Source: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Air-Transportation-Excise-Tax-ATG-Part-2
Timestamp: 2014-10-23 02:37:43
Document Index: 710694567

Matched Legal Cases: ['art 2', 'art 135', '§ 49', '§ 49', '§ 49', '§ 49', '§ 4291', '§ 4281', 'art 135', '§ 49', '§ 49', '§ 49', '§ 4271', '§ 4272', '§ 4272', '§ 4272', '§ 4262', '§49', '§ 49', '§ 49', '§ 49', '§ 49', '§ 49', '§ 4271', '§ 4291', '§ 4271', '§ 49', '§ 4271', '§ 4272', '§ 49', '§ 4261', '§ 4261', '§ 4261', '§ 40', '§ 40', '§ 6415', '§40', '§ 40', '§ 40', '§ 40', '§ 40', '§ 40', '§ 40', '§ 40', '§ 40', '§ 40', '§ 6415', '§ 49', 'art 4', '§ 6302', '§ 40', '§ 4261', '§ 4263', '§ 4291', '§ 49', '§ 6601', '§ 301', '§ 6672', '§ 301', '§ 48', '§ 6416', '§ 6421', '§ 48', '§ 6427', '§ 6427', '§ 4081', '§ 4081', '§ 48', '§ 4081', '§ 4082', '§ 4081', '§ 4081', '§ 4083', '§ 48', '§ 4083', '§ 6416', '§4081', '§4041', '§4041', '§6427', '§6416']

Air Transportation Excise Tax ATG – Part 2
Publication Date - April, 2008
Transportation of Property Tax
Amounts paid for Accessorial Services
Collected vs. Noncollected Excise Taxes
Methods of Accounting for Collected Taxes and Deposits
Administrative Procedures for Collected Taxes
Aviation Fuels other than Gasoline (Aviation Fuel)
Aviation Fuel Tax Credits and Refunds
One of the more interesting yet commonly misunderstood areas of air transportation deals with the applicability of the transportation of persons by air excise tax to the tour and travel industry. This chapter details various types of tour operations, describes the relationship between the operator and the travel agent, and provides guidance on determining which party is responsible for the collection and remittance of the excise tax to the Government.
A travel agency generally enters into contracts for travel services from suppliers such as airlines, hotels, car rental companies, and cruise lines. Travel agencies are also customers of tour operators since they purchase tour packages for resale to the general public.
When selling taxable transportation, a travel agency is acting either as a principal or as an agent for the airline company. When independent travel agencies sell tours to be taken on aircraft chartered from a carrier, the travel agencies are acting as principals and are required to collect the transportation tax, file returns, and pay over the tax to the Government. However, when travel agencies sell taxable tours as representatives of the airlines, they are acting as agents of the airlines. As agents, they are required to collect the transportation tax and remit the tax to the airlines. The airlines, in turn, are required to file returns and pay over the tax to the Government. This agency-versus-independent-broker distinction is based on a number of factors such as the exercise of possession, command, and control over the aircraft. Typically, travel agencies operate at the retail level, the wholesale level, or both. Cite: Rev. Rul. 75-296, 1975-2 C.B. 440.
Retail agencies sell services directly to the consumer. Retail agencies are commissioned middlemen for numerous suppliers of travel services. Most agencies provide information and reservations services at no charge to the customer, but in some locales, retail agencies are considering a fee structure for these services. The “consumer” is often thought of as an individual seeking transportation services or a tour booking. For many agencies, however, the more important “consumer” may be the business accounts. The income reported on the agency's tax return does not indicate the relative importance of the business accounts, but to the excise tax examiner, it provides valuable information about the point of collection of excise tax.
Wholesale agencies primarily assemble and sell “packages” of services, such as air and land arrangements to Alaska or Hawaii. Although some wholesale agencies specialize in only one type of service, such as air passage to South America, they do not usually provide these services themselves; rather, they secure them from suppliers. The consumer is the individual traveler, and the traveler must normally purchase the package through a retail agency. A wholesale agency earns its income by securing blocks of reservations and reselling them at a markup. Suppliers deal with wholesalers instead of selling only to the public directly because wholesalers generate advance sales to the suppliers.
