Understanding how excise tax differs from sales tax has become essential for businesses navigating modern tax compliance. While most e-commerce sellers focus on sales tax obligations post-Wayfair, excise taxes represent a separate obligation that significantly impacts specific product categories. Missing the distinction can lead to pricing errors, compliance gaps, and unexpected audit liabilities.
That’s where Hands Off Sales Tax (HOST) excels. Providing clarity on both tax types and managing the compliance burden so you can focus on growth instead of decoding tax codes.
Sales Tax 101: The Foundation
Sales tax is a consumption tax charged at the point of sale on most retail transactions. Retailers collect a percentage of the sale price and remit it to state and local governments, funding schools, roads, hospitals, and emergency services.
Unlike federal income tax, sales tax operates entirely at state and local levels. Forty-six states and Washington DC impose sales tax, while Delaware, Montana, New Hampshire, and Oregon have none. Alaska permits local jurisdictions to levy sales tax but maintains no state requirement.
Rates vary dramatically across jurisdictions. Each state sets its base rate, then counties, cities, and special districts add percentages. A customer in one city might pay 6.25% while someone 20 miles away pays 9% on identical products. With over 11,000 tax jurisdictions nationwide, calculating correct rates creates significant challenges.
The 2018 South Dakota v. Wayfair decision fundamentally changed sales tax for online retailers. Economic nexus rules now require collection once you exceed state-specific thresholds, typically $100,000 in sales or 200 transactions annually. This forced e-commerce businesses to monitor sales across dozens of jurisdictions and register in states where they’ve never operated physically.
Excise Tax Explained: Targeted Revenue Collection
Excise tax operates in a fundamentally different way. Rather than applying broadly to retail transactions, excise taxes target specific goods, services, or activities deemed to create social costs or require dedicated funding.
Excise taxes levy at federal, state, and local levels—often simultaneously on the same product. Federal excise taxes apply uniformly nationwide, while state and local versions vary by jurisdiction. In fiscal year 2020, federal excise taxes raised $86.8 billion, representing approximately 2.5% of total federal revenue.
Specific excise taxes charge a fixed amount per unit: 18.4 cents per gallon of gasoline (federal), 24.4 cents per gallon of diesel, or just over $1.00 per pack of cigarettes.
Ad valorem excise taxes calculate as a percentage of value: 10% federal tax on indoor tanning services.
Revenue typically funds programs directly related to the taxed product. Fuel taxes support highway construction through the Highway Trust Fund. Tobacco and alcohol taxes fund public health initiatives and cessation programs. This connection between tax and benefit helps offset social costs these products create.
Manufacturers, distributors, wholesalers, and importers pay excise taxes directly to government agencies when producing or selling taxed items. These businesses pass costs to consumers through higher prices, but the tax rarely appears as a separate receipt line item. This “hidden” nature means consumers pay excise taxes indirectly without seeing them itemized.
Key Differences: Excise Tax vs. Sales Tax
Who Pays Each Tax
Sales tax is collected from end consumers at purchase. Customers see it added to receipts as a separate line. Retailers act as collection agents, gathering tax and remitting it to governments.
Excise tax works differently. Manufacturers, distributors, or wholesalers pay excise tax directly to governments. They incorporate costs into wholesale pricing, passing them to retailers and ultimately consumers through higher prices—but consumers rarely see excise tax itemized separately.
When and Where They’re Applied
Sales tax applies broadly to most retail transactions involving tangible personal property and some services. Every qualifying purchase triggers collection in states where nexus exists.
Excise tax applies only to specific goods, services, or activities designated by law. Geographic application differs substantially. Sales tax is entirely state and local. Excise tax can be federal, state, or local—often with multiple levels taxing the same item. A gallon of gasoline incurs 18.4 cents federal excise tax plus state excise taxes averaging 31.02 cents per gallon.
How They’re Calculated
Sales tax is calculated as a percentage of retail sale price. An item sold for $100 in a location with 8% sales tax costs the customer $108.
Excise taxes use two methods. Specific excise taxes charge a fixed amount per unit regardless of price—federal cigarette tax is just over $1.00 per pack whether that pack retails for $5 or $15. Ad valorem excise taxes calculate as a percentage of value at wholesale or manufacturing levels rather than retail.
Common Examples by Tax Type
Sales Tax Examples:
- Clothing, electronics, furniture
- Restaurant meals, home goods
- Most tangible personal property
Excise Tax Examples:
- Gasoline/Diesel: 18.4¢/gallon federal (gasoline), 24.4¢/gallon (diesel), plus state taxes
- Tobacco Products: Just over $1.00 per pack federal, plus state rates from $0.17 (Missouri) to $5.35 (New York)
- Alcoholic Beverages: Varying rates based on type and content, applied federally and by states
- Airline Tickets: 7.5% federal tax plus per-segment fees
- Indoor Tanning: 10% federal tax
- Heavy Vehicles, Firearms, Fishing Equipment
Many products face both taxes. Cigarettes incur federal and state excise taxes at distribution plus sales tax at retail. Gasoline faces per-gallon excise taxes plus sales tax in some states. These multiple layers significantly impact final consumer prices.
