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The Sky’s the Limit: Looking at U.S. Air Travel Taxation

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: plane and simple. While there may be no place like home for the holidays, some of us are getting pretty tired of it. Last year, many of us celebrated the holiday season over Zoom or otherwise away from our loved ones due to the coronavirus pandemic. But now, with vaccines and the world slowly finding its new normal, experts predict that this year's holiday travel will reach pre-pandemic levels.

With travel, much like everything else, there's always a tax angle. For those traveling by car, it's built into the price you pay at the pump. But for this episode, we'll be exploring the issue of taxation and air travel here in the U.S.

So, what taxes do we as passengers pay? And how are these taxes affected by the pandemic?

Here to talk about this is Adam Feinberg, a member at Miller & Chevalier and an expert on federal excise taxes. Adam, welcome to the podcast.

Adam Feinberg: Thanks for having me Dave.

David D. Stewart: So, why don't we start off with what taxes passengers see on their receipts?

Adam Feinberg: Well, there are quite a few of them, unfortunately for the traveling public. The main one is a 7.5 percent excise tax. It's based on the amount paid for the transportation that applies to essentially every domestic trip in the United States that is taxable under code section 4261.

And there are two other taxes as well under that same code section. One is a domestic segment tax for every segment flown. That's just a flat fee. And then there's an international segment tax as well for any flights that come into or out of the United States.

And in addition to that, there are a whole host of user fees. Different agencies within the United States impose user fees on tickets. They're typically domestic tickets, either utilizing a U.S. airport, so for example in the case of the TSA fee, that's the $5.60 per one-way fee that all of us pay almost every trip we take in the U.S. Or there's some international user fees as well, including three that apply every time someone flies into the United States to cover the services of, for example, customs or immigration for inspecting passengers. And then on top of that, we have passenger facility charges, which are essentially fees that go to individual airports that elect to impose those taxes.

Those are the main taxes and user fees that apply to essentially all the U.S. tickets.

David D. Stewart: You know, I mentioned at the beginning that there's been a lot of upheaval for all of us in the pandemic. Has that caused some upheaval in the air travel taxation world?

Adam Feinberg: It certainly has. And probably the biggest impact along those lines was just the result of the massive reduction in travel that we saw right after COVID hit in about March of 2020, and shortly thereafter, Congress passed a tax holiday. So, they took the tax away for most of 2020. That expired at the end of of 2020.

But for a while, there were no taxes that anybody was paying. And not only that, but many, many people were canceling their tickets and airlines were issuing refunds. And when an airline issues a refund of the amount paid for the transportation, that essentially undoes the tax and the airline, which is the statutory collection agent for these taxes, is allowed to get the tax back from the IRS. And that has caused a massive confusion to some extent, because I'm not sure the IRS has totally decided exactly how it's going to handle the massive amount of refunds that have been given to customers and therefore need to be given to the carriers.

David D. Stewart: Now, two parts of any given tax is you have the rate and then of course the base. So, when we talk about the passenger excise duty, what's being taxed?

Adam Feinberg: Well, it depends. It's different for each of these taxes. So, the main excise tax is a 7.5 percent excise tax on the amount paid for the transportation. The taxable event is actually the payment of money, typically from a customer to an airline, and that is taxed at 7.5 percent.

Most of the other taxes are not similar percentage taxes, but they're rather in the nature of user fees and so they're flat amounts per event. So, per segment or per flight, depending on the particular tax or user fee. And those amounts obviously vary depending on the particular tax.

David D. Stewart: Now you're saying that, at least with the excise tax, it's a percentage of what's being paid for the travel. How does that affect, let's say, all of these myriad fees and add-ons the airlines have created in the last 20 years or so where there's many different things you can add on to your basic travel service?

Adam Feinberg: Well, that's a really excellent question. And an airline about 10 years ago or so decided to ask the IRS that question and sent in a ruling request with a list of about 30 or so different fees and activities and asked whether or not they were taxable. And there's no particularly easy question or easy answer to that question, I should say.

But the general rule is: is it for transportation or is it for something else? And the IRS has adopted in its guidance a test based on whether or not the payment of the particular fee for the service is optional. And if it's optional, in other words if you don't need to pay the fee to get on the airplane, then it's not really for the transportation because you're still flying and therefore it's not taxable.

