Excise tax refunds for purchases of frequent flyer miles

By Taylor Cortright, J.D., LL.M., and Deborah Gordon, J.D., LL.M., Washington, D.C.

Editor: Mary Van Leuven, J.D., LL.M.

Banks, hotel groups, large retailers, utilities, and car rental companies often purchase frequent flyer miles from domestic airlines to use in reward and loyalty programs. These companies may be eligible for refunds of federal excise tax paid with respect to the purchases. Generally, the IRS may allow an excise tax refund claim to the extent domestic frequent flyer miles are redeemed for nontransportation goods and services or international flights.

Taxation of frequent flyer miles

Since 1997, a 7.5% federal excise tax has been imposed on the amount paid for the right to grant mileage awards (such as frequent flyer miles) redeemable for the "taxable transportation" of persons by air (Sec. 4261(e)(3)). Taxable transportation generally means domestic transportation. The taxable event is payment for the purchase of mileage awards, regardless of whether the awards are ever redeemed. The tax is payable by the purchaser of the mileage awards; the purchaser is the "taxpayer," and the airline is the "collector" of the tax.

The IRS is authorized to promulgate regulations that exclude from the tax the amounts that are attributable to mileage awards not used for transportation of persons by air. However, the IRS has not issued those regulations. This leaves open certain questions:

  • Would the tax be imposed on a purchase of mileage awards from a foreign airline?
  • Would the tax be imposed on a purchase of bundled mileage awards and nontransportation services?
  • Would the tax be imposed on the purchase of mileage awards that may be redeemed for nontransportation goods and services, such as magazines, airport club passes, rental cars, or hotel rooms?
IRS guidance

In the nearly 22 years since the excise tax was applied to frequent flyer miles, the IRS has issued limited guidance on how purchases of frequent flyer miles are taxed. In Notice 2002-63, the IRS addressed purchases of mileage awards from foreign airlines. Assuming that mileage awards issued by a foreign carrier were redeemable only for foreign transportation, the IRS concluded these awards could not be redeemed for taxable transportation. Thus, amounts paid for mileage awards from foreign airlines are not subject to the tax.

The existing regulations broadly impose the tax on any amount paid for taxable transportation; however, in certain situations involving bundled payments for transportation and nontransportation services, a portion of the payment may be excluded from the tax base, to the extent the taxpayer meets certain requirements. The applicability of these regulations to purchases of mileage awards was uncertain. In CCA 201606028, released Feb. 5, 2016, the IRS relied on the regulations to conclude that a collector and taxpayer may exclude certain amounts from the tax base for the purchase of mileage awards. Amounts the CCA says can be excluded include nontransportation items such as customer lists, co-branding of credit cards, and marketing costs.

With respect to mileage awards that may be used other than for transportation of persons by air, in Notice 2015-76, the IRS indicated that taxpayers must pay tax on all frequent flyer miles purchased from an airline mileage awards program and then file a claim for credit or refund for tax paid on those frequent flyer miles that were ultimately redeemed other than for taxable air transportation. Because domestic airlines generally have been reluctant to share with taxpayers the percentage of frequent flyer miles that are redeemed for something other than taxable air transportation, the notice proposed a possible methodology and requested comments on the proposal. The IRS has not issued further guidance on this matter. As an administrative practice, however, IRS examination teams have been reviewing claims for refund.

Refund claims

Based on the authorities described above and the IRS's administrative practices, an excise tax refund claim may be allowed by the Service in certain situations. In particular, taxpayers should consider whether a portion of the amount paid for the mileage award is attributable to nontransportation goods and services and whether a percentage of the mileage award has been redeemed for nontaxable flights, goods, or services.

The basis of the claim for refund may relate to one or all of the following:

  • Allocation of the amount paid "per mile" between transportation and nontransportation elements, such as sales and marketing;
  • Redemption of mileage awards for transportation that is not "taxable transportation," such as international flights; and/or
  • Redemption of mileage awards for nontransportation goods and services, such as magazines, airport club passes, rental cars, or hotel rooms.

Potential claimants may include purchasers (such as banks that enter into co-branded credit card agreements with airlines) or companies that partner with airlines to offer frequent flyer miles for purchases of consumer goods or services. The purchaser may claim excise tax refunds if there is an overpayment of tax.


Generally, mileage awards programs are a significant business line for domestic airlines. Therefore, depending on a company's facts, potential excise tax refunds may be substantial.


Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com..

Contributors are members of or associated with KPMG LLP. These articles represent the views of the author(s) only, and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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