Should Some Frequent Flier Miles Be Exempt From Excise Tax?

By Alistair M. Nevius, J.D.

The IRS on Thursday asked for feedback on whether frequent flier miles that are redeemed for anything other than taxable air transportation should be exempt from the Sec. 4261 excise tax (Notice 2015-76).

While Sec. 4261(e)(3)(A) provides that airline mileage awards are subject to the air transportation excise tax, the IRS has been given authority to exclude amounts attributable to mileage awards if they are used for something other than air transportation. Under current procedures, taxpayers such as credit card companies must pay tax on all frequent flier miles purchased from an airline’s mileage award program and then file a claim for credit or refund for tax paid on those frequent flier miles that were ultimately redeemed for something other than taxable air transportation.

The IRS in Thursday’s notice proposes a possible method for reducing the amount of excise tax paid on frequent flier miles, based on historical data on how frequent flier miles are redeemed. Under this elective safe harbor, airline mileage award programs could reduce the tax base on frequent flier miles based on redemption data from that program for the prior calendar year, using a ratio of miles redeemed for something other than taxable air transportation over total miles redeemed.

The IRS is asking for comments on whether the proposed methodology is workable, whether a different methodology should be adopted, whether airlines are even willing to share the historical redemption data that credit card companies would need to verify the tax base, and other issues.

Alistair Nevius (anevius@aicpa.org) is The Tax Adviser’s editor-in-chief.

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