What Is an Excise Tax?

What is an excise tax?

Excise duties are indirect taxes imposed on the sale of some goods such as alcohol, tobacco, and energy products. The excise tax is an indirect tax that is not imposed on the customer directly but is imposed on the business selling goods or services to the consumer. The consumer thus pays the tax indirectly through an increase in the price of the taxable product or service. 

Excise taxes are applied by the federal govt, states, or municipalities. The authorized authority can apply these taxes as a percentage of the total cost or fixed amount. For instance, the excise tax on machinery is a percentage of the total cost while the excise tax on beer and fuel is fixed.

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What Is Meant by Excise Tax?

Excise tax is levied on goods that are specified in the respective excise tax laws that are consumable and are subject to daily consumption.

If you are selling goods that are subject to excise duties, then it is your duty as a business to collect and pay the taxes to the tax authority. 

As the federal revenue administration, customs collect excise taxes regulated by federal laws in one of two ways.  

Percentage of price: According to this method excise taxes are collected as a percentage of the product or service. For example, international air travel is subject to an excise tax of 10.5% of the price of the ticket plus $50.10. 

Per unit tax: Taxes are collected on each unit sold. For example, the excise tax is imposed on each liter of diesel sold. 

Even though this may not affect the profit margins of the seller, yet it does raise the price of the product, which may affect the sale.

When is it necessary to pay excise taxes?

There is a significant difference between when a product becomes subject to excise duty and when the tax must be paid. Most products are subject to excise duty when the products are manufactured or imported into the EU. This tax can be suspended; that is, it does not have to be paid until the product is released for consumption.

The tax does not have to be paid if, for unforeseeable reasons or following natural disasters, products subject to excise duties are lost or rendered unusable before being released for consumption.

Which Is an Example of an Excise Tax?

Here is some example of the excise taxes that are imposed by the federal government: 

  • Wine or Alcohol: per unit excise tax
  • Tobacco items: per unit excise tax
  • Ammunition and chemical: per unit excise tax
  • Gasoline: per unit excise tax
  • Sport fishing tools: percentage of price excise tax
  • Airline tickets: percentage of price excise tax
  • Indoor tanning services: percentage of price excise tax

Some excise taxes are imposed for future funding of huge capital projects. For example, airport excise taxes are imposed for further improvements. 

Who has to pay excise taxes?

That depends on who you are selling a product to, the excise duties may have to be paid:

  • By the person or company that is the authorized depository of the place where products subject to excise duty are produced, processed, stored, shipped, or received
  • The consignor, consignee, carrier, or third party provides a movement guarantee – who has withdrawn the products from the tax suspension regime.
  • By the person importing the products, if they are imported without being subject to the tax suspension regime.

If you are selling goods that are subject to excise duties, then it is your duty as a business person to collect and pay the taxes to the tax authority quarterly. You have to file form 720, Quarterly Federal Excise Tax Return which schedules the various types of federal excise taxes.  In the form, you have to list the types of taxes that you’ve collected and submitted to the government. In addition,  the states may have their own filing conditions. 

Note: The producer is not always liable for paying excise duty.

For example,  Gold leaf’s sells tobacco in Poland that is shipped from England. The company produces the tobacco, depositing it in an authorized warehouse until it is dispatched to Poland, under what is called a suspension regime. This means that the English company does not have to pay excise duty in the country itself. When the company receives the dispatched tobacco, it is released for consumption and, therefore, the suspension regime is lifted. The company is then required to pay excise duty based on the Polish rate.

What Is the Difference Between an Excise Tax and a Sales Tax?

Sale Tax: 

Sale tax is a tax imposed on consumer products and services and it is imposed on the final consumer of the products or services. For example, when a person imports a particular product, the sales tax for this product is imposed on the final consumer of it, where its value is placed with the value of the invoice, in this case, the retailer does not pay taxes until after the product has been sold out. 

A sale tax is calculated as a percentage of the sale price. For example, suppose that the tax in your country is 15% and the price of the product is $ 1,500, then the price of the commodity after the tax will be 1500 x 1.15 = $1725, and the ratio can be calculated in another way 1000 + (1000 x 0.15) = $1725

Excise Tax: 

Excise duties are indirect taxes imposed on the sale or use of harmful goods. The burden of taxation in the case of excise duty imposed on the producer or seller is imposed on the consumer in the form of an increased price of goods and services sold. 

The excise tax is added to a specific product on a per-unit basis. For example, the excise tax includes cigarettes ($3.01 per pack of 20), pipe tobacco ($5.603 per kg), beer ($10 for the first 4,000 barrels), cruise ship passengers ($6 per passenger), and fuel ($1.15 per gallon).

To pay excise taxes, you have to file Form 720 a month after the end of every quarter. You can fill the form through the IRS EFTPS system or sent it by mail.

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