Q: A client of my agency has asked me whether he can get a refund of the taxes and government fees on a nonrefundable ticket. Since I have never heard of such a thing, I told him that a refund is not possible. He asked me why this was so, and I admitted that I could not explain it. He works for a big corporation and said that the airlines would probably owe his corporation millions of dollars in refunds if the law authorizes or requires such refunds. What is your position?A:
Clients often ask me this question, and I have usually told them that the taxes and fees apply to the sale of air travel, not the transportation itself. However, my recent research shows that this is simply not so and that taxes and fees may indeed be refundable on every unused ticket.
Naturally, the airlines do not support my new position. For example, according to the American Airlines website, "Upon request, taxes and fees not imposed by the airline may be refunded if the airline's obligation to remit the tax or fee depends upon use of the ticket for travel. Taxes and fees will not be refunded if the airline's obligation to remit the tax or fee arises from the collection of the tax or fee. All taxes and fees imposed by the United States government fall within this category and are not refundable."
Similarly, the DOT has stated, "By law, this tax applies to the sale of air transportation, not to the transportation itself. Airlines remit this tax to the government shortly after the ticket is issued. If the passenger changes his or her schedule and forfeits the airfare on a nonrefundable ticket, the airline still owes this tax to the government."
However, let's look at the actual law governing the domestic tax of 7.5%, plus $4.10 per segment, for example. These taxes are imposed by Section 4261 of the Internal Revenue Code, which begins, "There is hereby imposed on the amount paid for taxable transportation of any person a tax equal to 7.5% of the amount so paid."
The key words here are "taxable transportation." That term is defined as "transportation by air which begins in the United States or in the 225-mile zone and ends in the United States or in the 225-mile zone."
In other words, the tax is on the transportation, not on the "collection" as American puts it or on the "sale" as DOT puts it.
My research shows that the same law applies to the $18 international ticket tax and the $9 Alaska and Hawaii taxes. I am not yet sure about the law governing Passenger Facilities Charges of up to $4.50 or the September 11th Security Fee of $11.20 per roundtrip ticket, but the laws may be similarly worded.
I could not find any court precedent to support my view of refundability, although I found a case that stated that the taxes are owed by the buyer, not the seller, of air transportation.
From this, I assume that the buyer has the right to claim a refund from the IRS if the tax was not due.
The IRS website explains how to obtain a refund, "If tax is collected and paid over for air transportation that isn't taxable air transportation, the collector may claim a credit or refund if it has repaid the tax to the person from whom the tax was collected. ... Alternatively, the person who paid the tax may claim a refund. For information on how to file for credits or refunds, see the instructions for Form 720 or Form 8849."
As we know, the "person who paid the tax" is the buyer. In your case, that is your client as well as his corporate employer.