An indirect tax is a tax the government places on goods or services rather than on your income, which a business collects from you as part of the purchase price and then forwards to the tax authority. You never write a check to the government for it. The seller does the paperwork, but the cost is built into what you pay at the register or the pump. Sales taxes, excise duties, customs tariffs, and value-added taxes all work this way.
How the Cost Reaches You
The business selling the product is the party legally responsible for tracking, reporting, and remitting the tax. To keep its margins intact, it raises the price of what it sells to cover that liability. Economists call this tax shifting. The business acts as a pass-through: it collects from customers, protects its bottom line, and sends the money on to the government. You are the one who actually pays.
In many cases you won’t realize a tax is baked into the price at all. Federal excise taxes on fuel and alcohol, for example, are already inside the shelf price with no line-item breakdown on the receipt. Even when a sales tax appears as a separate line at checkout, the excise taxes and import duties folded into the underlying price stay invisible. That lack of transparency is why indirect taxes are sometimes called hidden levies.
The Common Types
Sales Taxes
Sales taxes are the most visible indirect tax for most Americans. Forty-five states and the District of Columbia impose a statewide sales tax, and local governments in 38 states add their own rates on top. Five states charge no sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. Combined state and local rates run up to about 10% in the highest jurisdictions, with Louisiana leading the country at a combined average of 10.11%.1Tax Foundation. State and Local Sales Tax Rates, 2026
Retailers collect the tax at checkout, then file returns and remit the money to state and local revenue departments. The tax typically applies to tangible personal property and certain listed services, but the exact list of what’s taxable varies widely from state to state.
Online sales work the same way in most cases now. After the Supreme Court’s 2018 decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect sales tax if the seller crosses certain economic thresholds. South Dakota’s law, which the Court upheld, set the bar at $100,000 in gross sales or 200 separate transactions within the state. Every state with a sales tax has since adopted some form of economic nexus law, so sales tax now applies to almost all online purchases just as it does in a physical store. Whether digital products like streaming subscriptions, downloaded software, and e-books are taxable depends on how each state defines taxable goods.
Excise Duties
Excise taxes target specific products rather than broad categories of goods. At the federal level they apply to items like fuel, tobacco, alcohol, airline tickets, and firearms, and they are governed by Title 26 of the U.S. Code.
Two examples show how they work. The federal excise tax on a standard pack of cigarettes is $50.33 per thousand cigarettes, which comes out to roughly $1.01 per pack.2Office of the Law Revision Counsel. 26 USC 5701 – Rate of Tax The federal excise tax on gasoline is 18.3 cents per gallon, plus an additional 0.1 cent per gallon earmarked for the Leaking Underground Storage Tank Trust Fund, for a total of 18.4 cents per gallon.3Office of the Law Revision Counsel. 26 USC 4081 – Imposition of Tax In both cases the manufacturer or distributor pays the tax and passes the cost forward through higher retail prices. State excise taxes often stack on top, which is why a pack of cigarettes or a gallon of gas can vary sharply in price from one state to the next.
Customs Duties and Import Tariffs
Customs duties are charged when goods cross international borders. Under the Tariff Act of 1930, U.S. Customs and Border Protection assesses duties based on the Harmonized Tariff Schedule, which assigns specific rates to thousands of product categories.4Office of the Law Revision Counsel. 19 USC Ch 4 – Tariff Act of 1930 Importers pay the duty and pass the cost forward through their prices, so tariffs are another indirect tax that consumers ultimately bear.
Until recently, imports valued at $800 or less could enter the country duty-free under the de minimis exemption, and that threshold let an enormous volume of low-value packages from overseas sellers bypass duties. In 2026, executive action suspended the de minimis exemption for virtually all shipments. All imported goods must now go through formal entry processes and are subject to applicable duties, taxes, and fees regardless of value.5The White House. Continuing the Suspension of Duty-Free De Minimis Treatment for All Countries If you order from overseas retailers, you are more likely to see tariff-related costs in the price or at delivery than you were a few years ago.
Value-Added Tax
A value-added tax, or VAT, works differently from a sales tax. Instead of being collected once at the final sale, a VAT applies at every stage of production and distribution. Each business in the chain charges VAT on its sales and takes a credit for the VAT it already paid on its purchases. The credits cancel out along the way, and the full tax burden lands on the end consumer. The design avoids the double-taxation problem that can arise when sales taxes cascade through multiple wholesale transactions.6European Commission. How Does VAT Work?
The United States does not have a federal VAT or any broad national consumption tax. Federal consumption revenue comes entirely through targeted excise taxes.
How the Amount Is Figured
Ad Valorem (Percentage-Based)
An ad valorem tax takes a fixed percentage of the purchase price. Buy something for $100 in a jurisdiction with an 8% sales tax and you pay an extra $8.00 at the register. The tax scales with price: more expensive items generate more tax, cheaper items less. Most general sales taxes work this way, as do customs duties on many imported goods.
Specific (Unit-Based)
A specific tax charges a flat dollar amount per physical unit sold, regardless of price. The federal gasoline tax is a clear example. At 18.4 cents per gallon, filling up with 20 gallons costs you exactly $3.68 in federal tax whether gas is priced at $2.50 or $4.00 a gallon.3Office of the Law Revision Counsel. 26 USC 4081 – Imposition of Tax This gives the government a predictable revenue stream that doesn’t fluctuate with market prices. The trade-off is that inflation erodes the real value of a specific tax unless the rate is periodically raised by legislation. The federal gas tax hasn’t been increased since 1993.
Many products carry both types at once. A bottle of wine may face a specific federal excise tax per unit and a percentage-based state sales tax at checkout.
Who Really Bears the Cost
Tax incidence asks a simple question: whose wallet actually gets lighter? With indirect taxes the answer is almost always the final consumer. You don’t file a return or have any formal relationship with the taxing authority for these payments. The business handles the paperwork, and your total indirect tax bill for the year is set entirely by how much you spend and on what.
That spending-driven structure creates a fairness problem. Lower-income households spend a larger share of their income on consumption because they have less room to save or invest. A family earning $40,000 a year may spend nearly all of it on taxable goods and services, while a family earning $200,000 can afford to save a meaningful portion. Indirect taxes therefore take a bigger bite, proportionally, out of smaller paychecks. The Congressional Budget Office has said a consumption tax “would probably be more burdensome for lower-income households than those with higher income” precisely because lower-income families consume a greater share of their earnings.7Congressional Budget Office. Impose a Tax on Consumption This is what economists mean when they call indirect taxes regressive.
When You Won’t Pay One
Not every purchase triggers an indirect tax. The most common consumer exemptions target necessities. The specifics vary by state, but groceries, prescription drugs, and medical devices are frequently exempt from sales tax. Some states also exempt clothing below a certain per-item price. These carve-outs are policy tools aimed at softening the regressive effect on the purchases that weigh heaviest in a low-income household’s budget.
About 19 states also run temporary sales tax holidays, usually in late summer before the school year. During these windows certain categories of goods are exempt from state and sometimes local sales tax. Common exempt items include clothing and footwear (often capped around $100 per item), school supplies, and computers or tablets (with caps varying by state, sometimes up to $1,500 per item). A few states run additional holidays for emergency preparedness supplies, energy-efficient appliances, or hunting and outdoor gear. The savings are real but modest, and they apply only to specific items on specific dates.
Businesses buying inventory for resale can also avoid paying sales tax at the wholesale stage by giving their supplier a resale certificate. The tax then gets collected later, when the business sells the product to the end consumer, which is you.