What is an excise tax?

Excise tax (definition)

Excise taxes are levied to discourage the consumption of certain types of products. The tax is paid by business but the cost is passed to consumers.

Excise tax rates can be quite high, so businesses facing these taxes need to account for them carefully.

Common excise taxes

Governments tend to levy excise taxes to discourage consumption of certain goods or services. This is often for health, congestion, or environmental reasons. Some of the most common excise taxes are charged on:

  • alcohol
  • tobacco and vaping products
  • gambling
  • sugar or sugary products
  • energy consumption (especially petrol)
  • air travel
  • luxury goods (especially vehicles)
  • heavy vehicles

Who pays excise tax?

Businesses generally pay excise taxes rather than consumers. The excise is levied against the original manufacturer in most countries, but there are exceptions – in the US, for example, distributors pay the excise on gasoline.

Although businesses typically pay the tax, the cost is passed down the supply chain to consumers.

Excise tax rates and charges

Excise taxes are paid on top of VAT, and they’re often substantially higher.

In most cases, they’re charged per weight, volume, or unit. For example, a government might tax a specific amount per litre of fuel, or per pack of cigarettes. Occasionally, excise tax is charged as a percentage of the price.

Why excise tax matters to small business

Small business owners need to be aware of excise taxes that apply to them and their industry, so they can plan for the taxes and include them in their price modelling. Business owners also need to ensure they have sufficient cash flow to pay the tax when it’s due. Accounting software like Xero can help.

Excise tax vs excise duty

Excise duty means different things in different places. In some regions, excise duty is simply a different word for excise tax. In other regions it’s called an excise tax when a local business makes the goods, and an excise duty when a business imports the equivalent item. In other words the importer pays excise duty to make things fair.

See 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.