Excise Tax

What Is Excise Tax?

A kind of tax levied within a government infrastructure as opposed to international taxes levied across national borders. Motor fuel, airline tickets, tobacco, and other goods and services are commonly subject to federal excise tax.

Deeper Definition

An excise is classified as an indirect tax because the producer or seller who pays the levy to the government is expected to try to recoup their loss by raising the price of the final buyer of the goods. Excises are usually levied in addition to an indirect tax such as sales tax or value-added tax (VAT). They are commonly imposed on cigarette, alcohol, gasoline, beverages, soda, insurance premiums, amusement activities, and betting to make a relatively minimal and volatile portion of state and local tax collections.

Excise taxes are primarily levied against corporations. The cost of excise may or may not be visible to consumers. Many excise taxes are paid by merchants, who then pass the tax on to customers in the form of higher prices. Merchants pay excise taxes to wholesalers and factor them into product pricing, raising the overall retail price. However, some excise taxes are paid directly by the consumer, such as property taxes and excise taxes on specific retirement account activities. Federal, state, and local governments have the authority to institute excise tax.

Excise taxes are classified into two types: Ad valorem and specific. Ad valorem taxes are fixed percentage rates levied on particular goods and services. Specific goods are fixed dollar amounts that are levied on a particular purchase. Governments may also levy an Excise tax on goods with high social costs such as cigarettes and alcohol, and these taxes are sometimes referred to as “sin taxes.”

Excise Tax Example

It is commonplace for certain harmful consumer goods to be taxed in conservative countries, e.g., Nigeria. Several of those items are harmful or not recommended by regulatory agencies but since they are high grossing items, the government tries to dissuade use and mass production by imposing these taxes on these items which include tobacco cigarettes, alcohol, and so on.