And so, one of the classic examples that I think of, and this is right from the IRS guidance that I mentioned, is the unaccompanied minor fee. So, that's a fee that you can pay for a service where by the airline will take care of a minor during their travel, without their parents or a guardian. And the IRS said, well, in the case of a fee like that, that is mandatory, which this particular airline had a mandatory fee if the child was below a certain age, the IRS said, "Well, that is for transportation because you cannot get on the airplane unless you pay that fee." But the same fee for a child who was above the mandatory cutoff age, in other words where it was an optional service, that very same fee for the very same service was not taxable in that situation because it was not required in order to get on the airplane. So, it really sort of depends.

It's not the nature of the activity or the service that you're buying or even the particular amount that you're paying, it's whether or not that payment of that particular fee is an absolute requirement in order to get on the airplane. So, a classic example, an easy example of something that's not taxable are bag fees. You can get on the airplane, not pay a bag fee, not bring a bag with you, and you're still allowed to fly.

David D. Stewart: Now, you've covered the two ends of the spectrum. Where do we find the gray area in the middle?

Adam Feinberg: Well, right now there seems to be a bit of a dispute about premium economy fees. And the IRS a few years ago issued a PMTA on this exact subject.

So, the IRS has taken the position that if you have to pay an amount for a premium economy seat, so these are seats that are still within the economy cabin, don't come with any extra food or drink, but typically have extra leg room. The IRS has taken the position that those fees are taxable. But a number of carriers who've paid the tax in connection with that are seeking refunds on the basis that those fees are not in fact taxable because the passenger is still entitled to get on the airplane. In fact, the passenger already had a confirmed seat to travel on the very same airplane in the very same economy section.

And so, that sort of optionality test to determine whether or not that amount is for transportation seems to go in favor of the airline and in favor of that fee not being taxable in that circumstance. There's a added twist to that dispute because there actually used to be a separate tax for seating and sleeping accommodations. It was on the books for many decades, but Congress repealed that tax in 1997. Nonetheless, the IRS is still trying to apply that now repealed tax.

David D. Stewart: Are there local taxes that come into play with airlines or is this mostly at a federal level?

Adam Feinberg: Well, actually that's a great question. It is essentially all at a federal level and that's by congressional design. Congress has passed a law, it's not found in title 26 is actually found in Title 49, called the Anti-Head Tax Act. And it's essentially a tax preemption provision that says, "Well, hey, we've decided to impose these federal excise taxes and therefore we do not want states or local taxing authorities imposing taxes on air transportation." So, that outlaws local taxation of transportation. So, you can't have a head tax, you can't have a percentage tax that a state or local government applies to transportation that people purchase.

David D. Stewart: Going beyond what passengers might see on their ticket, and maybe to taxes that apply to the planes themselves, is there an excise tax applied to the fuel the planes use the way that cars have to pay one?

Adam Feinberg: There is. In fact, the tax on aviation fuel is found in the very same statutes, namely section 4081 and 4041 of the Internal Revenue Code as the taxes on fuels generally. There are different rates that apply sometimes to fuels that are used for aviation, and in particular there's a lower rate for commercial aviation fuel used in commercial aviation, under the theory that the government is already receiving substantial excise tax revenue from the ticket taxes we've already talked about. So, it would be unfair to tax commercial aviation, the fuel used in commercial aviation, at the same rate as say the fuel used in non-commercial aviation.

David D. Stewart: Now, what happens, let's say, if the plane is being used by a commercial operator, but not for a commercial purpose at any given time? Does that change how the excise tax works?

Adam Feinberg: Well, if the plane was being used for non-commercial purpose, for say one particular flight, then the fuel used on that flight would be taxable at the higher rate. So, you can't say sort of globally that a plane forever more is only used in commercial aviation. And so, you do have to look at it on a more specific basis. But that doesn't mean that that particular flight that isn't a commercial flight isn't still used in commercial aviation.

And this is another area where there's a bit of a dispute between the IRS and the aviation industry as to what should receive the lower commercial aviation tax rate. And I'm thinking in particular of a PMTA that the IRS issued in 2018 that says, well, basically, "If we as the IRS, don't collect the ticket taxes," that we talked about previously, "then the higher non-commercial aviation rate should apply."

