An excise tax is a tax on the sale of a specific product, not on income or property

An excise tax is a tax the federal government (or sometimes a state) places on the manufacturer or seller of a particular good. Unlike income tax, which is based on what you earn, or sales tax, which applies to most purchases, an excise tax targets only certain items. The tax is built into the price you pay at the register — you usually do not see it listed separately, though it is there.

The federal government uses excise taxes on products it wants to discourage use of, or to raise money for specific purposes. For example, the tax on gasoline funds highway maintenance. The tax on cigarettes and alcohol is partly intended to reduce consumption. Some excise taxes exist on luxury goods like private aircraft or expensive fishing equipment.

When you buy a taxed product, the seller collects the excise tax and sends it to the IRS or state tax authority. The manufacturer or importer may also owe excise tax, depending on the product. This means the tax can be paid at multiple points in the supply chain before the product reaches you.

Key Takeaways

  • Excise taxes are placed on specific products like fuel, alcohol, tobacco, and certain luxury goods, not on most everyday purchases.
  • The federal government collects excise taxes to discourage use of certain items or to fund specific programs like highway maintenance.
  • Excise tax is included in the final price you pay and is separate from regular sales tax.
  • Manufacturers, importers, and retailers may all owe excise tax at different stages, depending on what is being sold.
  • You report excise tax paid on business purchases or certain vehicle fuels on your tax return if you are may have access to to a refund.

Common products that have federal excise taxes

Gasoline and diesel fuel carry a federal excise tax of 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. This tax has not changed since 1993. The money goes into the Highway Trust Fund, which pays for road and bridge work.

Alcohol has excise taxes at different rates depending on the type. Beer, wine, and spirits each have their own tax per unit. Cigarettes and smokeless tobacco are taxed per pack or per pound. These rates change periodically and vary by product category.

Luxury goods with excise taxes include private aircraft, yachts, fishing rods and reels, bows and arrows, and certain firearms and ammunition. Heavy trucks and trailers over a certain weight also carry excise tax. Vaccines and certain medical devices have excise taxes as well.

Some excise taxes are temporary or tied to specific legislation. For example, there have been excise taxes on indoor tanning services and on high-cost health insurance plans. The products and rates subject to excise tax can change when Congress passes new tax laws.

Who actually pays the excise tax

The manufacturer or importer is usually responsible for paying federal excise tax to the IRS. For fuel, the tax is collected from the distributor or terminal operator before the fuel reaches gas stations. For alcohol and tobacco, the tax is collected from the producer or importer.

Retailers do not typically pay federal excise tax directly — the manufacturer has already paid it. However, the cost of that tax is passed along in the wholesale price, which the retailer then marks up and sells to you. The excise tax is already included in the price on the shelf.

If you buy a taxed product for business use, you may be able to recover some or all of the excise tax you paid. For example, if you buy diesel fuel for a farm or business vehicle, you can claim a refund or credit on your tax return. The rules for what qualifies are strict and depend on how the fuel is used.

How excise tax differs from sales tax

Sales tax applies to most goods and services you buy and is collected by the retailer at checkout. The rate varies by state and sometimes by county. Excise tax, by contrast, is federal (though some states have their own excise taxes too) and applies only to specific products.

Sales tax is a percentage of the purchase price. Excise tax is usually a flat amount per unit — so much per gallon of fuel, per pack of cigarettes, or per item. Because excise tax is per unit, the tax amount does not change if the price of the product goes up or down.

You pay both taxes on some purchases. When you buy a gallon of gasoline, you pay federal excise tax (18.4 cents per gallon), state excise tax (which varies), and then sales tax on top of that. The excise taxes are collected first, and sales tax is calculated on the total.

Excise tax refunds for business and agricultural use

If you use diesel fuel, gasoline, or other taxed fuel for a business purpose that qualifies for a refund, you can claim the excise tax back on your tax return. may have access to uses include farming, fishing, forestry, and certain commercial transportation. Fuel used for off-highway business purposes may also may have access to.

To claim a refund, you must keep records of how much fuel you bought and what you used it for. You report the refund on Form 4136, Credit for Federal Tax Paid on Fuels. The IRS will reduce your tax liability by the amount of excise tax you paid on may have access to fuel.

Not all fuel purchases may have access to. Fuel used to operate a vehicle on public roads does not may have access to for a refund, even if the vehicle is used for business. The rules are detailed, and mistakes can result in the IRS disallowing your claim. If you think you may may have access to, review the IRS instructions for Form 4136 carefully or speak with a tax professional.

State excise taxes

Many states impose their own excise taxes on top of federal excise taxes. State excise taxes on gasoline, diesel, and alcohol vary widely. Some states tax cigarettes at much higher rates than others. A few states have excise taxes on items the federal government does not tax.

State excise tax rates change periodically as states adjust their budgets or tax policy. The total tax you pay on a gallon of gasoline, for example, can be significantly different depending on which state you buy it in. This is why the price of fuel varies so much from state to state.

When you file your federal tax return, you report only federal excise taxes. State excise taxes are handled through your state tax return, if you file one. Some states allow credits or refunds for excise taxes paid on business fuel, similar to the federal rules.

Frequently Asked Questions

Why does the government tax some products and not others?

The government uses excise taxes for two main reasons: to raise money for specific programs (like the fuel tax funding highways) and to discourage consumption of products considered harmful or wasteful (like cigarettes and alcohol). Luxury goods are taxed partly as a revenue source and partly because they are not considered necessities.

Is excise tax the same as a sin tax?

A sin tax is a type of excise tax placed on products the government wants to discourage, such as cigarettes, alcohol, and gambling. Not all excise taxes are sin taxes — the fuel tax, for example, is an excise tax but not a sin tax. The term "sin tax" is informal and refers to the intent behind the tax.

Can I avoid paying excise tax by buying online?

No. Excise tax is owed on the product itself, regardless of where you buy it. If you order gasoline, alcohol, or tobacco online, the seller must collect and remit the excise tax. The tax is part of the product's cost, not a fee added at checkout.

Do I need to report excise tax I paid on my personal tax return?

For most personal purchases, no. Excise tax on items you buy for personal use (like gas for your car or a pack of cigarettes) is not reported on your tax return. You only report excise tax if you are claiming a refund for business or agricultural use of fuel.

What happens if a manufacturer does not pay the excise tax they owe?

The IRS can assess penalties, interest, and back taxes. In serious cases, the manufacturer may face criminal charges. Retailers and distributors can also be held liable if they knowingly sell products without the tax being paid. The IRS regularly audits manufacturers of heavily taxed products.