Source: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Air-Transportation-Excise-Tax---Audit-Technique-Guide
Timestamp: 2013-12-11 12:23:10
Document Index: 325690567

Matched Legal Cases: ['§ 4271', '§ 4291', '§ 49', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§4261', '§ 4261', '§ 4291', '§ 40', '§ 4261', '§ 4262', '§ 4262', '§ 4262', '§ 4262', '§ 4261', '§ 4263', '§ 4262', '§ 4261', '§ 4262', '§ 49', '§ 4261', '§ 1', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4263', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4261', '§ 4281', '§ 4281', '§ 4281', '§ 4281', '§ 4282']

Air Transportation Excise Tax - Audit Technique Guide
NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Document Limitations
Air Transportation of Persons Introduction
Transportation Taxes 225-Mile Zone
Uninterrupted International Air Transportation
Location of Payment for the Air Transportation
No Amount Paid for Air Transportation
Open Jaw Transportation
Exclusions from Taxable Transportation
Percentage Tax Payments Subject to Tax
Travel Card Programs
Segment Tax Domestic Segment Tax Rates
Changes in Segments by Reason of Rerouting
International Travel Facilities Tax Tax Rates
Exemptions to the Section 4261 Tax Introduction
Fixed Wing Aircraft - Forestry
Charges for Nontransportation Services
Exchange of Prepaid Order for Tickets
Caretakers and Messengers Accompanying Freight
Special Baggage Transportation Equipment
Circus or Show Conveyances
Caution on Former Exceptions
Business and Private Aircraft Introduction
Limited Liability Corporations/Disregarded Entities
Personal Use of Business Aircraft by Individuals
Aircraft Leases Introduction
Possession, Command, and Control
Leases Wet Lease
Additional Cites for Lease Issues
Management Companies and Charters Introduction
Definition of Commercial Aviation
Aircraft Charter Companies Air Charter with Wet Lease Taxable Amounts Paid
Air Charter with Dry Lease
Management Companies Wet Lease to Aircraft Management Company
Dry Lease to Aircraft Management Company
Time Sharing/Interchange Agreements
Introduction to Fractional Ownership
Charters by Tour Companies
Fractional Aircraft Ownership Important Note
The Fractional Aircraft Program
Cost and Fees Share Acquisition Costs
Aircraft Management Fee
Occupied Hourly Charge
Taxability of Fees
Operative Agreements Aircraft Purchase Agreement Dry Leases
Management Agreement Excise Tax Responsibility
Master Interchange Agreement
Issue of Possession, Command, and Control
Commercial Airlines and Scheduled Flights Introduction
Accounting for the Tax
Ticket Coding
Inter-Airline Operations
Discounted and Free Fares
Travel Agencies and Tour Operators Introduction
Travel Agencies Retail Travel Agencies
Wholesale Travel Agencies
Tour Operators Taxability of Tour Costs
“Free” Air Transportation Tours
Small Aircraft under 6,000 Pounds; Operated on an Established Line
Relationship Between the Entities
Foreign Based Travel Agencies
Alaska and Hawaii Introduction
Percentage Tax Calculating the Amount Subject to the Percentage Tax
Transportation within Alaska or within Hawaii
Domestic Segment Tax
International Facilities Tax Table of International Facilities Tax for Alaska and Hawaii
Transportation of Property by Air Introduction
Transportation of Property Tax Transportation must be within the United States
Shipments to and from Alaska and Hawaii
Property Imported and Exported Entirely by Air
Importation of Property Involving Two or More Modes of Transportation
Exportation of Property Involving Two or More Modes of Transportation
Freight Forwarder vs. Air Transporter
Determining the “Amount Paid” Subject to IRC § 4271 Tax
Air Carrier Providing Joint Services with Another Entity
Amounts paid for Accessorial Services Allocation between Air and Ground Costs
Exemptions from Tax Small Aircraft on Nonestablished Lines
Excess Baggage of Passengers
Attendants Accompanying Shipments
The Amount Paid When Charters are Involved
