What Is Excise Tax? Who Pays It?

Businesses in the United States have to pay a variety of taxes on the products they sell. The most common example of this is sales tax. But in some cases, companies may also have to pay excise taxes.

But what is excise tax? Is your company responsible for it? And if so, is there any way to write off or reduce your tax bill? These are the answers to all of those questions and more in the article below.

Read More: Owe Money to the IRS? Most People Don’t Realize You Can Do This

What Is Excise Tax?

Unlike sales taxes, which apply to any product or service sold, excise taxes apply to a single good, service or activity for a special reason.

For example, cigarettes have a federal excise tax of a little more than $1 on each pack. Other products with excise taxes include fuel, alcohol and sports betting.

Excise taxes can be either a flat fee or a percentage of the cost of the product or service. For instance, a state could put a 10% excise tax on tanning salons or charge a flat $5 excise tax on every tanning service.

Why Do Excise Taxes Exist?

As these examples suggest, the government will often levy excise taxes against a particular product or service to discourage its use.

For example, the government wants people to quit smoking, so it charges an extra $1 per pack to give them more of a financial incentive to do so. Whether you agree with this approach or not, it’s something that both the federal government and many state governments do.

The funds collected through excise tasks can be allocated anywhere. But they’re often put into trust funds for projects related to the taxed product. For instance, California collects an excise tax of 25 cents on cigarettes. It puts that money into a fund that can only be used for tobacco-related education and research.

Who Pays Excise Taxes?

The retailer, manufacturer or importer is typically responsible for paying excise taxes on the products they sell. However, businesses are free to pass all or some of these costs on to the buyer.

This means that although excise taxes are meant to discourage businesses from selling certain products and services, it’s often consumers who pay the cost.

How Can I Avoid Federal Excise Tax?

Whether you can avoid federal excise tax depends on whether you’re a consumer or a business owner. For consumers, avoiding federal and state excise taxes is as simple as not buying the products or services that have them.

But that’s not always possible — especially since products like gas have excise tax. It’s also worth noting that your tax bracket does not influence how much you pay in excise taxes. It’s entirely based on what the government charges and how much of that cost the retailer passes on to you.

Business owners can avoid excise taxes by not selling products or services that have them. If that’s not an option for your business, then you have to decide between paying excise taxes yourself or charging your customers for them by increasing the cost of your products.

Visit the tax resource center to learn more about how to optimize your tax situation this year.

What States Have the Highest Excise Taxes?

Excise taxes exist throughout the United States since they can be levied by the federal government. But states can set their own excise tax requirements as well. Some of these are more expensive than others.

States with the highest excise tax rates include:

• New York

• Illinois

• Washington

• Rhode Island

• California

If you’re looking for lower excise taxes, you can find them in states like Wyoming, Mississippi and Louisiana. This is one reason why it’s often more affordable to buy things like gas and cigarettes in these states.

Final Take

Unless you’re a business owner, excise taxes aren’t something you need to worry about until you’re trying to save money. They’ll either be added to your bill at the store automatically or the retailer will pay them for you.

Business owners need to know whether any products they sell carry excise taxes. If that’s the case, you’ll need to decide whether you want to pass that charge on to customers or pay it yourself. The answer may depend on your profit margin and what your competitors do.

This article originally appeared on GOBankingRates.com: What Is Excise Tax? Who Pays It?