In the United States, the government at both state and federal levels collects different kinds of taxes. Among different taxes, the two specific taxes including the excise and sales tax affect the prices consumers pay on particular goods or products. Both taxes increase the country’s economic health.
Excise tax definition: The excise tax is a particular tax that you pay without realizing which is geared to a particular product. But, the sales tax generally applies to every service or product. However, this guide will discuss the significant differences in excise and sales tax to help you understand their impact on businesses and consumers.
An Overview of Excise Tax
The excise tax meaning is a specific tax that is applied to particular services and goods. Unlike sales tax which applies to almost every service and goods, the excise tax mainly concentrates on specific items like tobacco, gasoline, luxury goods, and alcohol.
The main purpose of this excise tax is not only to generate government revenue but also to discourage individuals from consuming specific products. It is a great initiative by the Government because it wants individuals to stay healthier and protect the environment. For example, high excise tax on alcohol and cigarettes may reduce their usage because they impact human health negatively.
What Is Exactly Sales Tax?
Individuals are more familiar with the sales tax. It is mainly the consumption tax that the government imposes on the sales of goods and services. This tax is the percentage of the retail price which is collected at the point of sale.
It simply means that whenever you purchase some products or get some services, the sales tax is already added to the purchase price. Then, later, the retailers remit the sales taxes to the government. However, you need to know that the rates of the sales tax may vary depending on the region. So, the sales tax you are paying in the United States may be different from other countries.
How Excise Tax Is Collected and Calculated?
The excise tax is already there whatever services or products consumers use. This specific tax is mainly applied at the time of production or the wholesale level. It means that the manufacturers and distributors are the individuals who pay this tax to the government.
However, the cost though later passes down the supply chain to the consumers through much higher prices. Let’s understand the whole thing with an example:
- When a gas station sets the price per gallon of gasoline, this excise tax has already been factored into the price that the gas station put earlier. The excise tax comes in two forms; a fixed amount per unit and ad valorem taxes.
- So, suppose, the excise tax on the gas is 18.4¢ per gallon. So, if a business wants to sell gas for $3 per gallon, it will charge $3.18 from the consumer to cover the tax.
How Sales Tax Is Collected and Calculated?
Collecting sales tax is simpler and more visible to all consumers. Plus, calculating the sales tax is also easier than the excise tax. Whenever you buy services or products from a business or a company, they will add the sales tax to your bill at the point of sale. It means that the retailers here collect the taxes directly from the consumers and then periodically remit the taxes to the government.
Now that you know how the sales tax is collected by the government. Let’s understand how they calculate the sales tax with an example:
- The calculation of the sales tax mainly depends on the percentage of the actual sale price. It makes it easier for consumers to see how much tax they are paying to the government on their every purchase.
- For example, if the sales tax on a specific product is 7% and you are purchasing a product worth $100, you need to pay $107 at the checkout.
The Differences Between the Excise Tax and Sales Tax
The federal excise tax and sales tax in the United States falls on particular goods and services. First, businesses collect them from the consumers and then lend them to the government. The government mainly keeps these taxes and utilizes them to fund different programs.
However, even though there are similarities between the excise and sales tax, there are differences as well. Knowing those differences is very important for all businesses.
When They Apply
The excise taxes only apply to the particular products that are harmful to the environment and humans. So, you have to pay excise taxes on your purchase of tobacco, alcohol, fuels, and many more. But, the sales tax is applied to every product you buy. Be it groceries, clothes, electronics, or anything, you need to pay the sales tax for that.
Point of Collection
Excise taxes are collected mainly from wholesalers and manufacturers. But, consumers pay this tax without knowing anything like how much they are paying. On the contrary, the sales tax is directly collected from the consumers. So, they know how much sales taxes they pay on their purchase.
Calculation Method
The calculation method of excise and sales tax is different as well. Excise taxes are mainly the fixed amount per unit of any item or product but the sales taxes mean the percentage of the total sale price. So, the excise tax’s cost remains the same regardless of the price of the product. But, the sales tax’s price varies depending on the item sold.
Purpose of the Tax
Both excise and sales tax are there to generate revenue for the government. However, the federal excise tax has the aim of reducing the usage of harmful products or promoting eco-friendliness. However, the sales tax is only there to raise funds for public services.
Conclusion
Understanding the difference between the two prominent taxes- sales and excise tax helps individuals calculate how much they are paying. While the sales taxes are upfront and more personal, the excise tax is hidden. Paying them is more like you are including yourself in the shared economy of the government.
FAQs
Are there any exemptions to the excise tax?
Yes, but the exemptions may vary depending on product categories and localities. Some common exemptions are the machinery that is utilized for fishing or farming. There are specific grocery products as well like fruits, breads, milk, etc.
Can the sales and excise tax be combined on your same purchase?
Yes, the sales and excise tax may apply to a single item. But, it entirely depends on what you are buying and the purchase location. So, the total cost of the product you will purchase will reflect the sum of these taxes.
