Airline fees, taxable and non-taxable
The following services and fees are not taxable, according to the IRS:
• Assistance in making travel plans, purchasing tickets and requesting seat assignments, either in person or on the telephone (as opposed to on carrier’s website).
• Applying the fare paid for an unused nonrefundable ticket to a new ticket.
• Standby fees
• In-flight purchase of food, alcoholic beverages and headsets.
• Checked-bag fees, including overweight and oversized baggage.
• Purchase of airport lounge access, on daily or annual basis.
• Purchase of nonrefundable gift cards.
• Optional custodial services to children traveling without an adult.
• Fee for transference of miles to another account.
• Extending the expiration date of miles in a member’s account.
• Fee for redeeming miles for the purchase of air transportation.
• Fee for canceling and changing a ticket purchased with redeemed miles.
• Purchase of elite status in a loyalty program.
• Providing a printout of account details to a member or third party.
• Providing password protection for account inquiries made by telephone.
• Providing personalized luggage tags.
The following services and fees are taxable, according to the IRS:
• Enabling the purchase of upgrades that are paid for at check-in at automated kiosks.
• Enabling the purchase of upgrades to a higher class of service, at check-in or in advance, with money or miles.
• Fuel surcharges added at the time a customer purchases tickets or acquires tickets by redeeming miles.
• Mandatory custodial services to children traveling without an adult.
• A member's purchase of frequent-flyer miles for his or her frequent-flyer account or another member's account.
• A member's purchase of bonus miles for his or her account.
Airline revenue from baggage fees, in-flight food sales and certain other unbundled services are not subject to the federal airline ticket tax, the Internal Revenue Service recently reiterated.
The amounts are not included in those taxes, the IRS said in a letter released this month, because they "are not paid as a condition to receiving air transportation."
Specifically addressing checked-baggage fees, the IRS said such charges would not be included in the air transportation taxes because "the service is also optional and not reasonably necessary to the air transportation itself."
For domestic transportation, the federal tax consists of a flat-fee charge of $3.70 per segment plus 7.5% of the ticket price. In practice, airlines have not been collecting tax on fees collected separately.
But an unidentified airline last March asked the IRS for a ruling on the tax status of some ancillary services, including checked baggage, upgrades, lounge access and the carriage of unaccompanied minors.
Besides baggage and food and beverage service, other services not required to be included in air transportation taxes include:
• Helping customers make travel plans, purchasing tickets and requesting seat assignments, either in person or on the telephone.
• Optional "custodial" services for children traveling without an adult, including transfer of custody from a parent or another adult to a gate agent; a personalized safety briefing onboard the aircraft and further in-flight attention as necessary; arranging for airport transportation to a connecting flight; help picking up the child’s baggage; and ensuring the child’s safety from the moment of check-in until a responsible adult picks up the child.
• Headsets for in-flight entertainment.
• Access to premium airport lounges.
According to the IRS, taxable services include:
• Services for unaccompanied minors that are mandatory.
• Allowing frequent flyer members to purchase additional miles for their own or others’ accounts.
• Providing upgrades at check-in or permitting members to qualify for upgrades upon payment of a fee.
In the third quarter of 2009 alone, the nation’s top airlines collected nearly $2 billion in ancillary revenue, the Transportation Department reported.
The consultancy IdeaWorks estimates the country’s top five airlines will collect about $1.76 billion in checked baggage fees for 2010.
Analysts said it’s easier to charge, and raise, fees for these ancillary services than it is to raise base fares. An added advantage, said the analysts, is that the services often are not taxable.
