What is an excise tax?
Published Monday 19 October 2026
Table of contents
Key takeaways
- Excise tax is a tax on specific goods, typically alcohol, tobacco and fuel, rather than on spending in general
- Governments charge it as a fixed amount per unit or a percentage of value, and some combine the two
- Who pays depends on the country, and the cost is usually built into the price of the goods
- Rates, rules and licensing vary by country, so check with your national tax authority before you make or import excise goods
What is excise tax?
Excise tax is a tax on specific goods, typically alcohol, tobacco and fuel. Each country sets its own rates and licensing rules.
Broad consumption taxes such as value-added tax (VAT), goods and services tax (GST) or sales tax apply to most things you buy. Excise is narrower: the Organisation for Economic Co-operation and Development (OECD) report Consumption Tax Trends 2024 describes it as a tax on specific goods only.
Governments use excise to raise revenue and to influence behaviour where consumption harms health or the environment, according to the same OECD report. As a made-up illustration, picture a tax that adds $1 to a product’s shelf price: the higher price is the signal meant to steer buyers away from it.
Types of excise tax
Excise is usually charged in one of two ways. The method you face affects how your tax bill moves when your prices or sales volumes change.
Specific excise tax
A specific excise is a fixed amount per unit of product, such as per litre or per pack. The OECD’s 2024 report also calls this an ad quantum excise.
Because the charge depends on quantity, the tax per unit stays the same whether you sell a budget product or a premium one.
Ad valorem excise tax
An ad valorem excise is a percentage of the product’s price or value, so the tax rises as the price rises. The same OECD report notes that some countries combine both methods.
Common excise taxes
Most excise systems focus on a short list of product groups. The OECD’s 2024 report names the main groups taxed in every OECD country as:
- alcoholic drinks, such as beer and wine
- tobacco products, such as cigarettes
- mineral oils, including road fuels such as petrol (gasoline) and diesel
In the European Union (EU), the European Commission also lists energy products and electricity among the goods subject to excise.
Some countries also tax other goods, services or activities. In the United States, for example, the Internal Revenue Service (IRS) applies federal excise to certain services and activities as well as goods.
Who pays excise tax?
Who pays excise depends on the country. In the United Kingdom, excise duty applies to goods produced locally and to imports, on top of any customs duty.
In the United States, federal excise can apply when goods enter the country or are sold or used after import.
The OECD’s 2024 report describes consumption taxes such as excise as collected from businesses in the production and distribution chain. The same report says they’re then passed on to final consumers as part of the purchase price.
For your business, excise is a direct cost of each unit you make or import. Treat it like materials or packaging when you set your prices.
Excise tax rates and charges
Each country sets its own excise rates nationally, and those rates change over time. These labelled examples show how rates look in different places.
In the United States, IRS Publication 510 (December 2025) sets federal tax on gasoline at $0.184 per gallon and on indoor tanning at 10%. Both are federal rates only.
In the EU, the European Commission sets harmonised minimum excise rates for alcohol, tobacco, energy products and electricity. Member states can charge more than the minimum, so actual rates differ across the EU.
For current rates where you trade, check your national tax authority’s website before you price a product or file a return.
Here’s an illustrative example using made-up rates from no real country. Say you sell 1,000 bottles of spirits a year at a wholesale price of $20 each.
Under a specific excise of $3 per bottle, you’d owe $3,000. Under an ad valorem excise of 15%, you’d owe $3 per bottle ($20 × 15%), which is also $3,000 in total.
Now say you raise your price to $25. The specific tax stays at $3,000, while the ad valorem tax rises to $3,750 ($25 × 15% × 1,000).
Excise tax vs VAT, GST and sales tax
Excise and broad consumption taxes can apply to the same sale. VAT, GST and sales tax cover most goods and services, usually as a percentage of the price, while excise targets specific products.
The two taxes also stack. The OECD’s 2024 report notes that VAT in OECD countries is usually charged on the duty-paid value. That means the excise becomes part of the amount VAT is worked out on.
Picture a bottle of wine: the producer’s price plus excise forms the base for VAT, and the shopper pays both at the till.
Excise tax vs excise duty
The two terms mean much the same thing, and usage depends on where you are. The European Commission and the UK government say “excise duty”, while the IRS in the United States says “excise tax”.
Whichever term you see, it refers to a tax on specific goods. Use the name your own tax authority uses when you look up rates.
Why excise tax matters to small business
If you make or import excise goods, the tax affects your pricing and your paperwork. Approval rules differ by country, as these two examples show.
In the United States, distillers need a permit from the Alcohol and Tobacco Tax and Trade Bureau (TTB) to operate a distilled spirits plant. In the UK, you need your premises approved as an excise warehouse to store and move excise goods with duty suspended.
Filing is part of the job too. In the United States, businesses report many federal excise taxes on Form 720, a quarterly return.
Rates can change, so review your prices whenever your tax authority announces an update. Excise is normally collected when goods are released for consumption, according to the OECD’s 2024 report. Plan your cash flow around each bill.
Accounting software like Xero helps you track expenses and costs in one place. That makes it easier to see what excise adds to your costs.
Manage excise costs and your finances with Xero
Keeping on top of excise is just one part of running a compliant, profitable business. Xero brings your finances together in one place, giving you a real-time view of your cash flow and expenses.
Whether you’re reconciling transactions or preparing for tax time, Xero makes it simpler to stay organised and in control. Pick the plan that suits your business and get one month free.
FAQs on excise tax
Here are quick answers to common questions about excise tax.
What is an example of excise tax?
In the United States, examples include the federal tax on gasoline listed in IRS Publication 510. In the EU, member states charge excise on alcohol, tobacco and energy products at or above the minimum rates set by the European Commission.
How is excise tax different from VAT, GST or sales tax?
According to the OECD’s 2024 report, excise is normally collected once, from a registered business, when goods are released for consumption. The same report contrasts this with VAT, which is collected in stages along the supply chain.
How is excise duty calculated?
For a specific excise, multiply the quantity by the rate per unit; for an ad valorem excise, multiply the value by the percentage rate. Where a country uses both, you work out each part and add them together.
Do small businesses need an excise licence?
It depends on the country and the goods, so check with your national tax authority before you start producing or importing excise goods. In the United States, applying for a TTB distilled spirits permit has no federal fee.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.