In general, tour operators are entities that package or market inclusive vacation tours and sells them either through travel agents or directly to the public. Tour operators deliver the services specified in a given, advertised package. They may provide these services themselves by leasing planes, buses, hotels, or other facilities. On the other hand, they may obtain the services from suppliers, such as unrelated hotels, airlines, or car rental companies. In some cases, their offerings are marketed directly to the general public. In other cases, they are designed to the specifications of a wholesale travel agency that sells the packages under the agency's name. A tour operator profits from selling its package for amounts greater than its cost.
The majority of tour operators are small air carriers and airlines who are categorized by the FAA as Part 135 carriers, registered for on-demand air taxi services. These operators assemble tour packages that combine air transportation as well as non-air transportation components. The total package includes the air flight, lodging, meals, ground transportation, baggage handling, and any other fees, options, and services that are charged to the customers.
When selling the tour packages directly to the public, the tour operator has the responsibility for the collection and remittance of the air transportation excise tax. The operator must maintain adequate records in order to determine the basis upon which to apply the section 4261(a) tax. In other words, a distinction in the books and records is required to split the taxable air transportation component from the nontaxable, non-air transportation components. Facilities and Services Excise Taxes Reg. § 49.4261-2(c) provides:
If the charges for nontransportation services are not separable and are not shown in the exact amounts thereof in the records pertaining to the charges for transportation of the person, the tax must be computed upon the full amount of the payment.
Items which are considered to be non-air transportation components are:
Baggage handling, storage, and transfer;
Charges for admissions,
Charges for tour guides,
Charges for non-flight meals and meal plans,
Other non-air transportation services.
Cite: Facilities and Services Excise Taxes Reg. § 49.4261-7; examples of payments subject to tax. Facilities and Services Excise Taxes Reg. § 49.4261-8; examples of payments not subject to tax.
Taxability of Tour Costs
Amounts paid are taxable with respect to the portion that represents the air transportation of persons. The Service is not bound to accept the characterization of an amount allocated to something other than air transportation. This is especially true in the case of amounts paid as part of a package tour. For example, when an amount is paid for a travel package which includes travel to a casino, hotel accommodations, and ground transportation, the Service required a reallocation of the amounts paid between the amount paid for the taxable transportation and the amount paid for the nontaxable items. The reallocation was based on each item’s respective fair market value. The reallocation occurred even though the casino’s advertising claimed that the air transportation was free. Cite: Rev. Rul. 63-155, 1963-2 C.B. 566.
It is important to review records for changes to ensure that values assigned to nontaxable transportation are not higher than their actual value. If the values are too high, they have the effect of minimizing the base on which the section 4261(a) excise tax is computed. For example, when a total tour package price is $100, a taxpayer may insist that the non-air transportation charges are $75 when they are really $50. This results in a taxable base of $25 instead of $50. The taxpayer is to provide adequate substantiation and valuations for the non-air transportation charges. Cite: Cross v. United States, 311 F.2d 90 (4th Cir. 1962); 63-1 U.S.T.C. 15,466; and White House Sightseeing Corp. v. United States, 300 F.2d 449 (Ct.Cl. 1962); 62-1 U.S.T.C. 15,395 (cases involving the former tax on transportation by bus; the analysis for substantiation and valuation still applies to the tax on transportation by air). If the charges for nontransportation services are not separable from the charge for air transportation of the person, the tax must be computed upon the full amount of the payment. Cite: Facilities and Services Excise Taxes Reg. § 49.4261-2(c). The person or entity paying for taxable air transportation is liable for the transportation tax, but the person receiving the payment must collect the tax and file the return. Cite: IRC § 4291.
