Who Pays the Excise Tax: Buyer or Seller?
Clarify excise tax responsibility. Learn the distinction between who pays the government and who ultimately bears the cost.
Excise taxes are indirect taxes levied on specific goods, services, or activities, often imposed at the point of production, importation, or sale. This article clarifies who ultimately bears the cost of these taxes—the buyer or the seller.
Legal Liability Versus Economic Burden
Understanding excise taxes requires distinguishing between legal liability and economic burden, also known as tax incidence. Legal liability refers to the party directly responsible for remitting the tax payment to the government. This obligation typically falls upon the producer, manufacturer, importer, or seller of the taxed good or service.
Even when the seller holds the legal obligation to remit the tax, they frequently incorporate this cost into the product’s final price. This shifts the financial burden onto the buyer, who then pays a higher price. This transfer of cost is termed the “economic burden” or “tax incidence.”
While the buyer ultimately pays the increased price that includes the embedded tax, they are not the entity directly remitting the tax to the government. The legal remitter, usually the business, handles the calculation and payment to the tax authorities. This distinction illustrates how the “who pays” question is nuanced, as the party responsible for the payment to the government is often different from the party who ultimately feels the financial impact.
Common Excise Tax Applications
Excise taxes apply to various goods and services, with legal liability typically resting on specific points in the supply chain. For motor fuels like gasoline and diesel, federal excise taxes are 18.4 cents per gallon and 24.4 cents per gallon, respectively. Fuel distributors or refiners are generally legally liable for remitting these taxes, which are then built into the price consumers pay at the pump.
Tobacco products, including cigarettes, cigars, and smokeless tobacco, also carry federal excise taxes, with rates varying by product type. Manufacturers and importers of these products are legally responsible for paying these taxes, which are subsequently passed on to consumers through higher retail prices. Similarly, alcoholic beverages are subject to federal excise taxes based on volume and alcohol content, with manufacturers and importers bearing the initial legal liability.
Air transportation services incur a federal excise tax, which includes a percentage of the ticket price, 7.5%, plus a per-segment fee. The airline collecting the fare is responsible for collecting and remitting this tax, effectively passing the cost to the passenger. Indoor tanning services are subject to a 10% federal excise tax on the amount paid for the service, with the tanning salon legally obligated to collect this tax from the customer and remit it.
Firearms and ammunition are also subject to federal excise taxes, typically 10% of the sales price for pistols and revolvers, and 11% for other firearms and ammunition. The manufacturer or importer is legally liable for these taxes upon the first sale or use. In these examples, while the legally liable party remits the tax, the cost is incorporated into the final consumer price, making the buyer the economic bearer of the tax.
Collection and Remittance
Collecting and remitting excise taxes involves specific procedures for legally liable parties. Businesses subject to federal excise taxes, such as manufacturers, importers, or sellers, are responsible for calculating, reporting, and remitting these taxes to the Internal Revenue Service (IRS) by filing Form 720, Quarterly Federal Excise Tax Return.
Form 720 is filed quarterly, with specific due dates for each quarter. If a deadline falls on a weekend or holiday, the due date shifts to the next business day. Businesses with a quarterly tax liability exceeding $2,500 are required to make electronic payments, with some excise taxes requiring more frequent, semi-monthly deposits.
Buyers have no direct interaction with tax authorities regarding these excise taxes. Their payment is embedded within the purchase price of the good or service, and the legally liable business handles all reporting and remittance obligations. This system streamlines collection for the government while making the tax largely “hidden” from the consumer.