Treasury Responds to Concerns over Aviation Excise Tax

[1] Thank you for your letter to Secretary Summers regarding the application of the 7.5-percent aviation excise tax to the sale by air carriers of frequent flyer mileage awards and other similar rights to provide air transportation. The Secretary forwarded your letter to me and asked that I respond to it.

[2] You noted that the tax is imposed regardless of whether the sale of the mileage awards occurs within the United States or elsewhere, subjecting the awards to tax even if the transportation for which they ultimately are used has no nexus to the United States. You asked that we consider including a proposal to address this issue in the President's budget for fiscal year 2001.

[3] The Department of the Treasury is sensitive to the concerns you raise regarding the application of that tax to transactions occurring outside the United States. Similar concerns have also been raised by foreign governments and by both foreign and domestic air carriers affected by the application of the tax to foreign transactions.

[4] As you may know by now, the Administration's budget proposes to substitute cost-based user fees for the aviation excise taxes imposed under current law. Although the budget does not contain any specific proposals to modify the tax on frequent flyer mileage awards, we believe that a shift to cost-based user fees would address the concerns you have raised. In addition, however, the Department of the Treasury would, without abandoning its commitment to comprehensive reform in this area, support targeted legislation that appropriately limits the extraterritorial application of the tax on mileage awards, provided it is passed within a fiscally responsible budget framework.

[5] Please let me know if we can be of any further assistance. We very much appreciate your interest in this issue.

Sincerely,