A Primer On The Excise Tax Refund For Frequent Flyer Miles – Tax Authorities



Purchasers of frequent flyer miles from domestic airlines may be
eligible to claim a refund of the 7.5% federal excise tax paid upon
such purchase. Hotels, retailers, banks, foreign airlines, and car
rental companies typically purchase these miles from domestic
airlines for use in their rewards programs. Members of these
rewards programs can then redeem points for a variety of goods and
services, including air travel.

Taxation of Frequent Flyer Miles

A federal excise tax of 7.5% is imposed on the amount paid for
taxable transportation of persons by air1, which
includes amounts paid to an air carrier for the right to provide
mileage awards redeemable for taxable transportation.2
Taxable transportation generally means a flight that begins
domestically or from the designated zone in Canada or Mexico
— generally within 225 miles of the domestic border —
and ends domestically or within such zone.3 If a holder
of frequent flyer miles redeems them for any other item offered by
the rewards program, such as international flights, gift cards,
hotel stays, subscriptions, rental cars, televisions, or services,
such item is considered nontaxable transportation and not subject
to tax. Although the excise tax is scheduled to expire Sept. 30,
2023, prior scheduled expiration dates have been
extended.4

While the Treasury Department has the authority to promulgate
regulations regarding amounts attributable to mileage awards used
for nontaxable transportation, the Treasury Department has not
exercised this power.5 The IRS has issued only limited
guidance regarding the taxation of frequent flyer miles and claims
for refund,6 principally Notice 2015-76. Prior to the
issuance of regulations — which have not yet been issued
— taxpayers may rely on the guidance set forth in this
notice.

The notice clarifies that a purchase of mileage awards that may
be redeemed for taxable transportation or nontaxable transportation
is subject to the excise tax on the entire amount, but taxpayers
may use a reasonable method to allocate amounts paid — and
the value of any other benefits provided — between the
purchase of taxable transportation and nontaxable transportation.
Taxpayers may file a refund claim for the portion of excise tax
paid on those frequent flyer miles that are redeemed for nontaxable
transportation.

Filing a Claim

Who: Generally, the party subject to tax, in
this case, the purchaser of the mileage awards, makes any claim for
refund of the excise tax. The purchaser of the mileage awards (the
taxpayer) is required to pay the excise tax, and the party
receiving payment (generally, the airline) is treated as the
collector or collecting agent.7 As the collector, the
airline must collect the amount of the excise tax from the
purchaser and remit the tax to the IRS.8 The collector
— rather than the purchaser — is permitted to submit a
refund claim if the collector either (1) establishes that the
collector has repaid the amount of the excise tax collected on
nontaxable transportation to the purchaser or (2) obtains the
consent of the purchaser to the allowance of such
refund.9

What: The amount of any excise tax paid for
mileage awards that are redeemed for nontaxable transportation
— generally the amount paid for any mileage points that are
redeemed for an item other than domestic transportation — is
the amount eligible for a refund claim.

When: Claims may be submitted within three
years from the date the return was filed or two years from the date
the tax was paid, whichever period expires later, or if no return
was filed, within two years from the date the tax was
paid.10

How: A taxpayer typically claims a refund of
the excise tax by filing IRS Form 8849, setting forth the relevant
information substantiating the refund.

IRS exam teams have been reviewing all claims for refund and
beyond the basic requirements outlined above, taxpayers subject to
the excise tax on nontaxable transportation must consider
additional issues relating to such items as quantifying, claiming,
and substantiating a refund claim for any excise tax paid in
respect of nontaxable transportation.

Footnotes

1. IRC § 4261(a).

2. IRC § 4261(e)(3).

3. IRC §§ 4261(b)(2), 4262(a)(1).

4. IRC §§ 4261(k)(1)(A)(ii).

5. IRC § 4261(e)(3)(C); see also, Excise
Taxes; Transportation of Persons by Air; Transportation of Property
by Air; Aircraft Management Services, 85 FR 46032-01 (reserving
Treas. Reg. § 49.4261-9(b) to exercise the authority granted
in IRC § 4261(e)(3)(C)).

6. See IRS Notice 2002-63 2002-40 I.R.B. 644
(2002) and Rev. Rul. 2002-60, 2002-40 I.R.B. 641 (2002) (addressing
transactions with foreign airlines); IRS CCA 201606028 (Feb. 5,
2016) (determining that certain nontransportation items can be
excluded in cases where payments are bundled with transportation
services).

7. Treas. Reg. 49.4261-1(b)(1).

8. Id. The collector also must report the excise tax
collected on IRS Form 720.

9. IRC § 6415(a); Bombardier Aerospace Corp. v.
United States
, 831 F.3d 268, 272 (5th Cir. 2016).

10. IRC § 6511(a).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.