Determining Amount Paid for Mixed Load of Persons and Property
Collected Taxes and Deposits Introduction
Collected vs. Noncollected Excise Taxes Air Carrier Liability as Taxpayer
Methods of Accounting for Collected Taxes and Deposits Regular Method
Safe Harbor Rule Exceptions to the Safe Harbor Rule
September Rule for Deposits
Electronic Deposits Federal Tax Deposit Coupons
Return Due Dates
Claims for Refund of Collected Excise Taxes
Administrative Procedures for Collected Taxes Tax Assessments
Direct AssessmentsIRC § 4291 Notifications for Inability to Collect Tax
Aviation Fuel Taxes, Credits, and Refunds Introduction
Aviation Gasoline Aviation Gasoline Taxable Events
Aviation Gasoline Exemptions
Aviation Gasoline Claims by Ultimate Vendors
Aviation Gasoline Claims by Ultimate Purchaser
Aviation Gasoline Claims – Used on a Farm for Farming Purposes
Aviation Fuels other than Gasoline (Aviation Fuel) Background of Tax
Imposition of Tax Kerosene
Noncommercial Aviation
Foreign Trade or State and Local Government Use
Certain Refueler Trucks, Tankers, and Tank Wagons Treated as Terminals
Rate of Tax Commercial Aviation
Aviation Fuel Tax Credits and Refunds Ultimate Purchasers
On a Farm for Farming Purposes
Kerosene for Use Partly in Commercial Aviation and Partly in Nonexempt
Sales by Registered Ultimate Vendors
Summary Table of Claims
Potential Audit Issues
Examination Techniques Position Holder
Model Exemption Certificates and Waivers
Major Canadian and Mexican Cities within the 225 Mile Zone
Introduction - Air Transportation Excise Taxes
The Internal Revenue Code (the Code) imposes a tax on amounts paid for certain transportation of persons and property by air. Before June 28, 1962, a transportation tax applied to amounts paid for transportation by rail, motor vehicle, and water, in addition to amounts paid for transportation by air. Since that date the tax has applied only to the amount paid for transportation by air. Up until 1970, there were a number of exceptions to the tax. In 1970, however, Congress enacted the Airport and Airway Revenue Act of 1970, P.L. 91-258, 1970-1 C.B. 361 (the 1970 Act), eliminating most of these exceptions. The 1970 Act, also established the Airport and Airway Trust Fund, found in section 9502 of the Code.
Congress allowed the tax to expire twice during the mid-1990s. It expired December 31, 1995, and was reinstated August 27, 1996, expired again December 31, 1996, and was reinstated March 7, 1997. The Taxpayer Relief Act of 1997, P.L. 105-34 (the 1997 Act), changed the structure of the tax, effective for air transportation after September 30, 1997. The 1997 Act gradually reduced the percentage tax rate from 10% of the amount paid to its present level of 7.5%. The 1997 Act also introduced the domestic segment tax and clarified the rules for amounts paid to provide mileage awards.
The American Jobs Creation Act of 2004, P.L. 108-357 (AJCA), signed on October 22, 2004, and the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, P.L. 109-59 (SAFETEA), signed August 10, 2005, have provided additional exemptions to the tax. In addition, AJCA changed the point of taxation on aviation fuel. This field guide has been updated to reflect these changes.
The air transportation excise taxes were scheduled to be repealed as of October 1, 2007. A number of Acts have provided a continuous extension of the air transportation excise taxes. At the time this guide was written, the tax has been extended through June 30, 2008. This guide will be updated for any legislative changes which occur after June 30, 2008.
Section 4261 of the Code imposes an excise tax on amounts paid for:
Transportation of persons by air;
Each domestic segment;
The use of international travel facilities; and
The right to award free or reduced rate transportation.
Section 4271 of the Code imposes an excise tax on amounts paid for transportation of property by air.