When a tour operator/air carrier sells tour packages or junkets to the public, the tour price is a set figure with no breakdown for air transportation and non-air transportation charges. One flat fee that purportedly covers all charges is charged. In Las Vegas Hacienda, Inc. v. Civil Aeronautics Board, 298 F.2d 430 (9th Cir. 1962), cert. denied 369 U.S. 885 (1962), the court upheld a federal agency decision that a resort hotel operator selling package tours, including “free” airplane rides on its aircraft, was a common carrier for compensation or hire. On these facts, in Rev. Rul. 63-155, 1963-2 C.B. 566, the Service determined that the amounts paid by hotel customers for the “free” air transportation package tours included a charge for taxable transportation. Thus, the portion of the amount paid for the tours that was reasonably attributable to the transportation service was subject to the transportation tax. The revenue ruling outlines a formula used to arrive at the tax base on which to calculate the excise tax.
Further, Rev. Rul. 72-585, 1972-2 C.B. 578 states that, if a single amount is paid for air transportation of a mixed load of persons and property, tax must be paid (1) under section 4261 on the part of the payment that represents the amount charged for transportation of persons and (2) under section 4271 for the payment representing transportation of property. An allocation of the single charge must be made on a fair and reasonable basis and must be supportable by adequate records.
IRC § 4281 provides that the taxes imposed by section 4261 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 flights paid for and beginning after September 30, 2005, note that if the sole purpose of the flight is sightseeing, then the flight is by definition not operated on an established line.
A common mistake made by tour operators who use their own airplanes to fly tour passengers is that they claim to be exempt from the excise tax because they operate small aircraft with a certificated weight of 6,000 pounds or less. This misconception stems from their interpretation of the Federal Aviation Administration Regulations, Part 135, which categorizes these small aircraft as “on demand air taxi services, not operated on a specific SCHEDULE.” However, most do maintain somewhat of a schedule since they want to maximize the aircraft usage. These operators run, for example, morning and afternoon trips and set approximate times for departures. The issue in these cases is whether the carriers operate on an established line. The determination of whether an aircraft is operating on an established line is based on the facts and circumstances, using such criteria as regularity and frequency of flights.
Section 49.4263-5(c) of the Facilities and Services Excise Taxes Regulations defines the term “operated on an established line” to mean operated with some degree of regularity between definite points. Further, that term does not necessarily mean that strict regularity of schedule is maintained; that the full run is always made; that a particular route is followed, or that intermediate stops are restricted. The term implies that the person rendering the service maintains and exercises control over the direction, route, time, number of passengers carried, etc.
Section 49.4263-5(a) of the Regulations generally provides that the section 4281 exemption applies to amounts paid for the transportation of persons on a small aircraft of the type sometimes referred to as “air taxis.” Although the term “air taxis” is not defined in the regulations, it is described in Lake Mead Air, Inc. v. United States, 991 F. Supp. 1209, 1212 (D.Nev. 1997), as “an airplane for hire, subject to the whims of a particular customer. Except to the hiring customer, its route is wholly unpredictable and unreliable.”
In Rev. Rul. 66-301, 1966-2 C.B. 475, the operator of a helicopter offered rides on a walk-up basis at a community fair. There were no scheduled or fixed times of departure and no advance bookings or reservations were available. The existence of the rides was contingent upon the fair that lasted only a few days a year. Reasoning that a schedule other than customer demands is necessary to be conducted with “some degree of regularity,” the revenue ruling concluded that a sporadic operation like the community fair helicopter rides was not operated on an established line.
In Rev. Rul. 72-617, 1972-2 C.B. 580, an air taxi carrier entered into a contract with the United States Postal Service to provide overnight air mail service between two cities. Before entering into the contract, the carrier did not fly to these cities. The contract provided for exclusive use of the aircraft for six regularly scheduled round trips weekly between certain overnight hours to meet postal requirements for an overnight exchange of mail. Although the flights met the “some degree of regularity” requirement of the regulations, the revenue ruling concluded that the aircraft making the flights was not operated on an established line because the carrier did not retain control over the direction, route, time, or cargo carried.
