Sales tax and excise tax are two separate taxes on purchases, but they work in fundamentally different ways
Sales tax is a general tax applied to most goods and services you buy. It is collected at the point of sale by the retailer and sent to the state or local government. The tax rate is the same regardless of what you are buying — groceries, clothing, electronics — though some items are exempt in certain states.
Excise tax is a tax on specific products only: gasoline, alcohol, tobacco, airline tickets, fishing equipment, and a handful of others. It is often built into the price you see on the shelf, so you may not notice you are paying it. The federal government collects some excise taxes; states and localities collect others. A single product can have both sales tax and excise tax stacked on top of each other.
The key difference: sales tax applies broadly to almost everything you purchase, while excise tax targets only certain goods the government wants to discourage or regulate.
Key Takeaways
- Sales tax is a general tax on most purchases; excise tax applies only to specific products like gasoline, alcohol, and tobacco.
- Sales tax rates vary by state and locality but apply the same way to all taxable goods; excise tax rates differ by product and are often hidden in the listed price.
- Excise taxes are designed to discourage consumption of certain items or to fund related programs, while sales tax is primarily a revenue source for government.
- You can pay both sales tax and excise tax on the same item — for example, a bottle of beer has both an excise tax and a sales tax added to it.
How sales tax works in practice
When you buy something at a store, the cashier rings up the price and then adds sales tax at checkout. The rate depends on where you live. Some states have no sales tax at all. Others range from around 4 percent to over 7 percent. Many cities and counties add their own local sales tax on top of the state rate, so the total can reach 10 percent or higher.
The retailer collects the tax from you and then sends it to the state or local tax authority. Sales tax applies to most tangible goods — clothing, furniture, electronics, groceries in some states — and increasingly to services like haircuts and repairs. A few categories are usually exempt: prescription medications, medical devices, and in many states, unprepared food.
The amount you pay in sales tax is proportional to the price of the item. A $100 purchase in a 7 percent sales tax area costs $107. A $10 purchase costs $10.70. The tax rate stays the same; only the dollar amount changes.
How excise tax works in practice
Excise tax is built differently. Instead of being added at the register, it is often already included in the price you see. When you buy a gallon of gasoline, a pack of cigarettes, or a bottle of beer, part of what you pay goes directly to excise tax before the retailer ever sees it.
Federal excise taxes on gasoline, for example, are 18.4 cents per gallon for regular gasoline and 24.4 cents per gallon for diesel. These amounts do not change based on the price of oil — they are flat per-unit taxes. States add their own excise taxes on top, ranging from around 7 cents to over 50 cents per gallon depending on the state. When you pump gas, you are paying all of these at once, though they are not itemized on your receipt.
Excise taxes exist on a narrower list of products: gasoline and diesel fuel, alcohol (beer, wine, spirits), tobacco products, airline tickets, fishing equipment, firearms and ammunition, and a few others. The federal government sets some rates; states set others. A state can have a higher excise tax on alcohol than the federal rate, and you pay both.
Why these taxes exist and what they fund
Sales tax is primarily a revenue source. States and localities use it to fund schools, roads, police, and general government operations. It is broad-based because it applies to most purchases, so the burden is spread across many transactions.
Excise tax serves a different purpose. It is often called a "sin tax" when applied to alcohol and tobacco because the goal is partly to discourage consumption of products the government considers harmful. Excise taxes on gasoline fund highway maintenance and infrastructure. Excise taxes on firearms fund wildlife management programs in some states. The tax is designed both to raise money and to influence behavior — the higher the tax, the less people buy.
This is why excise taxes tend to be much higher per unit than sales tax. A pack of cigarettes might have a $1 or $2 excise tax added to it, which is far more than the sales tax on that same pack would be.
When you pay both taxes on the same item
Many products have both sales tax and excise tax. A bottle of beer has a federal excise tax (around 11 cents per 12-ounce bottle), a state excise tax (which varies widely), and then sales tax on top of the total. A gallon of gasoline has federal and state excise taxes built in, and then sales tax is added to the final price in most states.
The order matters slightly for the consumer. Excise tax is usually calculated first and included in the base price. Sales tax is then calculated on that total, including the excise tax. So you end up paying sales tax on the excise tax as well — a small compounding effect.
This stacking is intentional. The government wants the full tax burden on these items to be high enough to discourage consumption or to generate substantial revenue for related programs.
State and local variation in excise taxes
Excise tax rates vary dramatically by state and sometimes by locality. Gasoline excise taxes range from 7.5 cents per gallon in Alaska to over 60 cents per gallon in California. Cigarette excise taxes range from 17 cents per pack in Missouri to over $4 per pack in New York. Alcohol excise taxes differ by type of beverage and by state.
Sales tax rates also vary by state, but the variation is more predictable. Most states with sales tax fall in the 4 to 7 percent range. Excise tax rates, by contrast, can be two or three times higher in one state than in a neighboring state, and they change more frequently as legislatures adjust them.
This variation means that the total tax you pay on a gallon of gasoline or a pack of cigarettes can be very different depending on where you live. Someone buying cigarettes in New York pays far more excise tax than someone buying the same product in Missouri, even if the sales tax rate is similar.
Frequently Asked Questions
Is excise tax included in the price shown on the shelf?
Usually yes for gasoline, alcohol, and tobacco. The excise tax is built into the price before it reaches the shelf. For airline tickets and some other items, it may be shown separately on your receipt. Check your receipt to see the breakdown, or ask the retailer if you are unsure.
Do I pay sales tax on top of excise tax?
Yes, in most cases. Sales tax is calculated on the final price, which includes the excise tax. So you pay excise tax first, then sales tax on the total. This means the effective tax rate on these items is higher than either tax alone.
Can a state eliminate its excise tax?
States can change their excise tax rates or eliminate them, but federal excise taxes remain. For example, a state could lower its gasoline excise tax, but the federal 18.4 cents per gallon would still apply. Some states have very low or no state excise tax on certain products, but federal rates are consistent across the country.
Why is excise tax hidden in the price instead of shown separately?
Historically, excise taxes were included in the price to discourage people from noticing the tax burden and to make the product seem cheaper than it actually is. This practice continues today. Some receipts do break out excise tax separately, but many do not, so consumers often do not realize how much of the price is tax.
Do all states have sales tax?
No. Five states have no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, some of these states have other taxes or excise taxes that serve similar purposes. Even in states with no sales tax, federal excise taxes on gasoline, alcohol, and tobacco still apply.