Excise Tax: What It Is And How It Works

An excise tax is a tax on the purchase of a specific good or service, such as alcohol, cigarettes or gambling. Some excise taxes are imposed by the federal government, while others are imposed at the state or local level.

What is an excise tax?

An excise tax is similar to a sales tax in that it applies to the purchase of a good or service. But unlike sales taxes, which are generally always paid by the consumer, excise taxes may be charged directly to consumers or may be applied at other points in the supply chain, such as on the manufacturer. But, while some excise taxes are charged to businesses, those costs often get passed along to the consumer in the product price.

If an excise tax is charged at the point of purchase, then it falls into the general category of a consumption tax. Some excise taxes are known as sin taxes because they may apply to goods and services that the government is trying to discourage.

Products that are subject to an excise tax include:

• Cigarettes
• Gasoline
• Alcohol
• Gambling
• Telephone service
• Indoor tanning
• Airplane fuel
• Air travel

• Coal

How excise taxes work

As noted, excise taxes may be paid by consumers directly, or they may apply to manufacturers or other businesses along the supply chain. Those companies then generally add the cost of the excise tax to the purchase price.

Excise taxes are applied in one of two ways: either as a percentage of the purchase price or as a per-unit tax. This type of tax, similar to the sales tax, is an indirect tax. This means that instead of being paid directly to the government like income taxes and property taxes, it’s paid to another party (usually the retailer), and then passed along to the government.

An example of an excise tax

One of the most common examples of an excise tax that many people pay is the tax on gasoline. Unlike many other taxes, the gasoline tax is imposed by both the federal government and at the state level.

The excise tax on gasoline isn’t a percentage-based tax. Instead, it applies as a per-unit price. The federal gas tax is currently 18.4 cents per gallon, according to the U.S. Transportation Department’s Federal Highway Administration.

While the state gas tax differs in each state, the average is 32.61 cents per gallon, according to 2024 data from the U.S. Energy Information Administration.

Suppose you put 20 gallons of gas into your car in Wisconsin, where the gasoline excise tax is 30.9 cents per gallon. First, you would pay $3.68 ($0.1840 x 20) for the federal excise tax on gasoline. Then you’d pay $6.18 ($0.309 x 20) for Wisconsin’s excise tax. You would pay a total of $9.86 in excise taxes on your purchase of 20 gallons of gas.

Types of excise taxes

Excise taxes can be classified as either ad valorem or specific, where one is a percentage-based tax and the other is per unit.

Ad valorem excise taxes

Ad valorem is a Latin term that means “according to value.” An ad valorem tax is one that’s applied as a percentage of the purchase price. For example, there’s an excise tax on domestic air travel that’s 7.5 percent of the ticket purchase price. Because it’s percentage-based, the tax will fluctuate with airline ticket prices. Other examples of ad valorem excise tax include tanning services, heavy trucks and certain insurance policies.

Specific excise taxes

A specific excise tax is one that’s priced per unit instead of being percentage-based. Because this tax applies to a specific unit of a product, such as one container or one gallon, it doesn’t fluctuate with the price of the product. For example, beer generally has an excise tax of $18 per barrel (31 gallons), paid by the manufacturer — though smaller manufacturers pay a lower rate. Other examples of specific excise taxes include gasoline and cigarettes.

Excise tax vs. sales tax

Excise and sales taxes are similar. Both may be paid by a consumer on the purchase of a good or service. However, there are several differences between the two.

First, excise taxes only apply to a narrow list of specific products, while sales taxes apply to most or all products purchased by consumers.

Also, as noted, sales taxes are imposed on consumers, while excise taxes may be charged to either consumers or businesses. That said, even if the tax is invisible to the consumer because the business pays it, often the cost gets embedded in the product’s price.

Another important difference between excise and sales taxes is the way they’re structured. Sales taxes aren’t imposed by the federal government; in the U.S., only state and local governments impose these taxes. Also, rather than being either an ad valorem or specific tax, sales taxes are always an ad valorem (or percentage-based) tax.

Excise and sales taxes also serve a different purpose for governments. Sales taxes are a major source of revenue for state governments. Excise taxes are a source of revenue for federal, state and local governments, but revenue isn’t always their only purpose. For example, sin taxes are in place to discourage specific activities like smoking, drinking and gambling.