What Does Excise Duty Mean and How Is It Calculated?

Excise duty is an indirect tax on the sale or use of specific goods, services, or activities. Unlike sales tax, an excise duty is imposed on the producer or importer and is embedded within the product’s price, rather than being stated separately on a receipt. The purpose of these taxes is to generate revenue and to discourage the consumption of items deemed harmful. Revenue is often directed toward specific purposes; for instance, taxes on motor fuels finance the Highway Trust Fund, while taxes on airline tickets support the Airport and Airway Trust Fund.

Goods and Services Subject to Excise Duty

Transportation fuel is a category of goods subject to excise duty. The federal government imposes a tax of 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel, rates that have been in place since 1993. This tax is paid by the producer or importer, and most states also levy their own per-gallon excise taxes on fuel.

Tobacco and alcohol products are subject to what are often called “sin taxes.” These federal duties are levied to generate revenue and discourage consumption due to public health concerns. For tobacco, the tax is calculated per unit, equating to about $1.01 per standard 20-cigarette pack. Alcoholic beverages are taxed based on the type of alcohol and its alcohol content, with different rates for beer, wine, and distilled spirits.

The transportation sector faces several excise duties beyond fuel. Federal taxes on air travel include a 7.5% tax on the price of domestic tickets, a domestic segment tax of $5.20 per passenger for each take-off and landing, and a fee on international travel. For 2025, the international fee is $22.90 per passenger for both arrivals and departures. The sale of heavy-duty trucks and trailers is also subject to a retail excise tax applied to vehicles that exceed certain weight thresholds.

Some excise taxes address health and environmental concerns. The government levies a 10% excise tax on indoor tanning services, established by the Patient Protection and Affordable Care Act. Environmental excise taxes are imposed on items like ozone-depleting chemicals and on industries that contribute to pollution, such as petroleum and chemical production.

How Excise Duty is Levied

The calculation of excise duty falls into two primary methods: specific duty and ad valorem duty. Both federal and state governments utilize these calculation structures to determine the tax liability for producers and manufacturers.

A specific duty is a fixed monetary amount charged per unit of a product, and the final price of the item is not a factor in this calculation. For instance, the federal excise tax on gasoline is a specific duty, calculated as a set number of cents for every gallon sold. A brewery would calculate its federal excise tax liability by multiplying the barrels of beer it produces by the specific tax rate per barrel.

An ad valorem duty is calculated as a percentage of the value of the good or service. An example is the federal excise tax on domestic air travel, where the tax is 7.5% of the ticket price, so a more expensive ticket incurs a higher tax. Another application is the “gas guzzler” tax, an ad valorem tax imposed on the sale of new cars that do not meet certain fuel economy standards.

Responsibility for Payment and Remittance

The legal responsibility for remitting excise duty to the government rests with the manufacturer, producer, or importer. These businesses are required to track their production or import volumes, calculate the tax owed, and file forms like the quarterly federal Form 720. The Internal Revenue Service (IRS) is the primary agency responsible for collecting federal excise taxes.

Although the producer is the entity that sends the payment to the government, the economic burden of the tax is passed down the supply chain. The manufacturer incorporates the cost of the excise duty into the wholesale price it charges to distributors or retailers. This cost is then included in the final price that the consumer pays for the product, making it an indirect tax where the consumer ultimately bears the cost.

For example, when a consumer buys a gallon of gasoline, the price they pay at the pump includes the federal and state excise taxes that the oil producer or refiner has already paid or will pay to the government. The tax is embedded in the price, not added on separately at the time of purchase like a sales tax.