Excise Tax Examples

Definition of Excise Tax Examples

Excise tax is an indirect tax included in the price of certain goods which is paid at the time of purchase of those goods. Excise tax is levied within the country i.e. it is an intra-national tax, and, therefore, not imposed across national borders. The goods on which excise tax is paid include tobacco, gasoline, airline tickets, and other goods & services. Federal, state, and local governments all have the authority to levy an excise tax on the merchants who then transfer the burden of the tax to their customers in the form of addition in prices.

Explanation

Excise tax comes under the category of indirect taxes sinceitis paid by the merchants or vendors and then passed on to the customers by way of higher purchase prices. It is a business tax since businesses need to pay excise taxes apart from the income tax to the relevant authorities. Businesses wanting to file excise tax returns need to file them through Form 720 federal excise return on a quarterly basis with quarterly payments. There are some excise taxes like property taxes and excise tax penalties on retirement account that can be directly paid by the customers to the internal revenue service.

Excise taxes can be charges in two ways ad valorem and specific. Ad valorem (Latin phrase meaning “according to value”) excise tax is charged as a fixed percentage of the price of the product whereas specific excise tax (per unit tax) is a fixed dollar amount included in the purchase price of certain goods. The major portion of excise tax revenue in the U.S. comes from tobacco, motor fuel or gasoline, alcohol, health-related goods & services. There are some goods which have high social costs like cigarettes and alcohol and the government levies an excise tax on these goods as well. Taxes on these goods are sometimes called sin taxes.

Examples of Excise Tax

Here are some of the examples of the excise tax. In the first two examples, one example is for thecalculation for each ad valorem tax type and specific excise tax type. In the third example, we will refer to other goods and services on which Internal Revenue Service levies excise tax with the tax rate.

Example #1

Suppose internal revenue service levies 10% on Good A and 15% on Good B. Prices charged by the merchant before taxes for Good A were $100 and Good B was $ 200. How much excise tax was actually paid?

Solution:

Merchant will pay $ 10 on good A (10 % of $100) and $30 (15% of $200) on good B as an excise tax. This is an example of an ad valorem type of excise tax since the tax is being levied as a percentage of the value of goods.

Example #2

Customer A buys a pack of cigarette and the original cost before taxes was $4 per pack. Now suppose the New York State levies the specific excise tax of $4.35 per cigarette pack irrespective of the original price of the packet and there is an additional federal excise tax of $1.01. What shall be the value of the pack in this case and what shall be the excise tax?

Solution:

The final cost of a pack of cigarettes would be ($4+$4.35+$1.01) = $ 9.36 inclusive of excise tax of $5.36. Here the specific tax is imposed on the pack of cigarettes to the extent of $5.36 out of which $1.01 is imposed by the federal government and $4.35 is imposed by the state government. This is an example of the specific type of excise tax.

Example #3

Similarly, other types of ad valorem excise tax might be there for different types of products and services such as:

• firearms (10%)
• airline ticket (7.5%)
• heavy trucks (12%)

Further, there may be specific excise tax for some items such as:

• cigarettes ($1.01 on the pack of 20 cigarettes)
• pipe tobacco ($2,83 per pound)
• beer ($7 for the first 60,000 barrels) and so on.

Example #4

Let us assume that the original price before tax for a barrel of beer at a liquor shop is $650, now as we have read in example 4 that IRS levies $7 for the first 60,000 barrel. Let’s assume the store is still under the limit of 60,000 barrels. What shall be the cost per barrel of beer after the levy of excise duty?

Solution:

The cost after excise tax per barrel would be:

$650+$7 = $ 657 per barrel.

Conclusion

As we have discussed, the excise tax is an indirect tax that is paid by the merchant but the burden of which is actually borne by the customers in the form of higher purchase prices. Further, there are two categories of excise tax namely ad valorem (according to value) i.e. a fixed percentage of the purchase price of the good and specific (per unit tax) fixed dollar price tax on the product irrespective of its purchase price.

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