An excise tax is charged by the government on specific services or goods at the point of purchase. These specific goods and services may include food, alcohol, tobacco and more. Excise taxes can be levied by the government at the federal, state, or local level. Usually, businesses are the entities required to pay excise taxes, however, there are some paid directly by consumers.
How do excise taxes work?
The government usually levies excise taxes on businesses which could eventually be passed onto consumers. Many excise taxes are paid by merchants to wholesalers. As a result, merchants will take the cost of paying these excise taxes into consideration when determining the retail prices charged to consumers. On the other hand, some excise taxes are levied directly onto the consumer. This includes property taxes as well as taxes levied on specific retirement account activities.
There are two categories of excise taxes: ad valorem and specific.
Ad valorem excise taxes
An excise tax that charges based on a percentage of the value of the goods or services is known as “ad valorem” meaning “according to value” in Latin. For example, for tanning services, the Internal Revenue Service (IRS) charges a 10% excise tax. Therefore, when a tanning salon charges $100 to consumers for its services, the tanning salon will be required to pay a $10 excise tax charge to the IRS. For a $150 service, the tanning salon will need to pay the IRS $15.
Other types of ad valorem excise taxes include taxes on airline tickets, firearms, heavy trucks, and real estate (property taxes).
Specific excise taxes
The government also has the authority to levy excise taxes as a specific amount charged on the product or service. For example, the federal government charges a specific excise tax of $1.01 for a 20-pack of cigarettes. In the case of beer, the federal government charges a specific excise tax of $7 for the first 60,000 barrels.
In addition to the federal government charging a specific excise tax, state governments tend to charge high specific excise taxes on “sin goods.” This commonly includes goods such as beer, liquor, and cigarettes. When the state government adds onto the federal excise tax with its own specific excise tax, it can affect the retail price significantly.
Planning for excise tax liabilities
Excise taxes affect your business finances. This is why it is important to take excise tax liability into consideration when creating your financial plan for your business. There could be actions you can take to minimize your tax liabilities.
Also, whether or not you pass on the full cost of excise taxes to your customers may not be a straightforward decision. Much will depend on the industry you are in and how competitive the market is. It will also hinge on the other aspects of your business finances.
Consulting with our team of financial advisors can help you better understand your options and the financial consequences of each choice.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.