Compared to other types of taxes, excise taxes can seem more obscure for tax laypeople despite being impacted by them. So what are they?
The Internal Revenue Service provides a succinct explanation that excise taxes are imposed on purchases of certain goods or activities. As the IRS points out, the tax is often built into a product’s price. For example, alcohol producers and importers pay excise taxes on alcoholic beverages, and the amount of taxes paid is passed along until it reaches the ultimate customer as part of the retail price. There are numerous federal excise taxes, ranging from cigarette taxes to communications services taxes to taxes on the sale of ozone-depleting chemicals.
On the state level, excise taxes tend to be more cumbersome. Each state imposes many of the same taxes as the federal government (e.g., alcohol, tobacco, fuel, communications). Many states also levy additional excise taxes that are often reflective of their particular economic activities. For example, Washington state has an enhanced food fish excise tax, with rates varying based on the type of fish, while Maine has a $0.015 per pound blueberry tax.
Another complication on the excise front is the complex relationship between excise taxes and fees, which generally have different purposes. Taxes are intended to raise money for general governmental costs, with fees paying for specific services. A 2013 Tax Foundation report found that most states generally follow these definitions in their case law, with courts looking at a levy’s purpose and not just what it’s labeled as.
In many states, fees can be imposed on the same entity or activity as a particular excise tax. For example, Wisconsin imposes an intoxicating liquor occupation tax on each liter of alcohol, with an accompanying administrative fee levied on either the gallon or the liter. However, the distinction between taxes and fees can be an important one, as illustrated earlier this year in Calif. Bldg. Indus. Ass’n v. State Water Resources Control Bd. The California constitution requires different legislative actions for approving taxes versus fees, and the California Supreme Court had to decide whether a particular charge was an illegally imposed tax or a fee.
Despite most states’ case law assigning specific characteristics to taxes and fees, states sometimes use “tax” and fee” interchangeably in their documents. Alabama imposes what is referred to as a “hazardous waste disposal fee” under its state statute, while the state’s department of revenue webpage refers to it as a fee in some places and an “environmental tax” in others.
An additional wrinkle is created by how some states may classify the tax treatment of certain activities. For example, in some states, the taxes on hotel rentals are classified as sales tax, and the general sales tax applies to these transactions. In other states, the hotel tax is imposed as an excise tax in addition to the state sales tax. Sales taxes and excise taxes are also sometimes bundled together. Minnesota includes sales taxes in the price of tax stamps that cigarette distributors are required to buy and apply to their cigarette packages to indicate that they’ve paid the excise tax on their products.
Both the bases and rates of state excise taxes also tend to constantly change as states strive to find new revenue streams or tax developing markets. A good example is the taxation of cannabis in states like Colorado and Oregon. To keep up with state excise taxes in action, and to learn more about state tax generally, make sure to keep reading Bloomberg Tax’s SALT Talk.
Continue the discussion Bloomberg Tax’s State Tax Group on LinkedIn: If your state imposes an excise tax, how does it interact with other types of taxes on entities and activities?
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