Excise tax and sale tax are two different types of taxes that you may encounter as a small business owner. It is important to know the difference between the two so you can navigate these types of taxes more easily.
Excise taxes are generally imposed by the federal government or state governments on items such as gasoline, alcohol, tobacco, and wagering. These taxes are used to generate revenue, as well as to discourage behavior detrimental to individuals and society.
Excise tax is a fixed amount
An excise tax is a fixed amount that is applied to specific goods, services and activities. These taxes are often imposed to discourage the consumption of certain products. They are usually a relatively small percentage of a government’s total revenue.
The sales tax, on the other hand, is a percentage that is applied to almost everything you buy. While this can be a little confusing, it is important to know the difference between the two types of taxes so you can be sure you’re paying the right amount.
Unlike the sales tax, an excise tax is generally only applied to items that have high social costs. These goods include alcohol, cigarettes, gasoline and other items that are considered unhealthy or dangerous by some people.
For example, the federal government imposes an 18.4 cents per gallon excise tax on all gasoline sold in the U.S. The tax applies to both domestic and imported gasoline.
Some states also levy an excise tax on alcohol and tobacco products to help pay for public health programs and infrastructure projects. The government typically collects the money from retailers and distributors, but some consumers end up paying these taxes themselves by purchasing the products.
These fees are often incorporated into the price of the product and are not reflected on the purchase receipt, so customers don’t typically realize they’re paying them. However, it’s the responsibility of businesses that sell these products to remit these taxes and report them to the government once a quarter with Form 720, Quarterly Federal Excise Tax Return.
The government’s goal with these taxes is to discourage the consumption of products that have high social costs. This can be a good way to generate revenue for the government, but it’s important to know the difference between these types of taxes so you can be aware of how they affect your purchases and make informed decisions about the products you buy.
Sales tax is a percentage
Sales tax is a percentage-based tax on goods and services administered by state and local governments. This means that the amount of tax you pay can vary depending on where you live, what type of business you operate and what products you sell.
Most states and municipalities collect sales tax on the sale of certain items, but not all do. In some cases, consumers can buy items like groceries and prescription drugs without paying sales tax. Some states even have sales tax holidays, which occur during specific days each year and allow consumers to purchase items for a lower price.
While most people understand the concept of sales tax, a lot of business owners may not know what it is or how to handle it. The process of collecting and remitting sales tax can be confusing and complicated for small businesses because of the patchwork of regulations and tax rate differences.
Many states require businesses to collect sales tax when they have an "economic nexus" with the state, meaning that the business has a physical location or meets the criteria for economic transactions and sales in the state. This means that it's up to you, as a business owner, to ensure that you comply with these rules and collect the correct tax amount from your customers.
There are also a number of exemptions that can help you save on taxes. For example, some business owners can avoid paying sales tax on the materials they use to make their products by obtaining a resale certificate.
In addition to these exemptions, most states do not charge sales tax on the purchase of clothing or medical devices, and a few even have sales tax holidays. While it can be difficult to stay on top of all the different laws and regulations, taking the time to learn how sales tax works and how to correctly manage it can make the process much easier for your business.
Excise tax is a per-unit tax
Excise tax is a type of tax that's applied to specific goods and services. It can be levied on a product at the manufacturer's stage or when it's sold to consumers. It's a kind of indirect tax that often goes unnoticed by the consumer.
In general, these taxes are levied by federal and state governments at the federal level and by local government at the local level. The revenue they raise can be used for a variety of purposes, including to help fund community programs.
For example, fuel taxes are a common way to raise money for public infrastructure projects. Similarly, cigarette taxes are often used to fund health care costs related to smoking.
These taxes are levied on a product at the time it's manufactured, but they're usually not paid by the consumer. The cost is then passed on to the customer at the point of sale (POS).
There are two types of excise tax: percentage of price and per unit. A percentage of price tax is a tax charged as a fixed amount of the total value of the product or service, while a per unit tax is a specific excise tax that's charged for each unit sold.
The tax incidence of each type of tax depends on the price elasticities of supply and demand. A percentage-based tax has a lower incidence than a per-unit tax, because it doesn't change the marginal cost curve.
The elasticity of a given item's demand is important when determining whether an excise tax should be levied. Economists usually impose taxes that are designed to raise revenue and discourage behavior, like alcohol or tobacco sales, but not on items with a low level of elasticity.
Sales tax is a per-unit tax
The federal government, state governments, and local governments levy excise taxes on goods and services such as alcohol, tobacco, and gasoline. Depending on the jurisdiction, these taxes are either applied as a percentage of the total price or as a fixed amount.
Excise tax revenue accounts for a small portion of total federal and state tax revenues. However, they are a significant source of funding for governments, especially at the state level.
While sales tax and excise tax both impact the supply and demand curves, the way these taxes affect the cost curves is different. A per-unit tax can raise the cost of production or reduce it, and this shifts the supply curve in a different direction than a fixed tax.
As shown in Figure 1, a per-unit tax can impose a significant burden on consumers. The tax shifts the supply curve to the left, reducing the quantity demanded and increasing the equilibrium price. This shift also increases the amount of money that sellers must pay to consumers, as well as reduces the producer surplus.
It is important to note that a per-unit tax can shift the cost curve to the left, but it can also cause a downward shift of the supply curve. This is because the tax raises the cost of production, and if demand for the product is elastic (demand is elastic--think rubber band), this will increase the price.
In contrast, if buyers are not price sensitive, they will not be affected by the change in price. In econogeekspeak, we call this inelastic demand.
A per-unit tax is one of the six determinants of supply, and it can either raise the cost of production or reduce it. A specific tax raises the cost of production by a constant amount, and the result is a downward shift in the supply curve.
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