Airlines, Not Flyers, Reap Windfall from Expired Taxes

By Marcia Richards Suelzer, Toolkit Staff Writer

It seems logical that if a business is collecting a tax by adding it to the cost of the item purchased, and the tax expired, the amount the purchaser would have to pay would drop. Sadly, the actions by the airline industry are motivated not by logic, but by a desire to turn a tax lapse into a revenue windfall.

At midnight on July 22, 2011, numerous taxes imposed on airline tickets expired without fanfare while Congress contorted itself in attempts to deal with the federal deficit. Depending upon the cost of the flight and where it began or ended, the amount of tax could be steep. For example, if a round-trip ticket from Chicago to New York cost $400, then the ticket taxes would have tacked an additional $37.40 onto the price. (International travel, and travel to and from Alaska and Hawaii was taxed even more steeply.) For frequent flyers, the annual cost of ticket taxes can be significant.

Prior to the expiration of these taxes, airlines added the amount due to the ticket price, thereby collecting the tax from the travelers. The amounts collected were forwarded to the IRS. Following the expiration, most airlines simply stopped collecting the taxes and increased the base fares, so the customer pays the same amount. (Alaskan, Hawaiian and Spirit are the lone holdouts.) The airlines assert that their action was justified by increased fuel costs.

As the tax generated $25 million a day in revenue, the airlines stand to benefit significantly. For example, Delta, one of the airlines who has elected to keep the ticket price constant and pocket what would normally be turned over as taxes, will receive an extra four to five million dollars a day, according to the Altanta Journal Constitution.

Where does this leave the airlines' customers? One could say, "without a wing and a prayer." The IRS has indicated that customers who purchased a ticket before the tax expired, but traveled after the expiration, may be entitled to a refund. The IRS has asked the airlines to facilitate this refund process, but the request has not been well-received. Airlines are directing their customers to contact the IRS in order to obtain a refund. Thus, it is likely that the IRS will provide additional guidance on how to request refunds of taxes paid.

Think Ahead. If you purchased an airline ticket before July 23 and flew after that date, make sure that you retain proof of your purchase and that the receipt itemizes federal taxes paid. In all liklihood, you will need this information in order to obtain a refund from the IRS.

It is unclear what impact a reinstatement will have on individual travelers. Because the airlines are not collecting tax, the IRS has indicated that the traveler may be liable for the tax, depending on how any reinstating legislation treats the tax.

Posted August 3, 2011.