The air transportation taxes are collected excise taxes under section 4291 of the Code. The amounts collected are deposited into the Airport and Airway Trust Fund. The amounts deposited into the trust fund are primarily used to improve and maintain the nation’s airport and air traffic control systems. In addition, taxes on aviation kerosene and aviation gasoline are transferred from the Highway Trust Fund to the Airport and Airway Trust Fund. Generally, a reduced rate of excise tax is imposed on fuel consumed in the aircraft while flying commercial aviation flights. For flights in noncommercial aviation, a higher rate of excise fuel tax is imposed on the gallons of fuel consumed in the flight.
As discussed in this field guide, there are different types and rates of excise taxes imposed on air transportation. Therefore, it is important to determine what type of service is being provided by the air transporter. This determination is to be made on a flight-by-flight basis and is the basis for a number of audit issues.
Involvement in air transportation includes any entity or person flying an aircraft or supplying fuel for the aircraft. This can include, but is not limited to, the following groups:
Scheduled commercial airlines,
On-demand air taxi services,
Charter airlines,
Charter brokers,
Fractional Aircraft Companies,
Management Companies,
Integrated package delivery companies,
Travel agencies and tour brokers,
Businesses and individuals that operate aircraft for their own use,
Purchasers of airline tickets,
Internet Intermediaries for air transportation, and
Marketers of fuel that is used in aircraft.
This document serves as a field audit guide for excise and other Internal Revenue Agents. The contents of this document are not to be used or Cited as authority for setting or sustaining a technical position. This document is not an official pronouncement of the law or the position of the Service and cannot be used, Cited, or relied upon as such.
Caution should be used in applying existing regulations and revenue rulings to present fact situations. The section 4261 regulations (Facilities and Services Excise Taxes Regulations § 49.4261-1 et. seq.), for the most part have not been revised since 1963, and do not reflect the many changes in the Code since that time. Similarly, many revenue rulings contain out-of-date tax rates and do not reflect the significant changes made in the Code in 1996, 1997, and 2005.
Air Transportation of Persons
IRC § 4261 of the Code imposes two different taxes on the amount paid for domestic taxable transportation of persons by air:
IRC § 4261(a) imposes a percentage tax on the amount paid for taxable transportation of any person (the percentage tax). IRC § 4261(b) imposes a segment tax on the amount paid for each domestic segment of taxable transportation (the domestic segment tax).
IRC § 4261(e)(3) applies the percentage tax to the amount paid for the right to award frequent flyer miles.
The percentage tax and the segment tax are combined together to determine the domestic transportation of persons by air tax and are reported on Form 720, IRS No. 026. The amount reported on IRS No. 026 also includes the tax under IRC §4261(e)(3).
IRC § 4261(c) imposes the international facilities tax on the amount paid for international transportation that begins or ends in the United States, with a reduced rate for departures from Alaska or Hawaii. The international facilities tax is reported on Form 720, IRS No. 027.
The air transportation of persons taxes under section 4261 are collected taxes. The person liable for the tax, the taxpayer, is the person making the payment for the taxable transportation. The person receiving the payment, the collector, is the person that collects the tax and files the Form 720 excise tax return. Collected taxes are discussed further in Chapter 11. Cites: IRC §§ 4291 and 7501 and Reg. § 40.6011(a)-1. Air Transportation Taxes
The percentage tax and the domestic segment tax are imposed on the amount paid for taxable transportation under IRC §§ 4261(a) and (b), respectively.
IRC § 4262(a) defines taxable transportation for purposes of sections 4261(a) and (b) as transportation by air that meets either of the following tests:
Transportation that begins and ends in the United States or at any place in Canada or Mexico not more than 225 miles from the nearest point on the border of the continental United States (the 225-mile-zone rule) or
Transportation that is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if it is not a part of uninterrupted international air transportation.
Flights over international waters and international lands, such as flights to and from Alaska and Hawaii, require special consideration. Reference Alaska and Hawaii for special rules. Cite: IRC § 4262(b).
225-Mile Zone
The term “225-mile zone” means that portion of Canada and Mexico that is not more than 225 miles from the nearest point in the continental United States. Cite: IRC § 4262(c)(2). The 225-mile zone only extends the area of the United States into Canada and Mexico for determination of the taxable transportation. It does not extend the area over the oceans to include any island nations. Note: For a listing of major Canadian and Mexican cities falling within the 225-mile zone, see Appendix B.