But there are some obvious situations where the ticket tax might not be applicable, but the plane is still being used in what I think everybody would think of as commercial aviation. The classic examples include things like a commercial airline moving a plane, either for maintenance purposes or for repositioning purposes. So it can onboard paying customers that it will then fly.

Those particular flights, they might be empty, but they are certainly necessary parts of an airlines' commercial operations. The IRS has taken the position that the fuel used on those flights is taxable at the higher non-commercial rate. And industry has taken the position, obviously the opposite position, that those flights should be taxable at the lower commercial aviation rate.

David D. Stewart: How is that dispute getting resolved?

Adam Feinberg: Well, it's unclear to me that it has been resolved or that there's really any clear path for it to be resolved. There have been some discussions I know between the industry, including its major domestic industry trade association and the IRS. But as far as I'm aware the IRS is still auditing and assessing airlines in this exact situation. So, it's unclear how or when that dispute will be resolved.

David D. Stewart: Now, I guess the other side of the passengers' interaction with airlines would be on frequent flyer awards. Are there tax issues around there?

Adam Feinberg: There are indeed. And this area too has been filled with disputes and the current law has become, I suppose, a bit more clear in 1997, when Congress passed what is essentially the first explicit tax on frequent flyer miles. It's not on the miles themselves, but again, it's a tax on the payment for miles.

So, this tax came about because of the arrangements that credit card companies and banks had with airlines, where miles would get issued to the credit card company's customers and the credit card company would pay the airline in connection with those miles. And Congress was concerned that the domestic transportation that would be awarded through the use of those miles would not be taxed at all and they impose this tax, which is now found at, or has always been found, in section 4261 (e)(3). And so that tax does apply to payments made to a carrier in connection with the issuance of miles.

But there are lots of complications to that as well, as with all areas in the aviation excise tax world. And so, one example of that is miles that are used that are actually redeemed for something other than taxable transportation.

So, Congress said, "OK, we're gonna tax the payments in connection with the creation of these miles, because some of those miles are going to get used for taxable transportation and some of the miles are gonna be used for something else, like hotel stays, foreign transportation, and all manner of other things." These days you can use your points for almost anything.

And so, Congress anticipated, and in fact, instructed the IRS to promulgate regulations under which the portion of miles for which these tax payments had been made that are actually redeemed for something other than taxable transportation, you could essentially get the tax back. And despite the fact that we are now 24 years down the road from 1997, the IRS still has not promulgated such regulations, but they do allow refunds on this basis.

And so, if you can prove up that the airline typically redeems a certain portion of the mile for something other than taxable transportation, then you can get a refund if you are one of these entities that has paid that tax. But that proves to be difficult sometimes because airlines hold very close to the vest the amount of redemptions for any sort of purposes, because it's very proprietary information. So, it can be sometimes hard to prove how much a particular airline or even a set of airlines is redeeming or what percentage of their miles is being redeemed for something other than domestic transportation.

David D. Stewart: That's really interesting. Now, are there any issues that we should be keeping an eye out for on the horizon in the air travel tax space?

Adam Feinberg: I don't think any major ones, other than the sort of things that we've already talked about.

I mean, one big issue right now is simply, what is the volume of air transportation going to be in the post-COVID world? That's not really a tax question per se, but it certainly has huge implications to the tax world.

I mean, the excise taxes that we've been talking about, both the aviation fuel excise taxes and the ticket taxes, are used to fund the airport and airway trust fund. And with a substantially reduced volume of flights, the tax revenues obviously are way down and for most of 2020, the revenues were zero. And so, at some point somebody's going to have to start looking at, "Well, do we have adequate funds for all of these purposes?" And you've got to weigh that on the other hand with an aviation industry that is obviously suffering mightily from what is a really a devastating set of events to their business.

So, it's hard to say what, if anything, might come of that. Hopefully air transportation gets back to normal. We obviously have the holidays coming up, business travel is starting to pick up. And there really isn't anything quite as good as having a business meeting or, more importantly, seeing your family and friends during the holidays. Hopefully with more and more folks becoming vaccinated, better safety protocols in place and the airline industry, I think, has been very good on that front. Hopefully we see the volume of transportation increase and things start to return to normal.

David D. Stewart: Well, this has been fascinating. Thank you so much for being here.

Adam Feinberg: Dave, its my pleasure, and I hope everyone has a happy holidays, whether or not they're getting on an airplane.

