How is an excise tax different from a sales tax?

If your business is selling to customers in the United States, it’s important to understand the breakdown of excise tax vs. sales tax.

What is an excise tax?

An excise tax is a targeted, consumption-based tax imposed on specific goods and services, often used as a tool for both revenue generation and social policy. Unlike general sales taxes, which are applied broadly, excise taxes are focused on particular products or services. These taxes are designed to either raise funds for government projects or deter the consumption of certain goods due to health or environmental concerns.

Examples of items commonly subject to excise taxes include gasoline, tobacco, alcoholic beverages, luxury cars, and services like indoor tanning. By singling out certain goods, excise taxes play a critical role in shaping consumer behavior and funding public initiatives.

Types of excise taxes

Excise taxes fall under three types: specific products with a flat rate, ad valorem percentage, or unique one-off cases.

Specific excise tax

This type involves a fixed dollar amount per unit of the product sold. For example, gasoline is often taxed at a specific rate per gallon, which stays constant regardless of the product's price. Similarly, tobacco products may have a fixed tax per pack.

Ad Valorem excise tax

This tax is based on a percentage of the product's value rather than a fixed amount, making it proportional to the item's cost. Luxury cars, for instance, may be subject to an ad valorem excise tax, where the tax amount increases with the car's price.

Other excise taxes

Excise taxes can also apply to specific instruments and services. For example, certain activities in retirement accounts might trigger an excise tax. Other cases could include taxes on indoor tanning services, intended to address health concerns associated with UV exposure.

What is the difference between an excise tax and a sales tax?

Knowing the differences between an excise tax and a sales tax is essential for businesses who want to understand public finance and comply with tax obligations. It’s very different from how US sales tax works. While both are forms of taxation that ultimately affect consumers, they operate differently in scope, calculation, and visibility.

1. Scope of excise tax vs. sales tax

Excise tax targeted on specific goods only

Excise taxes are imposed on particular goods or services, mainly on items that are legally regulated or generate a lot of revenue, like gasoline, tobacco, and alcohol. This targeted approach means excise taxes are only applied to select products for certain reasons, such as public health or environmental safety. These taxes can also be applied to luxury items that are considered non-essential or accessible only by the super-wealthy.

Sales tax as broad-based

In contrast, sales tax is applied more broadly to a wide range of goods and services purchased by consumers. This consumption tax typically covers most tangible products, and a growing number of digital products are taxed as well. It’s designed to provide a stable revenue source for state and local governments, with exemptions often given to essentials like food and medicine.

2. Calculation of excise tax vs. sales tax

Excise tax as a flat amount

Excise taxes are often calculated as a fixed amount per unit of the product sold. This means each unit —like a gallon of gasoline or a pack of cigarettes— has a specified tax amount added to its cost, regardless of the product's selling price.

Sales tax as a percentage of sale price

Sales taxes are calculated as a percentage of the transaction price at the point of sale. The tax amount varies directly with the price of the item, increasing as the sale price increases, making it a proportional tax applied to the full value of the purchase.

3. Visibility of excise tax vs. sales tax

Excise taxes built into prices

Excise taxes are typically included in the price of the product, which means consumers often don’t see a separate excise tax charge at the point of sale. The tax is embedded in the product's cost and is part of what the consumer pays, albeit indirectly.

Sales taxes added at checkout

In contrast, sales taxes are usually added at the point of checkout, where consumers see the tax explicitly listed on their receipts. This line item displayed the total amount of sales tax added to the sale price, showing consumers the exact amount they are paying in tax.

Why governments implement excise taxes

Excise taxes are a tool for governments, providing strategic benefits that go beyond just collecting money. In addition to revenue generation, these benefits include avoiding controversy, funding specific projects and shaping citizen habits.

Revenue generation

Governments often turn to excise taxes to sidestep the tricky politics of raising income or sales taxes. By focusing on specific products, these taxes bring in revenue without hiking rates for everyone, helping fund government projects without upsetting a broad tax base.

Funding specific needs

Excise taxes often directly fund public projects that benefit the taxpayers. Take the gasoline tax, for instance —its revenue is used to maintain and improve roads, so drivers see their money put back into something they use every day.

Influencing healthier behavior

By taxing products like tobacco and alcohol more heavily, governments aim to reduce their use because they're linked to health risks and other costs. These taxes help people make healthier choices and balance out the broader impact such products can have on society.

How the US compares internationally

Looking at how the United States uses excise taxes compared to other countries gives us some insights into different tax strategies. In general, the US takes a more targeted approach, compared to the broader scope seen in many other countries.

OECD comparison

Generally the US collects less revenue from excise taxes compared to the average in other OECD countries. This means the US relies more on other forms of taxation to fund government services.

Narrower definition

The US has a narrower definition of what falls under excise taxes. While some countries apply these taxes more broadly, the US tends to focus on a smaller range of products, which explains why excise tax revenue here can be lower than in other nations.

How to identify and track excise taxes

Figuring out how to identify and track excise taxes can be a bit tricky, but it's important for understanding the full cost of certain products and services.

One of the main challenges is that excise taxes are often built into the price you pay, so they might not be obvious at checkout. This makes it harder for consumers to see exactly how much tax they’re paying since it’s not listed separately like sales tax usually is.

How to find excise tax information online

There are plenty of online resources where you can find information about excise taxes. State and federal websites will give you a clearer idea of what excise taxes apply to which products and how much you’re actually paying. These sites often have detailed explanations and updates that can help you stay informed about tax rates and rules.

You can also check these sales tax guides by state, which include links to every state’s department of revenue or taxation.

In the meantime, if you need help with tracking sales taxes and complying with rules in various states, check out Quaderno and automate the process! Start a free trial of our tax compliance software.