Example: A flight from Minneapolis, MN, to Toronto, Canada, which is within the 225-mile zone, is considered to be taxable transportation for imposition of the taxes under sections 4261(a) and (b). This is true even though the aircraft has left the United States and has entered into Canada. Uninterrupted International Air Transportation
Generally, uninterrupted international air transportation is defined as any transportation that does not both begin and end in the United States, and in which the scheduled interval between arrival and departure at any airport in the United States 12 hours or less. Cite: IRC § 4262(c)(3).
A flight departs Paris, France, and arrives in New York, NY. The passenger must change planes for his connecting flight to Dallas, Texas, which connects to a flight to Cancun, Mexico. Cancun is not located within the 225-mile zone. The scheduled time between arrival in New York and departure to Dallas is 3 hours and the scheduled time in Dallas until the flight to Cancun leaves is 4 hours. In this case, the taxes under sections 4261(a) and (b) do not apply because the flight between New York and Dallas is uninterrupted international air transportation.
However, if the passenger is scheduled to spend a couple of days in New York before continuing on to Dallas, where the passenger spends 13 hours, the flight sequence is broken down into three flights: one from Paris to New York, the second from New York to Dallas, and the third from Dallas to Cancun. The passenger’s flights would be subject to the taxes on air transportation. In this case, the percentage and domestic segment taxes under sections 4261(a) and (b) would be imposed on the flight between New York and Dallas and the international facilities tax imposed by section 4261(c) would be imposed on the flights from Paris to New York and again from Dallas to Cancun. Location of Payment for the Air Transportation
If the payment for the taxable transportation of persons by air is made within the United States, then the percentage and domestic segment taxes will be imposed on flight segments which take-off and land in the United States and/or the 225-mile zone. However, if a payment is made for transportation of persons by air outside the United States, the percentage and segment taxes will apply to transportation which begins and ends within the United States. Cite: IRC § 4261(e)(2).
A flight from Toronto, Canada, to Vancouver, Canada, both of which are within the 225-mile zone, is considered to be taxable transportation for imposition of the taxes under sections 4261(a) and (b) if the payment for the air transportation is made within the United States. However, if the payment for the flight is made in Canada, the percentage and segment taxes will not apply to the flight. No Amount Paid for Air Transportation
As a general rule, all amounts paid for the air transportation of persons are subject to tax. Where no amount is paid for air transportation, such as when the transportation is obtained by the redemption of frequent flyer miles, the transaction is not subject to the percentage tax, the domestic segment tax, or international facilities tax. Cite: Rev. Rul. 84-12, 1984-1 C.B. 211. Similarly, where an airline provides its employees with free air transportation, the tax does not apply. However, if the employee pays any amount for the flight, the amount paid is subject to tax. Cite: Rev. Rul. 70-381, 1970-2 C.B. 270.
Round trip air transportation is considered to be two trips, the trip from Point A to Point B and the return trip from Point B back to Point A. Cite: IRC § 4263(e). When the round trip is to an international destination, the departing and returning flights are considered to be two separate trips and the international facilities tax is imposed on each of the trips, the departing trip and the returning trip.
“Open jaw” transportation occurs when either (1) the return trip of an international flight is to a point other than the original departure point within the U.S., or (2) the return trip of an international flight to the original departure point within the U.S. departs from a point other than the original specified destination. For example, X departs from Point A, a domestic location, to Point B, an international location, and returns from Point B to Point C, another domestic location. If the distance between domestic points (Points A and C) is less than the distance of the shorter leg traveled (Points A to B, or Points B to C), the flight pattern is considered to be open jaw transportation and to be two separate international flights. In this case, the international facilities tax under section 4261(c) is imposed on each flight. This is discussed in the example below.
A trip from New York to Panama and from Panama to New Orleans is considered to be two international flights because the distance of the open jaw (New York to New Orleans) is shorter than the distance between Panama and New Orleans (the shorter of the two segments traveled). Therefore, the international facilities tax is imposed on the flight from New York to Panama and again on the flight from Panama to New Orleans.