David D. Stewart: All right. Hope you do as well.

And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Y. Bora Bozkurt explores the tax rules governing plain vanilla convertible debt in the context of common fact patterns. Sarah Webber examines the recent proposal to retroactively disallow charitable contribution deductions for syndicated conservation easements and explores the risks. In Tax Notes International, Phelippe Toledo Pires de Oliveira explores the possibility of a wealth tax under Brazilian law. Lorenz Jarass proposes a simple withholding tax system that would comply with the EU interest and royalty directive to prevent double taxation as well as nontaxation. In Featured Analysis, Joseph Thorndike examines the role of political salesmanship in the federal tax system. On the Opinions page, Robert Goulder and Daniel Shaviro discuss generational swings in the U.S. appetite for residence-based taxation of multinationals’ foreign profits. Marie Sapirie writes that the uproar over the state and local taxation deduction limit has an irresistible political attraction that ensures its longevity.

And now, for a closer look at what’s new and noteworthy in our magazines, here is Tax Notes State Editor in Chief Jéanne Rauch-Zender.

Jéanne Rauch-Zender: Thank you, Paige. I'm here with Tim Noonan, partner in the New York office of Hodgson Russ, and one of my board members. Welcome to the podcast, Tim.

Timothy P. Noonan: Thanks, Jéanne. Happy to be here.

Jéanne Rauch-Zender: Let's discuss your recent article, "The Nuts and Bolts of New York’s 548-Day Rule, Revisited," which you coauthored with Kristine Bly. You first wrote to the 548-day rule in March of 2011. Why revisit the rule now?

Timothy P. Noonan: We decided to take another run at it just because so many of our clients had come to us really over the past 10 years, and we saw a variety of different questions and different issues arising. And really with COVID, the 548-day rule allows you to spend time in a foreign country and spend time away from your home in New York, and lots of people were able to do that.

So, it became really a huge issue for us, for a lot of clients and with all the new questions that were arising, we thought it was good time to revisit it. And also, there's not a lot out there on it. It's really sort of a unique topic. So, there's just an absence of good information out there for folks. So, we decided it was time to add to that and give folks some benefit from all of our experience on the issue.

Jéanne Rauch-Zender: Absolutely. It certainly is a very interesting issue. And it's interesting how COVID continues to impact many of the existing rules. What's the biggest walking point or perhaps walking points that you want to share in relation to the article?

Timothy P. Noonan: Well, I think the idea around the 548-day rule is almost that it's necessary because of the difficulty of New York's residency rules in the first place. So, if you want to change your residency from New York, you have to prove, well, you've got to prove two things: that you left New York with the intention of not coming back and you landed in a new state with the intention of living there permanently.

So, that takes a lot. It takes a lot for people to be able to prove a move. And it's also subjective. Right? So, whether or not someone did effectuate a landing properly is oftentimes up to the discretion of a New York tax auditor. The beauty of the 548-day rule is it takes all that guesswork out of it. It is not subjective. It's objective. If you meet the day counting test for the defined period of 548 days, which is 18 months, you're good to go. Like, you're fine. You don't have to worry about subjectivity or discretion.

It's also 18 months. Right? So, you don't have to leave for the rest of your life. You don't have to move permanently. You just have to get out of town for 18 months. So, it's a great planning technique for folks who are looking to potentially structure around a transaction. It's also a nice planning technique for folks who are moving, but they're worried about potential subjectivity, potential audit risks. You can use the 548-day rule to kind of back that up, to bootstrap it, and protect yourself against a difficult residency audit. So it's a nice, it's a really nice planning tool for folks.

Jéanne Rauch-Zender: Excellent. It is. It's an excellent article. And I agree. I always think that the more planning techniques that we can share with the audience, the better. Thank you for joining me on the podcast today, Tim. Can you tell me where our listeners can find you online?

Timothy P. Noonan: Sure. I am at Twitter @NoonanNotes, which is coincidentally the title of my monthly column in the magazine. So, you can reach me there or Google me and you can find me. And I'm always open for questions from far and wide. I get lots of inquiries from folks who find me on Google. I'm happy to answer questions on obscure topics such as this.

Jéanne Rauch-Zender: You can find Tim and Kristine's articles online at And be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussions on what's new and noteworthy in Tax Notes. Again, that's Tax Analysts with an S. Back to you, Dave.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.

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