Author: Alex Zhong, Tax Accountant, 1-800Accountant (a BizFilings partner)
As a small business owner, you’re likely very familiar with various taxes and the different laws that can apply at the local, state, and federal levels. State income tax, sales tax, employment tax, and self-employment taxes are all part of running a business.
Sales tax and excise duty are two kinds of taxes that are often confused with one another. Learn about the differences between the two taxes and why it’s important to understand the role each tax plays in business.
What Is Excise Duty?
Excuse duty, or excise tax, is an enacted tax on particular goods, products, activities, or services at purchase. Although businesses are responsible for collecting excise taxes and sending them to the proper authorities, the cost of the tax is typically passed on to the consumer in the form of increased prices. Much of the time, consumers are not aware that they are taking on the cost of excise duty in their purchase.
Excise taxes are usually collected for one of the following reasons:
- Excise taxes are a good way to generate revenue without increasing income or sales taxes, which is often seen as a politically charged move.
- The money collected from excise taxes most often goes towards maintaining the systems or processes used by those paying the tax. For example, excise taxes on gasoline can go towards maintaining roads, highways, and interstate systems.
- Excise taxes can deter consumers from using certain products. This may be for health reasons (excise taxes on tobacco or alcohol) or environmental reasons (excise taxes on chemicals and gasoline).
Excise taxes exist at the state, local, and federal levels. At the federal level, the United States collects about 4% of its revenue from excise taxes; they aren’t imposed across international borders. Statutory excise taxes can vary from state to state, so consumers should look to their states for information on what excise taxes exist and how much they cost.
How Are Excise Duties Charged?
Excise taxes can be charged in one of the following ways:
- Percentage of Price: Also known as an ad valorem tax, percentage of price excise taxes are charged as a set percentage of the total value of the product or service.
- Per Unit Tax: Under per unit tax, or a specific excise tax, an excise tax is charged for each unit sold regardless of the base price.
What's an Example of Excise Duty?
Check out some of the most common excise duties below.
Percentage of Price:
- Sportfishing equipment
- Airline tickets
- Indoor tanning services
- Firearms and ammunition
Per Unit Tax:
- Gasoline and diesel
- Tobacco and cigarette products
- Cruise ship passengers
What Is Sales Tax?
It’s more likely that business owners and consumers are familiar with sales tax. Businesses collect sales tax from the consumer at the point of purchase and remit the taxes to the proper government authority for the sale of certain goods and services.
Sales tax in the United States can quickly get complicated as sales tax is governed at the state level and can vary dramatically between states. All states and Washington D.C. utilize their own tax rates, with the exception of Alaska, Delaware, Montana, New Hampshire, and Oregon.
Some states implement a state-wide tax rate. However, other states allow towns, cities, and counties to levy their own tax rates. This adds to the confusion that some business owners face as they prepare their taxes. Especially with the rise of e-commerce, sales taxes can become increasingly difficult for businesses to manage on their own.
What's the Difference between Excise Duty and Sales Tax?
There are a couple of key differences between excise duty and sales tax:
- Excise duty applies to specific goods and services while sales tax is charged for a much broader range of things.
- Sales tax is typically charged as a percentage of the cost, while excise duty can be charged as a percentage of the cost or on a per-unit basis.
- Consumers pay for sales tax at the point of purchase while excise taxes are often indirectly passed on to the consumer in the form of higher prices for whatever goods or services qualify for the excise duty.
Although it’s easy to confuse excise duty and sales tax, it’s essential for business owners to know the difference between the two types of tax. For some business owners, they won’t have to deal with excise tax and only with sales tax. For others, depending on their industry, they may have to work with both types of tax. It’s for this latter group especially that it’s crucial to have a solid understanding of how excise tax works and how to submit excise payments to the proper governmental authority.
If you don’t know how to handle excise tax or sales tax, it’s essential to speak to an accountant to make sure you’re paying and recording everything properly.
The nuances of sales tax can be confusing for small businesses - which is where we can help. BizFilings has partnered with 1-800Accountant, a nationwide online tax preparation, accounting, bookkeeping, and payroll service provider.
Through their partnership, 1-800Accountant will provide free consultations to BizFilings readers and clients. Simply with a specialist today to learn more.
About the Author
Alex Zhong is a Tax Accountant in the Pacific team at 1-800Accountant. Alex studied at Queens College at the City University of New York and received a Bachelor's degree in Accounting, Finance, International Business and Economics. Alex has 8 years of experience in public accounting with a strong accounting and tax background. He specializes in business tax returns.