What Is a Federal Excise Tax?

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Excise taxes, also known as manufacturer’s excise taxes, are fees imposed by all levels of government on specific goods, activities, and services, such as gasoline, gambling, and telephone service. Excise taxes are usually passed on to the consumer as the normal cost of doing business. The amount of the tax is occasionally posted for the consumer, such as at many US gas stations. However, the amount is often simply incorporated into the price without any notation.

Tax Collection

Most state constitutions include provisions for excise taxes, most limiting the amounts collected to fuels and activities such as gambling. Manufacturers usually pay excise taxes when filing federal income taxes. Federal excise taxes on imported goods are collected at the point of entry to the United States.

Telephone Tax

The first telephone excise tax was passed in 1898 to increase federal revenue to assist in paying off the national debt incurred as a result of the Spanish-American War. The long-distance tax was reintroduced in 1914 to assist in raising funds for World War I and again in 1932 to assist in collection for national relief programs. With America’s entrance into World War II, the amount of the tax was raised and, for the first time, local telephone service was taxed. The federal excise taxes on all types of telephone services and delivery systems have been collected in increasing amounts since World War II.

Gasoline Tax

The first excise tax on fuel was passed by the state of Oregon in 1919, and other states soon followed. All states and the District of Columbia were collecting excise gasoline taxes by 1932, ranging from a low of 2 cents to a high of 7 cents per gallon. The federal government had enacted other forms of excise taxes prior to 1932, but Congress saw gasoline as a prime mechanism for collecting additional funds to pay for the New Deal programs. The first federal tax on gasoline was a penny per gallon. Since it was first adopted, the federal gasoline excise tax has funded the Highway Trust Fund, removal of leaking underground fuel storage tanks, reduction of the national debt, alternative methods of transportation and creation and upkeep of recreational trails.

Aviation Tax

Federal excise taxes are also levied on aviation companies. Private operators pay a fuel tax, while commercial firms pay taxes based on the amount of property transported. Passenger taxes are based on segments of the flight, a head tax and/or a percentage of the fee collected for travel.

Federal Tax Exemptions

Manufacturers' unions and industry lobbyists work to reduce the amount of excise taxes levied on industries, goods and services. Congress passes new exemptions and tax refunds each year, while earlier exemptions expire or are extended. Some fishing and archery products, for example, are exempt from federal excise taxes. Aviation may be exempt from excise tax payment depending on its purpose (i.e., for museums, governments, small aircraft, and emergency medical flights, among others). Some firearms sales can likewise be exempted from excise tax depending on the volume of business done by the manufacturer, producer, or importer.