Luxury Tax Items: What Is Currently Taxed?

A luxury tax is an excise tax levied on goods and services considered non-essential. The purpose of this tax is to generate revenue for the government by targeting individuals with a higher capacity to pay. While a prominent federal luxury tax was repealed, the concept persists through various state and local tax laws. These taxes are applied to a range of high-value items, from vehicles to real estate.

The Repealed Federal Luxury Tax

In 1990, the United States government enacted a federal luxury tax as part of the Omnibus Budget Reconciliation Act. This law placed a surcharge on five categories of items, each with a price threshold that triggered the tax. For passenger vehicles, the tax applied to the portion of the sales price exceeding $30,000.

The tax also extended to other luxury items. Boats and yachts were subject to the tax on sales prices over $100,000, while aircraft were taxed on amounts exceeding $250,000. Jewelry and furs were both taxed on sales prices over $10,000. The tax rate was 10% of the amount that exceeded these established thresholds.

The federal luxury tax was short-lived due to its economic consequences. The tax on boats, aircraft, jewelry, and furs was repealed in 1993. The tax on luxury automobiles was phased out and fully expired at the end of 2002. The repeal was a response to job losses in the affected industries as consumers sought to avoid the tax.

Current State and Local Luxury Taxes

While the federal luxury tax no longer exists, several states and municipalities have implemented their own forms of luxury taxes on high-value vehicles and real estate. For instance, some states levy a higher sales tax rate on vehicles that exceed a certain sales price.

A common local luxury tax is the real estate transfer tax, sometimes called a “mansion tax.” These taxes are imposed on the sale of high-value properties and are structured with tiered rates that increase with the property’s value. A city might charge a higher percentage of the sales price for properties that sell for over $1 million, with additional tiers for more expensive homes.

Some jurisdictions also apply special tax rates to other luxury goods, like jewelry and watches that exceed a certain value. The specific items and thresholds vary widely depending on the state or city.

How Luxury Taxes are Calculated and Paid

A luxury tax is calculated only on the amount that exceeds an established price threshold, not the entire purchase price. For example, if a state has a luxury tax on vehicles over $75,000 and a car is purchased for $90,000, the tax would be calculated on the $15,000 difference.

The seller is responsible for collecting and remitting the luxury tax. The seller calculates the tax due, adds it to the purchase price, and collects it from the buyer. The seller then remits the funds to the appropriate tax authority.

Sellers are required to file specific tax forms to report and pay the collected taxes, usually on a monthly or quarterly basis. Failure to collect and remit these taxes can result in penalties and interest charges for the seller.