On the other hand, when a flight departs from Point A, a domestic location within the United States, and lands at Point B, an international location outside of the 225 mile zone, and then returns from Point B to Point C, a different domestic location within the United States, and the distance between Points A and C is longer than the distance traveled between Points A and B, or Points B and C, the flight pattern is considered to be one domestic trip from Point A to Point C. In this case, the percentage and domestic segment taxes imposed under sections 4261(a) and (b) apply. This is discussed in the example below:
A trip from New York to Bermuda and from Bermuda to Miami is considered to be one domestic flight from New York to Miami. The “open jaw” between New York and Miami is in the U.S. and the distance between New York and Miami is greater than the shorter segment traveled (Bermuda to Miami). Therefore, the percentage and domestic segment taxes under sections 4261(a) and (b) are imposed.
The term “taxable transportation” does not include that portion of any transportation by air which meets all four of the following requirements:
such portion is outside the United States;
neither such portion nor any segment thereof is directly or indirectly- between (i) a point where the route of the transportation leaves or enters the continental United States, or (ii) a port or station in the 225-mile zone, and
a port or station in the 225-mile zone;
such portion- begins at either (i) the point where the route of the transportation leaves the United States, or (ii) a port or station in the 225-mile zone, and
ends at either (i) the point where the route of the transportation enters the United States, or (ii) a port or station in the 225-mile zone; and
a direct line from the point (or the port or station) specified in paragraph (3)(A), to the point (or the port or station) specified in paragraph (3)(B), passes through or over a point which is not within 225 miles of the United States.
Cite: IRC § 4262(b).
This exclusion generally comes into play for flights between Alaska and Hawaii and for flights between the continental United States or the 225 mile zone to Alaska and Hawaii. Flights between the continental United States and the states of Alaska or Hawaii fly over international waters or land. Therefore, the amount paid must be apportioned between the portion of the flight which flies over the United States and the portion of the flight which flies over international territories. This issue is discussed further in Chapter 9, Alaska and Hawaii.
As of October 1, 1999, IRC § 4261(a) imposes a tax of 7.5 percent on all amounts paid for taxable transportation, the percentage tax. The tax is imposed on amounts paid in cash, paid by property, or paid in barter situations. The tax is imposed at the time payment is made for the flight, not on the date of the flight itself.
Payments Subject to Tax
Amounts paid for air transportation include the following: Charges for layover or waiting time,
Deadhead Service - Movement of an empty aircraft,
Additional amounts paid to change the class of a ticket,
State sales taxes - In Rev. Rul. 73-344, 1973-2 C.B. 365, the sales tax was imposed on the seller rather than the purchaser of air transportation. Thus, the amount paid by the purchaser for such sales tax is part of the ‘amount paid’ for air transportation.
Cash fares - Cash is paid and no ticket is issued.
Scrip books - Tax applies to the amount paid when the scrip book is purchased, not when it is used.
Additional charges - Amounts paid for changing the route or destination, extending the time limit of a ticket, changing the class of accommodations, or providing exclusive occupancy of a section, etc. are subject to the tax.
Commutation or season tickets - Commutation or season tickets are subject to the tax where a single trip is 30 miles or more and the ticket is good for more than 1 month. Tax is collected from the purchaser at the time of payment, not when the tickets are used.
Prepaid exchange or similar order for transportation - The tax applies to the amounts paid for prepaid orders, exchange orders, or similar orders for transportation. Additional amounts paid in procuring transportation in connection with the use of prepaid orders, exchange orders, or similar orders, are likewise subject to tax.
Combinations of rail, motor vehicle, water, or air transportation - The tax applies only to the portion of transportation that is by air. Taxability of tours and travel vacation packages is discussed further in Chapter 8, Tour Operators and Travel Agencies.
Chartered conveyances - The tax is imposed on the amount paid for a chartered aircraft. Taxability of aircraft charters is discussed further in Chapter 5, Management Companies and Charters. However, if the owner of an aircraft sells transportation to a charterer then no tax will be due on the amount paid to the owner but the owner must inform the charterer of the charterer’s liability for collecting and accounting for the tax on the amount paid to him.