In Rev. Rul. 72-219, 1972-1, C.B. 350, air carrier operated both scheduled and unscheduled flights between the same destinations. Viewed together, the Service concluded that the activity was conducted ‘with some degree of regularity between definite points,’ and that the airline, in rendering the extra flights between these two points, ‘maintains and exercises control over the direction, route, time, number of passengers carried. etc.’ Thus, all flights were taxable.
The functions of the above entities are not sharply separate or mutually exclusive. Although some entities operate strictly as retail agencies or as wholesalers, it is not unusual to find others who have both features within their operations. Along with selling a full range of retail services, some agencies wholesale unusual vacation packages they have assembled. In such cases, an individual who wants to book a vacation package has to make the booking through a travel agency.
Accordingly, a tour operator can also function as a wholesaler. An example is a company that offers bus tours of selected areas of the United States. Its primary operation is conducting tours. For some portions of those tours, it uses its own facilities; for other portions, it enters into contracts with suppliers. In this capacity, it is a tour operator. It is also a wholesaler to the extent that it markets its tours through retail agencies.
With the advent of the internet, a new type of agency has developed in the sale of airline tickets. When the ultimate customer would like to purchase an airline ticket at the lowest possible price, the customer logs onto the internet intermediary’s web site and enters information on the location and date a flight is needed. The internet intermediary contacts the airlines and receives price quotes for itineraries. This information is then passed on to the customer without identifying the specific air carrier. The customer then decides whether or not to accept a quote. Upon the acceptance of a quote by the customer, the internet intermediary purchases the ticket from the airline in the customer’s name and forwards it electronically to the ultimate customer. The internet intermediary is not related to the airline or under the airline’s supervision or control.
In order for the internet intermediary to make a profit, a fee is added to the initial ticket price quoted by the airline to the internet reseller. Even though the ultimate purchaser pays a higher amount to the internet intermediary, the amount of the section 4261 tax is computed on the amount paid by the internet intermediary to the airline. In this case, the internet intermediary is acting as a conduit for the ultimate purchaser and the additional fee paid is for the intermediary’s services, not a fee for the purchase of air transportation. The airline selling the ticket is responsible for collecting and remitting the tax on the sale of the ticket. Cite: Rev. Rul. 2006-52, 2006-43 I.R.B. 761.
There are a number of foreign-based travel agencies acting as principals that sell package tours to vacation destinations in the United States. Payment for the air transportation is made outside the United States. If the payment is for air transportation of persons that begins and ends in the United States, sections 4261(a) and (b) apply. If the payment is for air transportation of persons that begins or ends in the United States, section 4261(c)(1) applies. In this case, the foreign based travel agency is responsible for collecting and remitting the applicable taxes to the United States Government. Given that these travel agencies are located in a foreign country, there is difficulty in obtaining books and records, ensuring that the tax is properly collected, and securing payment.
Another issue concerns domestic tour operators who team with foreign based travel agencies and sell a “sightseeing trip” by air to a national park or other attraction to be included in the overall tour. The domestic tour operator may not collect the excise tax on this segment of the flight, arguing that the total flight is uninterrupted international air travel that begins and ends outside the United States. This depends on the timing of the flight pattern. Determine whether the sightseeing destinations are part of an uninterrupted international flight or are merely “side trips.” Additionally, after September 30, 2005, it must be determined if the sightseeing tour takes place on an aircraft with a certificated weight of 6,000 pounds or less, in which case, the flight probably meets the section 4281 exemption. Reference Uninterrupted International Air Transportation in Chapter 1, Air Transportation of Persons for a discussion of uninterrupted international flights.
The most valuable and complete information gathered on an examination comes from an interview with the taxpayer. A tour of the taxpayer's facility and a discussion of the taxpayer’s books and accounts used to record transactions, to see how daily business is conducted, is also important. However, reviewing and inspecting the taxpayer's in-house books and records provides only a portion of the data needed for an audit. Pilots' log books, flight charts, and information required by the local airport authority, such as passenger counts, are informative. Airport Authorities, which are also required to provide information to the FAA and the U.S. Department of Transportation, are also good sources of data on the volume of operations of the taxpayer.
