How to Calculate Excise Tax

Figure excise tax using paper and pen.

Taxes are inevitable, as are the discussions by legislative bodies of tax proposals, whether the proposals are minor tweaks or radical revisions. Inevitably, that debate or filibuster raises both political and moral issues. There's no question that someone must pay to support government programs. The argument relates to what members of society or its entities should shoulder that burden.

Advertisement

Should the poor be taxed at the same rate as the rich? Should the individual or the corporation carry the weight? In the case of an excise tax, the questions are what taxes will be paid on which goods or services.

Video of the Day

Justification for the Excise Tax

The basis of an excise tax is the idea that those who consume certain goods or services should bear a tax burden that's thought to offset the cost to society of the product's production or the provision of a service. In some cases, taxes are shifted forward, away from the maker of the product or the provider of the service and to its consumers.

Advertisement

The consumption expenditures that are subject to the excise tax fit into one of two categories:

  • Sumptuary Excises​: Consumption expenditures, such as the purchase of liquor and tobacco, that give rise to societal costs that go beyond production costs and whose use warrants the payment of a tax.
  • Luxury Excises​: Expenditures that reflect the ability of a certain customer to pay, such as those in the higher income brackets who purchase jewelry or perfume.

Advertisement

Definition of Excise Tax

An excise tax targets the purchaser of a good or service, including tobacco and alcohol., who may also be its consumer. The excise tax is imposed on the manufacture, sale or use of a certain commodity or the provision of a particular service. The tax can be imposed and collected at the point of production or importation, or at its point of sale.

Advertisement

The excise tax rate is a prescribed dollar amount per unit of a commodity, such as 15 cents per gallon of gasoline, or a certain percentage of its sales price, such as 8 percent of the price of a watch. An excise tax, which a local, state or federal government can impose, may relate to a variety of goods and services, including truck bodies and parts, fishing equipment, airline passenger tickets, wagers, wine and cigarettes.

Advertisement

Consider also:Types of Indirect Taxes

How to Calculate Excise Tax

There are two main types of excise taxes: ad valorem and specific. An ad valorem excise tax amounts to a fixed percentage of the price of good or service at the time of its purchase. In turn, the specific excise tax is a set fee that's added to a product's per-unit price. The method for how to calculate excise tax revenue depends on the type.

Advertisement

Ad Valorem Excise Tax

An ad valorem excise tax is equal to a percentage of the assessed value of a product, service or a property. For instance, the property tax on real estate is an ad valorem tax, as is the sales tax on consumer goods. For instance, a city that levies an 8 percent sales tax on furniture will impose a sales tax of $240 on a $3,000 couch.

Advertisement

Other ad valorem taxes include those imposed according to the value of real estate and a sales tax in the form of seller taxes and consumer excise taxes.

Specific Excise Taxes

A specific excise tax is a set fee that a tax authority imposes on a product on a per unit basis. For instance, the federal government imposes an excise tax on alcohol, tobacco, firearms and gasoline on a per unit basis. For example, an ​18.4 cent​ excise tax is imposed on each gallon of gasoline.

Advertisement

Consider also:Why Do State and Federal Governments Collect Taxes?

Collection of Excise Tax

Typically, businesses collect excise taxes which they, in turn, pay and report on a quarterly basis to the federal government using Form 720 Federal Excise Tax Return. Businesses also collect and pass on excise taxes to state and local governments.

Advertisement

references