Payments remitted to air transportation providers in foreign countries by persons in the United States – Where payments to a foreign entity that provides taxable transportation of persons by air are made by the purchaser through payment from within the United States, the payment is considered to be made within the United States, and tax applies.
Cite: IRC § 4262(d) and Facilities and Services Excise Taxes Reg. § 49.4261-7 provides specific examples of methods of payment that are subject to tax. Frequent Flyer Miles
The percentage tax applies to any amount paid to an air carrier or related person, whether in cash or in kind, for the right to award free or reduced rate air transportation. Cite: IRC § 4261(e)(3). An example of this type of transaction is if a credit card company purchases miles from a carrier for the right to award the frequent flyer miles to its customers as a premium. Other entities which purchase miles include hotels, rental car companies, telecommunications companies, other foreign and domestic airlines, and passengers.
The percentage tax is computed based on the gross amount paid for the right to award frequent flyer miles. No bifurcation or division of the amounts paid between the frequent flyer miles and costs such as marketing is allowed. Limited guidance has been provided in Rev. Rul. 2002-60, 2002-2 C.B. 641; and Notice 2002-63, 2002-2 C.B. 644. Should an issue concerning the bifurcation, or division, of frequent flyer mile purchases occur, please contact the Air Transportation EIS or the Policy Analyst assigned to Air Transportation Taxes for assistance.
Under an air travel card program, the customer purchases a travel card for a set fee. The travel card allows the customer a certain number of hours of flying time or value of flights on the air transporter’s aircraft. Since the travel card is an amount paid for air transportation, the amount paid for the card is generally considered taxable under section 4261(a) when the card is purchased. Reference Travel Card Programs for additional information on this issue.
Often, an air charter company is also in the business of selling aircraft. Because of the high cost of operating the aircraft for a demonstration flight, the air charter company will charge the prospective buyer a fee for the demonstration. Many times there is no tax collected on these demonstration flights. However, Revenue Ruling 68-256, 1968-1 C.B. 489,, provides that when a prospective purchaser makes a payment for a demonstration flight, the amount paid is an amount paid for taxable transportation. Therefore, under those circumstances, amounts paid for demonstration flights are taxable.
Other products are continually being developed by the industry. For example, recent developments have included gift certificates, gift cards, and passes for unlimited travel for certain periods of time. Request copies of contracts, including the terms and conditions, to determine the important facts concerning the product under review. If needed, contact the Air Transportation EIS or Analyst for assistance.
Segment Tax
In addition to the percentage tax, a segment tax is imposed on each domestic segment of transportation of persons by air under section 4261(b) (except to or from a rural airport). A domestic segment is any segment consisting of one takeoff and one landing. In addition, the segment must be a part of taxable transportation described in section 4262(a)(1). Therefore, the segment tax applies when the air transportation begins in the United States or the 225-mile zone and also ends in the United States or the 225-mile zone. The tax is imposed on each person on board the aircraft and for each taxable segment flown. Cite: Rev. Rul. 2002-34, 2002-1 C.B. 1150.
Company charters an aircraft for 200 passengers. The aircraft flies round-trip from Oklahoma City, OK, to Memphis, TN. The segment tax is computed based on 400 segments (200 passengers times 2 segments). Assuming that all payments were made during 2006, the total segment tax would be $1,320 (200 persons times 2 segments times $3.30 tax rate).
Domestic Segment Tax Rates
During 2004
During 2007
During 2003 and thereafter, the segment tax is adjusted by the cost of living index determined under IRC § 1(f)(3). The segment tax is imposed when the payment is made even if the actual flight takes place at a later date. Although IRC § 4261(b)(1) states that the tax rate is determined when the segment begins, IRC § 4261(e)(4)(D) provides a special rule for segments beginning after 2002, and states that the tax will be based on the rate in effect at the time payment for air transportation is made.