In addition to the sales, income, and expense information obtained from the taxpayer's books, a review of the following data and documentation discussed below is necessary:
Review the operation of the company to determine the types of services furnished, the types of aircraft used, the areas covered, the records kept, the services the taxpayer considers taxable and not taxable, the method by which the tax is computed, and other information as appropriate.
Review the records looking for untaxed revenue, including records on untaxed flights as well as the details of items not taxed on charter flights. Ensure that the untaxed charges are, in fact, properly described.
The air carrier prepares a list of passengers on each flight in case of an accident. Request these manifests to compare the number of passengers flown with the number of passengers reported for the excise tax computation.
Pilots keep a log for each flight. Review the pilot logs for owned or leased aircraft to ensure all flights are accounted for.
Review a copy of the charter or lease agreement(s) when applicable. Such documents often spell out the arrangements for the collection and payment of taxes.
Whenever possible, secure brochures and pamphlets from the taxpayer's flight terminal/facility. Some companies also maintain websites. Review to ensure all services are accounted for.
Contact the travel agencies that air carriers use as sources of customers. Also, see if the air carrier uses any large commercial bus services as a source of customer counts.
Since many air carriers use vouchers in lieu of tickets, secure the vouchers to determine the passenger counts.
Determine the basis on which the excise tax was collected from the passengers. Some air carriers and travel agents have charged the air transportation tax on the total tour package price.
Contact the local airport authority to get the figures on the passenger facility charge, if applicable.
Review the aircraft maintenance logs to determine the flight hours and the frequency of trips.
In order to fly to the states of Alaska and Hawaii, flight patterns must cross international waters and/or foreign countries. Flights to Alaska and Hawaii are neither fully domestic flights nor international flights. As a result, the percentage tax, the domestic segment tax, and the international travel facilities tax are all imposed on amounts paid for this transportation. However, there are special rules for calculating the percentage tax and a reduced-rate international travel facilities tax. This chapter will discuss the special rules and provide resource information as to the tax rates to be used in computing the amount of excise tax due.
Flights between the continental United States and Alaska or Hawaii must be apportioned between the portion that occurs over the United States and the portion of the flight that occurs outside of the United States. The same apportionment must also be performed for flights between Alaska and Hawaii. The percentage of the flight which occurs over the United States or its territorial waters is used to determine the amount upon which the percentage tax is imposed. Cite: Rev. Rul. 75-166, 1975-1 C.B. 352. In order to correctly determine the amount paid subject to percentage tax, the arrival/departure location within the continental United States and the departure/arrival location in Alaska and Hawaii must be known.
Calculating the Amount Subject to the Percentage Tax
Taxable transportation to and from Alaska and Hawaii does not include transportation which meets all four of the following:
The portion is outside the United States;
Neither the portion nor any segment thereof is directly or indirectly (A) between (i) a point where the rout of the transportation leaves or enters the continental Untied States, or (ii) a port or station in the 225-mile zone, and (B) a port or station in the 225-mile zone;
Such portion (A) 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 (B) 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.
Transportation is generally considered to leave or enter the United States when the route of the transportation passes over either the U.S. border (if traveling into a contiguous foreign country) or a point 3 nautical miles (3.45 statute miles) from low tide on the coast line. Cite: Facilities and Services Excise Taxes Reg. § 49.4262(b)-1(a).
Under the provisions of section 4262(b) transportation between the continental United States or the 225-mile zone and Alaska or Hawaii will be partially exempt from the tax. The portion of such transportation which (i) is outside the United States, (ii) is not transportation between ports or stations within the continental United States or the 225-mile zone, and (iii) is not transportation between ports or stations within Alaska or Hawaii, meets all the requirements set forth in section 4262(b) and is excluded from taxable transportation. Cite: Facilities and Services Excise Taxes Reg. § 49.4262(b)-1(b).
