Who Pays Excise Tax?

Excise tax is lesser-known but an important part of the taxation scheme of a country and levied on specific goods and services. An important feature of excises is that they are indirect taxes, meaning that they are included in the price of the product or service and passed on to the consumer. However, with that, the collection and remittance burden rests on the described businesses, which are either manufacturing, selling, or distributing the goods. The question remains: who actually pays excise tax, and how does it affect both business and consumers? Let's get deeper.

What is Excise Tax?

An excise tax is a kind of tax levied on the sale of specific products; common examples include alcohol, tobacco, fuel, and luxury products. It can also be levied on certain activities or services, like air travel, betting, and automobile production. The objective of the use of excise taxes, by governments, is regulation of consumption in exchange for revenue generation and sometimes to discourage harmful or otherwise environmentally damaging products.

Unlike sales tax, which applies generally to most purchases made by consumers, excise taxes often are "selective." They target specific industries or activities and usually are built into the price of the product so that consumers pay the tax without typically realising it.

Who is Responsible for Paying Excise Tax?

Manufacturers and Producers

In most cases, excise tax is the duty of the manufacturers, producers, or importers of the respective goods and services. For instance, when a producer makes a pack of cigarettes, he is liable to pay excise tax for every pack that he manufactures. Tax collection is usually direct to the government at the point of production or importation long before reaching consumers.

These manufacturers add the cost of the excise tax to the price of the product. In other words, they essentially pass the burden to wholesalers, retailers, and eventually consumers. Officially, however, on record with the government, is the producer or manufacturer.

Importers

Importers pay a charge on any item imported into the country, a charge known as excise tax. For example, if a company imports beer, gasoline, or high-end automobiles, they would have paid their excise taxes upon clearing customs to facilitate their sale within the country.

Just like the manufacturers, importers are also going to factor in the cost of the excise tax in their product pricing. This way, before it is sold to the lower tiers of the chain of distribution, the cost is factored in.

Distributors and Retailers

There are instances where retailers and distributors become liable for taxes on excise if the goods being sold did not go through the manufacturing level without being taxed. For instance, some kinds of excise impose their own taxes at local or state levels and require retailers to remit tax when goods are sold to consumers. This is most common with smaller-scale or specialised products, such as fuel in certain states.

In the case of service excise taxes, such as air travel, for example, the service providers, in this case, the airlines, collect and remit the excise tax directly to the government.

Consumers

While it is technically the businesses that remit the excise taxes to the government, generally the burden will fall on the consumers. As excise taxes are in the price of a good or service, consumers indirectly pay the tax each time they purchase an excise-taxed good. For example, fill up your car's gas tank and you see that the federal and state excise taxes are tacked on to the pump price. In the same way, when you purchase alcohol or cigarettes, the price includes the excise taxes that the manufacturer or importer will pass down.

Types of Excise Taxes

Sin Taxes Sin taxes are those imposed on products known to be harmful to public health, such as tobacco and alcohol. The revenue objectives of sin taxes are not solely monetary but also serve a deterrent purpose. Because excise taxes on tobacco and alcohol have significant implications for public health, they are usually quite high. Though manufacturers cover these taxes, consumers pay for them in the retail price of the product.
Fuel Taxes Fuel taxes are probably the most collected excise tax. These taxes are levied on gasoline, diesel, among other types of fuels consumed by motor vehicles. The money collected through fuel excise taxes usually is channelled to funding public infrastructure, such as maintenance and construction of roads. The fuel excise tax is paid by oil companies, importers, and refineries though it's felt at the pump by consumers.
Taxes on Luxury Goods Some excise taxes can also be imposed on luxury goods such as yachts, high-cost cars, and luxury jewellery. These taxations target the wealthier consumers who purchase these products. The tax is paid by businesses involved in the manufacturing or importing of luxury goods. Still, the factor remains the same because all excise taxes are passed to the consumer.
Taxes on Airline Tickets The excise tax on air travel accumulates through airline ticket taxes. That is to say, the tax is levied on the ticket price by the carriers, with them collecting it from passengers although it remains a charge payable by the airlines to the government.

Why Does Excise Tax Matter?

An excise tax plays several very important roles in the economy. It brings in good revenues to governments and often is directed toward certain public goods like road maintenance, healthcare programs, or environmental conservation. Another role in which excise taxes prove useful is as a regulatory measure for products that are considered detrimental to human health and the environment, for example, cigarettes or fossil fuel.

An excise tax will have a marginal impact on pricing strategies, production decisions, and demand in markets. Manufacturers, importers, and retailers must know their tax liability and take it into their planning. Lack of proper management of excise taxes leads to improper legal consequence and burden financial consequence.

Excise taxes are not always perceptible in what consumers are paying through it, but indirectly, they are reducing purchasing power. In most cases, high excise taxes usually mean that there will be a high price for goods or services in which the tax is applied.

Business Entities Responsible for Excise Taxes

The business entities responsible for remitting the excise taxes are manufacturers, producers, importers, or retailers. However, it is the consumers who pay their part of the excise tax in the form of increased prices. Excise taxes are mainly on certain goods or services to raise revenues for public projects or even control the consumption of harmful products. Knowing who pays excise tax and what its implications are among businesses and consumers will help better navigate this financial and regulatory landscape.