What Is a Luxury Tax?

Luxury Tax Explained in Less Than 5 Minutes

Updated on November 28, 2022

Reviewed by

Fact checked by David Rubin

Woman in store looking at price tag on an expensive handbag — Photo:
Jose Luis Pelaez Inc / Getty Images

Definition

A luxury tax is one that’s levied on certain purchases that cost more than a specific amount and aren’t considered to be necessities to daily living. As the name suggests, they're "luxury" items. You may never have to pay this tax because you always have the option of not making a purchase or buying an item that's subject to it.

Key Takeaways

A luxury tax is imposed as a percentage of a purchase price over a certain threshold.
The tax is aimed specifically at “luxury” purchases that aren't considered essential or necessary to daily life.
The federal government imposed a luxury tax in 1991 on boats, autos, private planes, and jewelry, but the tax was repealed just two years later when it adversely impacted certain industries.
Critics of the luxury tax claim that it's an unreliable source of revenue because consumers have the right to simply not buy products that are subject to it.

How a Luxury Tax Works

A luxury tax is a type of sales tax that applies only to certain goods or services. It focuses on high-cost items, such as jewelry and expensive vehicles, boats, and airplanes. These purchases can come with a luxury sales tax because they're considered to be unnecessary purchases. A luxury tax can be paid by vendors that may or may not then pass the cost on to consumers.

Revenues generated by the tax are distributed across various government programs that benefit the population at large, not just those individuals who can afford to make purchases that would trigger the tax. Supporters of the tax often argue that it also bolsters the U.S. auto industry because many high-priced cars are subject to this tax, and they're imported from other countries.

Examples of a Luxury Tax

A luxury tax is a percentage that’s added to the purchase price of an applicable product. You don’t have to concern yourself with paying it unless you make that particular purchase.

Congress enacted a 10% federal luxury tax in 1991. It was imposed on the first sales price of a number of items that sold for more than a specific amount, including:

Furs and jewelry that sold for $10,000 or more
Vehicles that sold for $30,000 or more
Boats that cost more than $100,000
Aircraft with price tags of more than $250,000

Note

The Omnibus Budget Reconciliation Act repealed this tax in 1993, and it was phased out by 2003.

New Jersey imposes a one-time 0.4% surcharge on vehicles that cost more than $45,000 or those that have a fuel efficiency rating of less than 19 miles per gallon, as of 2022. Let’s say you purchase a luxury vehicle with a sticker price of $50,000 in this state. You’d pay 0.4% extra on that car simply because it cost more than $45,000. You would also have to pay any other state sales taxes and fees.

How Much Are Luxury Taxes?

The federal government's 1990s luxury tax on expensive cars, furs, jewelry, and more was 10% until it was repealed. It then only applied to cars at a rate of 3%, until it was phased out entirely in 2003.

Your state or municipality may impose a luxury tax, and state luxury taxes are not necessarily just imposed on vehicles. For example, you’ll pay a tax of 9.625% for an alcoholic beverage bought on the premises of a casino in Atlantic City, New Jersey because ordering a glass at a drinking, dining, or gaming establishment is considered a luxury. You’d pay only the state’s sales and use tax if you bought a bottle of wine at a liquor store instead.

Note

Check your state’s taxation website to find out if it or any of its counties or municipalities impose any type of luxury tax.

Criticism of Luxury Taxes

Critics of the luxury tax argue that it has a damaging effect on the market for luxury goods, and that it can’t be relied upon to generate necessary revenues. The tax may depend too much on personal choice. Consumers can simply opt not to make purchases that would incur this type of tax.

The federal government figured this out with the 1991 luxury tax that was set at 10%. The tax was imposed with the expectation that it would raise about $9 billion in revenues. In reality, it brought in negligible tax dollars and it was eliminated just a couple of years later. Consumers simply changed their buying habits in response to the tax. They bought slightly used yachts rather than brand new ones, and the yacht industry suffered significantly in the early 1990s as a result.

Frequently Asked Questions (FAQs)

Why is a luxury tax considered to be a "progressive" tax?

A progressive tax focuses on a certain demographic of wealthy taxpayers. A luxury tax is considered to be a progressive tax because it only applies to purchases that are likely to be made by high earners who can afford them.

Does the federal government collect any type of sales tax?

The federal government doesn’t collect a sales tax. Only states do. But the federal government imposed a luxury tax, which is a form of sales tax, in the early 1900s. It was ultimately repealed.

Was this page helpful?

Thanks for your feedback!

Tell us why!

Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.