Illinois Excise Tax Audit

Illinois Excise Tax Audit

The first thing that you need to know about excise tax is that IT IS NOT SALES TAX! This is a very common misconception and there is a lot of area for confusion.

Excise tax differs from sales tax in two fundamental ways. First, it is only on specific goods. Whereas sales tax applies to just about everything you buy (usually with specific exceptions such as unprepared food and clothing), excise taxes are applied to specific goods. The most common examples are luxury goods or those that have been linked to specific health issues like cigarettes, alcohol and tanning salons.

Second, sales tax is a percentage of the sale price. So if you buy a Mercedes S Class, you will pay more sales tax than if you bought a Toyota Corolla. The percentage of tax applied is set by the local government and 45 States in the United States have such a sales tax. Excise tax on the other hand is a flat tax applied before the purchase price for specific items, some of them by states and some by the Federal Government.

There are two types of excise tax – the specific fixed dollar amount mentioned above for gasoline and cigarettes that is included in the price and an ad valorem tax that is a percentage charged for a specific good. There is also a third type of excise tax in the US on retirement accounts, including excess contributions to IRAs, early distributions from those IRAs, and penalty for not meeting the minimum distribution requirements.

The effective federal excise tax rate varies depending on the income bracket of the individual with the Top 1% of earners paying about 0.1% in excise taxes and the bottom 40% paying around 1-1.5% in excise taxes. This is largely because of the gasoline taxes that almost all individuals pay. Gasoline and other essentials make up a larger percentage of poor individuals’ budgets and therefore they pay a higher percentage of what they make in excise taxes.

Other items for which excise taxes apply include beer, liquor, wine, airline tickets, certain types of vehicles (such as luxury cars or trucks), and some other things  such as indoor tanning on which there is a 10% tax, bows, quivers, broad heads and points for arrows (on which there is an 11% tax), sport fishing equipment and tires.

Another very high profile excise tax that has not yet been implemented but will become one of the final pieces of the Affordable Care Act to be implemented in 2018 is the Cadillac Tax. This tax applies to specific types of high-cost health benefit plans, to which a 40% excise tax will be added. These limits are set at $10,200 for individuals and $27,500 for couples and family per year. The measure has not yet been implemented but is expected to help fund other components of the law when it is implemented.

Illinois Excise Tax Audit