Why E-Commerce Sellers Must Understand Both
Economic nexus rules multiplied compliance obligations exponentially. Crossing $100,000 in California sales triggers registration, collection, and filing requirements. The same happens in Texas, New York, Florida, and every state where you exceed thresholds. Many businesses spend 30+ hours monthly managing sales tax—time that generates no revenue.
Sales tax software can automate calculations, but configuration matters immensely. Incorrectly configured software may overtax exempt items, miss required local taxes, or double-tax due to system overlaps.
Excise tax obligations depend entirely on product mix. Most e-commerce sellers won’t encounter excise taxes unless they sell specifically excised goods like tobacco, alcohol, fuel, or firearms.
Understanding both taxes helps price products correctly. When purchasing inventory, excise taxes are often embedded in wholesale costs. Failing to recognize this leads to incorrect markup calculations and margin erosion. For example, if you purchase cigarettes wholesale at $50 per carton, that price already includes approximately $10 in federal excise tax (just over $1.00 × 10 packs) plus state excise taxes.
State tax authorities have become increasingly aggressive pursuing sales tax from remote sellers. An audit can uncover years of unfiled returns, leading to back taxes, penalties, and interest. For businesses handling excised products, compliance burden multiplies.
HOST: Your Partner for Sales Tax Compliance
At Hands Off Sales Tax, we’ve focused exclusively on sales tax services for over 25 years. Our team helps e-commerce businesses manage changing requirements so you can focus on running your business.
Nexus Analysis: We analyze your sales data and footprint to determine precisely where you’ve met economic or physical nexus thresholds.
Sales Tax Registration: We handle registration with every applicable state taxing jurisdiction, completing paperwork and navigating each state’s unique requirements.
Sales Tax Filings: We prepare and file returns monthly, quarterly, or annually based on each state’s requirements, including local and special district returns.
Sales Tax Consultation: Schedule 15, 30, or 60-minute consultations to discuss your specific situation, get clarity on complex scenarios, or receive strategic guidance.
Audit Defense: We handle communications with tax authorities, prepare documentation, organize records, and work to minimize liability.
Voluntary Disclosure Agreements: If you discover past obligations, we file VDAs with states to limit lookback periods and abate penalties.
Free Sales Tax Software Review: We review your configuration to identify costly mistakes like overtaxing exempt items or double-taxing due to system overlaps.
Through our parent company TaxMatrix, we’ve helped North America’s largest companies manage sales tax requirements. Now we bring that expertise to small and medium-sized e-commerce businesses.
Ready to Take Sales Tax Off Your Plate?
Tax compliance doesn’t have to drain your time or create constant stress. Every hour spent researching rules, filing returns, or responding to notices is an hour not spent growing your business.
Whether you’re crossing economic nexus thresholds in new states, unsure about product taxability, or overwhelmed by filing requirements, professional help eliminates guesswork and prevents costly mistakes.
Contact us today to discuss your sales tax needs or schedule a free consultation. Let us handle the tax so you can focus on sales.
Frequently Asked Questions
What is the main difference between excise tax and sales tax?
Sales tax applies broadly to most retail purchases and is collected from consumers at point of sale. Excise tax targets specific goods or services, is paid by manufacturers or distributors, and usually gets passed to consumers through higher prices rather than appearing separately.
Do I need to worry about excise taxes as an e-commerce seller?
Most e-commerce sellers only manage sales tax obligations. Excise taxes apply only if you sell specifically excised products like tobacco, alcohol, fuel, firearms, or other designated items.
Can a single product be subject to both sales tax and excise tax?
Yes. Cigarettes incur federal and state excise taxes paid by distributors, then sales tax collected from customers at retail. Gasoline faces per-gallon excise taxes plus sales tax in some states. These multiple taxation layers are legal and common.
How do economic nexus rules affect my sales tax obligations?
After the 2018 Wayfair decision, businesses must collect sales tax in states where they exceed economic nexus thresholds, even without physical presence. Most states set thresholds around $100,000 in sales or 200 transactions annually. Once you cross a state’s threshold, you must register, collect, and remit sales tax there.
Who actually pays excise taxes to the government?
Manufacturers, distributors, wholesalers, and importers pay excise taxes directly to the IRS or state/local tax agencies using specific forms and schedules. These businesses usually pass costs to retailers and ultimately consumers through higher wholesale and retail prices.
How can I ensure I’m charging correct sales tax rates across all states?
Sales tax rates depend on customer location and can include state, county, city, and special district taxes across over 11,000 jurisdictions. Most businesses use sales tax automation software to calculate correct rates. However, software must be properly configured to avoid costly errors. Having an expert review your setup helps identify mistakes before they become audit problems.
