Watch out for excise tax audits
By Jeff Wieand - April 1, 2009
Nobody likes a tax audit. Even Internal Revenue Service agents would probably rather go fishing.
While no audit is fun, a transportation excise tax audit can be particularly unpleasant. For proof, just read the hefty 100-page document that the IRS put out on the subject last year. (You can find it at www.irs.gov. Search for “Air Transportation Excise Tax-Audit Technique Guide.”) The Audit Guide provides insight into what revenue agents are supposed to be looking for in transportation excise tax audits.
Before we discuss that, let’s talk about the tax itself. The transportation excise tax is imposed on the “amount paid” by one person for air transportation provided by another person. The provider of the transportation has what the IRS calls “possession, command and control” of the aircraft and is responsible for collecting the tax, though the passenger is not thereby relieved of responsibility for payment. Airlines state the tax separately on your ticket (which is why it’s often called the “ticket tax”), and charter companies tack it onto your charter bill.
The rate of tax has remained constant for years at 7.5 percent of the amount paid (though it has been as high as 10 percent). So if your charter bill is $50,000, the excise tax comes to $3,750. That won’t break the bank, but it’s not chickenfeed, either.
Figuring out the “amount paid” in the case of airline tickets and charter invoices is fairly straightforward. But fractional programs present a special challenge. The programs were originally intended as a form of noncommercial aviation under the rules and exemptions for “large aircraft” in Federal Aviation Regulations Part 91.501. But the IRS took the position (as it did for other FAA “large aircraft” scenarios) that the fractional program had possession, command and control of the aircraft and was providing a transportation service to the share owners. It follows that transportation tax is due.
But then what is the “amount paid” that the tax is due on? Apart from miscellaneous charges like catering, the owner of a fractional share basically has three costs to deal with: the purchase price of the fractional interest; a monthly management fee to the program manager to hangar, insure, crew and maintain the aircraft; and an hourly charge for flights (supplemented by a fuel surcharge that has blossomed into a major expense in recent years). Most fractional programs assess the 7.5-percent transportation excise tax on the hourly rate, with or without including the fuel surcharge as part of the “amount paid.”
Imposing the tax on hourly expenditures certainly makes sense and is consistent with a 1997 court decision involving the NetJets fractional program, which upheld a tax on that company’s occupied hourly fee on the theory that the program provides a taxable transportation service to the owners. But the court case didn’t deal with whether the IRS could charge the tax on other program payments as well, and there have been rumblings from the IRS ever since that the management fee should also be subject to the tax.
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