The segment tax does not apply to a domestic segment beginning or ending at a rural airport. Cite: IRC § 4261(e)(1). NOTE: The percentage tax on the amount paid for domestic transportation is applicable to flights to and from rural airports at the 7.5 percent tax rate.
A rural airport, for these purposes, is any airport that had fewer than 100,000 commercial passengers departing in the second preceding calendar year, and
Is not within 75 miles of an airport that had at least 100,000 commercial passengers departing in the second preceding calendar year; or
Is receiving essential air service subsidies as of August 5, 1997.
Cite: IRC § 4261(e)(1)(B).
Beginning October 1, 2005, in addition to the above requirements, a rural airport also includes an airport that:
Is not connected by paved roads to another airport, and
Had fewer than 100,000 commercial air passengers on flight segments of at least 100 miles during the second preceding calendar year.
Cite IRC § 4261(e)(1)(B) (as amended by SAFETEA).
While most rural airports are at least 75 miles away from larger airports, in some states (e.g., Alaska), there are small community airports that are within 75 miles of a larger airport but are not connected by paved roads. Passengers who need to go to the larger airport cannot drive but have to fly to get there; thus, prior to this law change, they paid the segment tax on these flights.
Rev. Proc. 2005-45, 2005-2 C.B. 141, provides guidance in determining if an airport meets the definition of a rural airport. It states:
The U.S. Department of Transportation, Office of the Secretary of Transportation, in coordination with the Department of the Treasury, periodically publishes an updated list of [rural] airports…. This list may be relied upon to determine whether an airport is a rural airport for purposes of the exception from the domestic segment tax. The updated list of airports that meet the requirements of § 4261 (e)(1)(B) is located on the Excise Tax page. In addition, any airport not listed … qualifies as a rural airport if it meets the requirements of § 4261(e)(1)(B). [Rev. Proc. 98-18, 1998-1 CB 435, is obsoleted.]
If transportation is purchased between two locations on specified flights, and there is a change in the route which alters the number of domestic segments, but there is no change in the amount charged for the transportation, then there is no change in the domestic segment tax imposed. For example, if the aircraft is rerouted to another airport due to weather conditions en route to its final destination, there is no change in the domestic segment tax imposed. Cite: IRC § 4261(b)(3).
The “A” family books a flight from Seattle, WA, to Orlando, FL. The itinerary specifies a stopover in Salt Lake City to change planes on both legs of the trip. The family pays for the tickets, including the segment tax for 4 segments (Seattle to Salt Lake City plus Salt Lake City to Orlando plus Orlando to Salt Lake City plus Salt Lake City to Seattle).
Between Salt Lake City and Orlando, the pilot is directed to land the plane in Houston due to mechanical problems. This unscheduled stop in Houston creates an additional segment.
Since the additional segment was due to an unscheduled change in the flight pattern and no additional charge was imposed on the family, the segment tax for the additional segment is not imposed.
International Travel Facilities Tax
IRC § 4261(c)(1) imposes a tax on any amount paid for the transportation of any person by air that begins or ends in the United States. This tax is imposed at the time that the air transportation is purchased. The international facilities tax is imposed whether the payment for transportation is made inside or outside of the United States and whether the transportation provider is a domestic or foreign entity. The tax rate is indexed for inflation, as shown in the chart below..
International Facilities Tax
IRC § 4261(c) Departures to/from Alaska and Hawaii
As noted in the chart above, a reduced international facilities tax is imposed on departures only for flights between the continental United States, and Alaska or Hawaii. Cite: IRC § 4261(c)(3). See the discussion of Alaska and Hawaii for details on the calculation.
Note: Travel between Alaska or Hawaii and a foreign destination, including U.S. possessions, is taxed exclusively as international travel and is subject to the full international facilities tax rate.
Although air carriers are generally responsible for collection and remitting air transportation taxes, liability for the tax is imposed on passengers. However, if the person paying for the taxable air transportation fails to pay the tax for any reason, the liability for the applicable section 4261 taxes is imposed on the air carrier providing the initial segment of air transportation that begins or ends in the United States. Cite: IRC § 4263(c). Note: Air carrier liability does not apply to the tax on amounts collected for the transportation of property under IRC section 4271.
