipt, where it is added to the retail price, to arrive at the total amount the consumer will pay.
An excise tax is most often a set amount per unit sold, such as a $1.00 excise tax on every pack of cigarettes sold, regardless of their retail price. Sales tax is based on a percentage of purchase price, so a man who buys a Honda Civic will pay a lower sales tax than the woman who buys a BMW 5 Series. There may also be an excise tax on the purchase of an automobile.
Federal Excise Tax
The IRS defines federal excise tax as “taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product,” and taxes on “activities, such as on wagering or on highway usage by trucks.” Federal excise tax is explained by the IRS on its website. Here, consumers can obtain excise tax forms and publications.
Each state may impose its own excise taxes on certain items. While the IRS publishes federal excise tax information, information on state taxes must be obtained on each state’s tax authority website.
Enforcement of Excise Tax
The Internal Revenue Service (“IRS”) is responsible for collecting federal excise taxes, which amount to about $70 billion in revenue each year. Avoiding excise taxes is a federal crime, and the IRS is authorized to investigate and prosecute people who fraudulently avoid payment of excise taxes. In the case of a corporation dodging these taxes, the IRS may sue the company, and if any of the corporate officers are found to have intentionally committed the fraud, they may be held criminally liable.
On another front, the Bureau of Alcohol, Tobacco, Firearms and Explosives, commonly known as the “ATF,” is tasked with regulating the manufacture, sale, and transportation of alcohol, tobacco, firearms, and explosives. This includes ensuring these items are not transferred or sold in such a manner as to avoid paying excise taxes.
A major goal of the ATF’s enforcement programs is to target organized criminal enterprises engaged in interstate trade in its controlled goods. This is an important endeavor, as such enterprises are often responsible for violent crime, and in introducing a variety of contraband items into the U.S. commerce stream. This stemming of illegal trafficking in alcohol and tobacco products, seeks to apprehend and prosecute those who avoid payment of excise taxes.
As of January, 2003, another federal agency, the Alcohol and Tobacco Tax & Trade Bureau (the “TTB”), a division of the U.S. Department of the Treasury, is responsible for:
- Regulating the manufacture, wholesale and importation of alcohol and tobacco;
- Regulating the alcohol and tobacco industries and Special Occupational TAX (SOT); and
- Collection of the Alcohol, Tobacco, Firearms and Ammunition Excise Taxes imposed on manufactures and importers of these products.
In addition to its regulatory and investigatory tasks, the TTB’s website provides a host of information for consumers and businesses regarding excise taxes, required permits, import/export requirements, and even labeling of certain products.
Excise Tax Fraud Example in Tobacco Products
In 2016, California business man, Moo Hoon “Steve” Kim, was convicted of mail fraud in a scheme to avoid paying a large amount in excise taxes on tobacco products. Over a three-year period, revealed in court documents, Kim illegally brought over $35 million in untaxed tobacco products into California. The products Kim primarily dealt in were cigars, chewing tobacco, and leaf tobacco.
Kim used an elaborate series of front companies to hide his illegal purchases from sources outside of his state. Kim operated another front company as a retail outlet for selling his untaxed tobacco products. In just those three years, Kim’s scheme of excise tax fraud cost the state of California over $16 million in tax revenues. The bulk of California’s tobacco excise tax revenues fund the state’s early childhood development program.
In this example of excise tax fraud, Kim was sentenced to five years in the state prison, and ordered to pay over $16 million in restitution for the mail fraud committed in furtherance of his tax fraud scheme.
Related Legal Terms and Issues
- Distribution – The act of sharing something out among a number of recipients.
- Domestic Products – Products manufactured in America.
- Front Company – A shell company used to shield another company from scrutiny, or from legal liability.
- Special Occupational Tax – A tax imposed on importers and manufacturers of firearms.
- Tariff – A tax imposed on certain imported goods or services.