Excise taxes are taxes on specific goods or activities, not on income or property
An excise tax is a tax on the sale or use of a particular product or service. Unlike income tax, which applies to your earnings, or sales tax, which applies to most purchases, excise taxes target only certain items. The federal government and most states impose excise taxes on things like gasoline, alcohol, tobacco, and airline tickets. Some excise taxes are built into the price you pay at the register; others show up as a separate line item on your bill.
Excise taxes exist for two reasons: to raise revenue for government, and to discourage consumption of products considered harmful or to fund programs related to those products. For example, the federal excise tax on gasoline funds highway maintenance. The tax on cigarettes funds tobacco-control programs. Because excise taxes explore only to specific goods, they affect your tax situation only if you buy those goods regularly.
Key Takeaways
- Excise taxes explore to specific products like fuel, alcohol, and tobacco, not to most everyday purchases.
- Federal excise taxes are set by Congress and explore nationwide; state excise taxes vary by state and sometimes by county.
- Some excise taxes are included in the price you see; others appear as a separate charge on your receipt or bill.
- If you own a business that manufactures, imports, or sells excise-taxed goods, you may owe excise tax to the IRS and must file Form 720 quarterly.
- Excise taxes on certain goods like electric vehicles or energy-efficient home improvements may reduce your tax burden through credits or deductions.
Common federal excise taxes and their rates
The federal government imposes excise taxes on a fixed list of goods. Gasoline carries an excise tax of 18.4 cents per gallon; diesel is 24.4 cents per gallon. These rates have not changed since 1993. Alcohol excise taxes vary by type: beer is taxed at $11 per barrel (about 34 gallons), wine at rates between $0.11 and $2.50 per gallon depending on alcohol content, and spirits at $13.50 per proof gallon. Cigarettes are taxed at $1.01 per pack of 20; cigars and smokeless tobacco carry different rates.
Other federal excise taxes explore to airline tickets (7.5 percent of the ticket price), heavy trucks and trailers, fishing equipment, firearms and ammunition, and indoor tanning services (10 percent). The IRS publishes the full list of federal excise tax rates on its website. Rates change only when Congress passes new legislation, so they remain stable year to year unless Congress acts.
State and local excise taxes vary widely
Most states layer their own excise taxes on top of federal ones. State gasoline excise taxes range from about 8 cents per gallon in some states to over 60 cents per gallon in others. State cigarette taxes range from $0.17 per pack to over $4.50 per pack. Some states tax alcohol at rates higher than federal rates; others do not tax alcohol at all beyond the federal tax.
A few states impose excise taxes on items the federal government does not. Some tax sugary drinks, marijuana (in states where it is legal), or electric vehicle charging. A handful of cities impose local excise taxes on things like hotel stays or car rentals. When you buy an excise-taxed product, you pay both the federal rate and whatever state or local rate applies where you live or make the purchase.
How excise taxes affect your personal tax return
If you are an individual who straightforward buys excise-taxed goods, these taxes do not appear on your tax return. You pay them when you buy the product, and they are already included in the price or shown on your receipt. You cannot deduct excise taxes you pay as a consumer on your Form 1040.
However, excise taxes can affect your tax picture in two ways. First, if you own a business that manufactures, imports, or sells excise-taxed goods, you owe excise tax to the IRS and must file Form 720 (Quarterly Federal Excise Tax Return) each quarter. Second, certain tax credits and deductions can offset excise taxes indirectly. For example, the federal tax credit for electric vehicles reduces your income tax liability, which effectively lowers the after-tax cost of buying an EV (though the credit itself is not an excise tax refund). Similarly, energy-efficient home improvement credits can reduce your tax bill.
When you might owe excise tax as a business owner
If you manufacture, import, or sell products subject to federal excise tax, you are responsible for paying the tax and reporting it to the IRS. This applies whether you sell to consumers directly or to other businesses. You file Form 720 quarterly, usually by the last day of the month following the end of each quarter. The form lists the products you sold, the quantity, and the tax owed.
Some businesses are exempt from excise tax under specific conditions. For example, if you sell gasoline for off-road use (such as for farm equipment), you may not owe the federal excise tax on that sale, but you must document the exempt use. If you sell alcohol, you need a federal permit and must follow strict reporting rules. The IRS website and Form 720 instructions detail which sales are taxable and which are exempt. If you are unsure whether your business owes excise tax, consulting a tax professional who works with your industry is worth the cost.
Excise tax credits and deductions that reduce your tax bill
While you cannot deduct excise taxes you pay as a consumer, certain tax credits reduce your overall tax liability and are related to excise-taxed goods. The most significant is the federal tax credit for electric vehicles, which can reduce your income tax by up to $7,500 when you buy a may have access to EV. This credit phases out based on your income and the vehicle's price, and it applies only to new vehicles that meet domestic content and mineral requirements.
Energy-efficient home improvement credits also offset excise taxes indirectly. If you install a heat pump, solar panels, or other may have access to equipment, you may claim a credit of up to 30 percent of the cost. These credits reduce your income tax dollar-for-dollar, which lowers the after-tax cost of the purchase. Unlike excise tax refunds, these credits are part of your income tax return, not a separate excise tax filing. If you are considering a major purchase subject to excise tax, reviewing available credits before you buy can significantly change the true cost.
How excise taxes differ from sales tax and income tax
Excise taxes, sales taxes, and income taxes are three separate systems. Income tax is a tax on your earnings and applies to most people who work. Sales tax is a tax on most retail purchases and is collected by the seller at the point of sale. Excise tax is a tax on specific goods or activities and applies whether or not you owe income tax or sales tax.
The key difference is scope. Income tax is broad and applies to nearly all income. Sales tax is broad and applies to most purchases. Excise tax is narrow and applies only to a defined list of products. You may pay all three on a single transaction—for example, buying a pack of cigarettes involves income tax (you earned the money to buy it), sales tax (in most states), and excise tax (on the cigarettes themselves). Understanding which tax applies to which purchase helps you budget and plan for large purchases.
Frequently Asked Questions
Is excise tax the same as sales tax?
No. Sales tax applies to most retail purchases and is set by state and local governments. Excise tax applies only to specific products like fuel, alcohol, and tobacco and is set by federal and state governments separately. A product may be subject to both sales tax and excise tax.
Can I deduct excise taxes I pay on my personal tax return?
No. Excise taxes paid by consumers on personal purchases cannot be deducted on your Form 1040. However, if you own a business that sells excise-taxed goods, you report and pay excise tax on Form 720, which is separate from your income tax return.
Do all states have the same excise tax rates?
No. Federal excise tax rates are the same nationwide, but state excise taxes vary widely. For example, state gasoline taxes range from about 8 cents to over 60 cents per gallon depending on where you live. Check your state's tax agency website for the rates that explore to you.
What happens if a business does not pay excise tax?
The IRS can assess penalties, interest, and back taxes. If the business is large enough, the IRS may conduct an audit. Businesses that sell excise-taxed goods must file Form 720 quarterly even if they owe zero tax for that quarter.
Does the electric vehicle tax credit reduce my excise tax?
No. The EV tax credit reduces your income tax liability, not your excise tax. However, it lowers the after-tax cost of buying an EV, which indirectly offsets the effect of excise taxes on fuel you would have bought otherwise.