An excise tax is a tax charged on the sale of specific goods or services, such as fuel, tobacco, or airline tickets, rather than on income or on purchases generally. Businesses usually pay it directly to the government, then fold the cost into what customers pay at checkout or at the pump.
At a Glance
- Excise taxes target specific items like fuel, tobacco, alcohol, and airline tickets rather than purchases in general.
- They come in two forms: ad valorem (a percentage of value) and specific (a flat amount per unit).
- Businesses typically remit excise taxes and pass the cost along through higher prices.
- So called sin taxes apply extra excise charges to goods like cigarettes and alcohol because of their social costs.
- Retirement accounts carry their own excise tax penalties for missed distributions or excess contributions.
How the Tax Actually Gets Collected
Excise taxes are aimed at businesses, not shoppers directly. A company selling a taxable product, gasoline, cigarettes, plane tickets, owes the tax to the government and typically bakes that cost into its pricing. That means most consumers never see a separate line item for it; they just pay a slightly higher price overall.
There are exceptions. Property taxes and certain retirement account penalties are excise taxes that individuals pay directly rather than through a markup on a product. Federal, state, and local governments can each impose their own excise taxes, and income tax remains the dominant revenue source for federal and state budgets, with excise tax revenue making up a smaller slice.
Businesses that collect excise taxes have their own paperwork obligations. They must file Form 720, the Federal Excise Tax Return, on a quarterly basis, along with quarterly payments. They're also expected to keep up with any separate state and local excise tax requirements, and they may be eligible for deductions or credits on their income tax returns tied to excise payments made during the year.
Two Ways Excise Taxes Are Calculated
Excise taxes fall into one of two structures. Ad valorem taxes are charged as a percentage of a product's value, so the dollar amount rises and falls with the price. Specific taxes are a fixed dollar amount per unit, regardless of what the item costs.
The IRS charges a 10% ad valorem excise tax on indoor tanning services, so a $100 tanning session generates $10 in tax. Other ad valorem examples include a 10% tax on firearms, 7.5% on airline tickets, and 12% on heavy trucks. Property taxes are often grouped into this category as well, since they scale with a property's assessed value.
| Item | Tax Type | Rate (as of Feb. 2025) |
|---|---|---|
| Indoor tanning services | Ad valorem | 10% |
| Firearms | Ad valorem | 10% |
| Airline tickets | Ad valorem | 7.5% |
| Heavy trucks | Ad valorem | 12% |
| Small cigarettes (pack of 20) | Specific | $1.01 per pack |
| Pipe tobacco | Specific | $2.83 per pound |
| Beer (first 60,000 barrels) | Specific | $3.50 |
| Cruise ship passengers | Specific | $3 per passenger |
| Gasoline | Specific | $0.183 per gallon |
Specific taxes charge a flat rate per unit sold rather than a share of the price. Federal figures from February 2025 show gasoline taxed at 18.3 cents per gallon, small cigarettes at $1.01 per pack of 20, and pipe tobacco at $2.83 per pound.
Why Sin Taxes Cost So Much at the Register
Goods viewed as carrying a high social cost, tobacco and alcohol chief among them, often get hit with what people call sin taxes. These are excise taxes layered on top of the standard price specifically because lawmakers want to discourage consumption or offset the public costs tied to the product.
The layering effect is real. New York charges a state excise tax of $5.35 per pack of 20 cigarettes. Add the federal tax of $1.01, and a single pack carries $6.36 in excise taxes alone before the retailer's markup or sales tax even enter the picture. That kind of stacking, federal tax plus state tax plus local tax in some cities, is exactly why cigarette prices vary so dramatically depending on where you buy them.
Excise Taxes Hiding in Your Retirement Account
Retirement savers run into excise taxes too, usually disguised as penalties. Contribute more than the allowed limit to an IRA and fail to fix it by the deadline, and a 6% excise tax applies to the excess amount. Pull money out of certain IRAs or qualified plans before age 59 and a half, and a 10% excise tax penalty typically follows.
Required minimum distributions carry their own penalty structure. Miss an RMD from a covered retirement account and the excise tax penalty is 25% of the amount that should have been withdrawn. That penalty drops to 10% if the missed distribution gets corrected before the end of what's called the correction window, a period that starts when the penalty is imposed (usually January 1 of the following year) and ends at the earliest of three dates: when the IRS actually assesses the penalty, when the IRS sends a notice of deficiency, or the last day of the second tax year after the penalty was imposed. As of January 1, 2023, RMDs become mandatory at age 73 for owners of traditional IRAs and several other tax deferred retirement plans.
Excise Tax Versus Sales Tax: Knowing the Difference
The two get confused constantly, but they work differently. An excise tax applies to a specific good or service, and the merchant is generally on the hook for paying it to the government, whether or not that cost gets passed to the buyer. A sales tax, by contrast, applies broadly across most purchases and is collected directly from the consumer by the merchant, who then remits it to the government as a percentage of the sale price.
Will Shoppers Ever See These Costs Broken Out?
Most excise taxes stay buried inside the sticker price, so shoppers rarely see the breakdown. Fuel is the notable exception: many gas stations post a breakdown at the pump showing how much of the price reflects the fuel itself versus taxes. Whether that kind of transparency spreads to other taxed goods remains an open question, and for now, tobacco, alcohol, and airline tickets mostly keep their excise costs folded quietly into the total.