When to Charge Excise Tax and When to Charge Sales Tax

When to Charge Excise Tax and When to Charge Sales Tax

Taxes are an inevitable part of running a business. One of the most important decisions a business owner must make is which taxes to charge to customers. Two types of taxes that are often confused are excise tax and sales tax. Excise and sales taxes are different from each other and understanding the difference between the two can save your business from paying unnecessary fines and penalties.

Excise tax is a tax on a specific product or service, while sales tax is a tax on the sale of a product or service. Excise tax is charged at the manufacturer or distributor level and is included in the price of the product or service. Examples of goods which have excise tax include fuel, cigarettes, and alcoholic drinks. Excise tax is used by the government to influence consumer behavior, to reduce demand for certain products, to raise revenue, and to fund specific government programs.

On the other hand, sales tax is charged at the point of sale and is generally added to the retail price of the product or service. For example, if you purchase a product for $100 and the sales tax is 10%, you will pay $110. Sales tax is charged by state governments and varies from state to state. Certain products and services are exempt from sales tax, such as food, clothing, and medical supplies. Sales tax is used by the government to fund public programs and services such as schools, roads, and public safety.

So, how do you know if you should charge excise tax or sales tax? The answer depends on the nature of your business and the product or service you are offering.

If you are a manufacturer or distributor of goods that are subject to excise tax, you must charge excise tax and include it in the price of the product or service. Failure to pay the correct amount of excise tax can result in hefty fines and penalties.

If you are a retailer or service provider, you must charge sales tax at the point of sale to your customers. The sales tax rate can vary between states or even cities, so it’s important to know the specific sales tax rate in your location.

Certain products and services may be subject to both excise tax and sales tax. Take for example, a manufacturer of cigarettes. The manufacturer must pay excise tax on each pack of cigarettes they produce. When the cigarettes are sold to a retailer, the retailer must also charge sales tax to the customer at the point of sale.

In conclusion, if you are a business owner, it’s important to understand the difference between excise tax and sales tax. Charging the correct tax can help you avoid penalties and fines. Excise tax is charged at the manufacturer or distributor level on specific products or services, while sales tax is charged at the point of sale and varies by state. By taking the time to understand these taxes, you can ensure that your business is in compliance with the law and avoid any unnecessary expenses.