Exemptions to the Section 4261 Tax
As a general rule, all amounts paid for the air transportation of persons are subject to tax. However, as with other excise taxes, there are exceptions to this rule. This chapter provides a list and a brief discussion of the exemptions to the taxes imposed under section 4261 of the Code. Helicopter Use
Under IRC § 4261(f), no tax is imposed on air transportation by helicopter for the purpose of-
transporting individuals, equipment, or supplies in the exploration for, or the development or removal of, hard minerals, oil, or gas, or
the planting, cultivation, cutting, or transportation of, or caring for, trees including logging operations.
The flight is exempt from tax only if the helicopter does not take off from, or land at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise use services provided pursuant to section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code during the flight. In the case of helicopter transportation described in paragraph (1), this subsection shall be applied by treating each flight segment as a distinct flight.
Contact the Airport Manager of the air facility in question to determine if the airport is eligible for assistance under the Airport and Airway Development Act of 1970.
For flights after September 30, 2005, IRC § 4261(f)(2) exempts flights on fixed-wing aircraft used for forestry purposes. Again, the flights are exempt only if the fixed wing aircraft does not take off from, or land at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise use services provided pursuant to section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code, during the flight. Contact the Airport Manager of the air facility in question to determine if the airport is eligible for assistance under the Airport and Airway Development Act of 1970.
Under IRC § 4261(g), no tax is imposed under section 4261 or 4271 on any air transportation for the purpose of providing emergency medical services-
by helicopter, or
by a fixed-wing aircraft equipped for and exclusively dedicated on that flight to acute care emergency medical services.
NOTE: Whenever an agent is dealing with verification of this exemption, extreme care should be given to protecting and respecting the patient’s right to privacy. Skydiving
Under IRC § 4261(h), no tax is imposed by IRC section 4261 or 4271 on any air transportation exclusively for the purposes of skydiving. Cite: IRC § 4261(h). Seaplanes
Under IRC § 4261(i), no tax is imposed by section 4261 or 4271 on any air transportation by a seaplane with respect to any segment consisting of a takeoff from, and a landing on, water, but only if the places at which such takeoff and landing occur have not received and are not receiving financial assistance from the Airport and Airways Trust Fund. Cite: IRC § 4261(i), which was added by SAFETEA, is effective for flights after September 30, 2005.
Contact the Airport Manager of the air facility in question to determine if the airport is eligible for assistance under the Airport and Airways Trust Fund.
Under IRC § 4281, the taxes imposed by sections 4261 and 4271 shall not apply to transportation by an aircraft having a maximum certificated takeoff weight of 6,000 pounds or less, except when such aircraft is operated on an established line. For purposes of the preceding sentence, the term “maximum certificated takeoff weight” means the maximum such weight contained in the type certificate or airworthiness certificate. An aircraft is operated on an established line if the route is operated with some degree of regularity. Cite: IRC § 4281. Sightseeing Flights
IRC § 4281 was amended by SAFETEA to create a “sightseeing” exemption for an aircraft with a certificated takeoff weight of 6,000 pounds or less at any time during which such aircraft is being operated on a flight the sole purpose of which is sightseeing. Cite: IRC § 4281. Therefore, sightseeing flights on small aircraft are exempt from the domestic air transportation taxes for flights which occur after September 30, 2005. This amendment did not impact the taxability of sightseeing tours on aircraft or helicopters larger than 6,000 pounds.
Under IRC § 4282, if one member of an affiliated group is the owner or lessee of an aircraft, and such aircraft is not available for hire by persons who are not members of such group, no tax shall be imposed under section 4261 or 4271 upon any payment received by one member of the affiliated group from another member of such group for services furnished to such other member in connection with the use of such aircraft.
Under section 4282(b), the determination of whether an aircraft is available for hire by persons who are not members of an affiliated group shall be made on a flight-by-flight basis. Under section 4282(c), the term “affiliated group” has the meaning assigned to the term by section 1504(a), except that all c