Example (2). B purchased a ticket for transportation by air from Chicago to Juneau, Alaska, by way of Vancouver, Canada. The portion of the transportation from Vancouver to the point where the route of the transportation enters the three-mile limit off the coast of Alaska is not subject to tax.
Cite: Facilities and Services Excise Taxes Reg. § 49.4262(b)-1(b).
For air transportation between stations within Alaska or between stations within Hawaii, the regular percentage tax rate imposed under section 4261(a) applies. There is no apportionment of the percentage tax as no portion of the flights meets the exclusions set forth under section 4262(b).
The domestic segment tax is imposed on all segments to and from as well as within Hawaii and Alaska. The tax rate is the full, unapportioned domestic segment tax rate in effect at the time of the payment of the flight. (However, there is an exception to the domestic segment tax under section 4261(e)(1) for segments to and from rural airports. A number of airports in Hawaii and Alaska meet the definition of rural airport. Thus, the domestic segment may not apply. See the discussion of Rural Airports in Chapter 1, Air Transportation of Persons.)
In 2007, passenger A pays $5,000 to fly from Minneapolis, MN, to Honolulu, HI. A segment tax of $6.80 ($3.40 times 2 segments, one from Minneapolis to Honolulu and one from Honolulu to Minneapolis) is imposed on the round trip ticket.
Along with the section 4261(a) percentage tax and 4261(b) segment tax, the section 4261(c)(3) international facilities tax is imposed because the aircraft travels over international waters and/or the land of another country. (Note that section 4261(c)(2) provides an exception for transportation entirely taxable under section 4261(a). Because amounts paid for flights to and from Alaska and Hawaii are not entirely taxable under section 4261(a), that exception does not apply.) Thus, the international facilities tax is modified to reflect a specific Alaska and Hawaii rate. The tax applies to departures only.
Table of International Facilities Tax for Alaska and Hawaii
Continuing the example above, Passenger A would also be responsible for paying $7.50 of international facilities taxes for the departure beginning in Minneapolis, MN, and ending in Honolulu, HI.
As with transportation of persons by air, the amount paid for transportation of property by air is subject to excise tax. The excise tax collected on the amount paid for the taxable transportation of property by air is also deposited into the Airport and Airway Trust Fund. This fund is used to improve and maintain the nation’s airports and airways.
IRC § 4271 imposes a tax at a rate of 6.25 percent on the amount paid for taxable transportation of property by air. This tax is imposed on the “amounts paid” to a person engaged in the business of transporting property by air. As in the taxable transportation of persons, the taxpayer is the entity paying for the transportation of property and the collector/return filer is generally the entity receiving the payment for the transportation.
Transportation must be within the United States
Unlike the tax on the transportation of persons, the transportation of property by air excise tax is imposed only on amounts paid to transport property within the United States and its boundaries. Under IRC § 4272(a), the term “taxable transportation” means transportation by air which begins and ends in the United States. Air transportation of property which begins or ends outside of the United States or within the 225-mile zone is not taxable.
Company A signs a contract with Air Transporter C to fly Company A’s property from Chicago, IL, to Winnipeg, Canada. Since the destination of the air transportation is outside of the United States, the section 4271 tax does not apply even though it is transported to a location within 225 miles of the U. S.
Although the tax on transportation of property by air applies to the amount paid for shipments between the continental United States and Alaska or Hawaii, it will not apply to the portion of the payment allocable to the transportation which is not over the United States (i.e. the amount of the transportation over international waters or a foreign country). IRC § 4272(a) provides that the term “taxable transportation” does not include the portion of transportation which meets the requirements of paragraphs (1), (2), (3), and (4) of section 4262(b). In other words, the amount paid for the portion of the transportation where:
such portion is outside of 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 (B) 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 (B) 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
is not an amount paid for “taxable transportation of property” and tax is not due.
In contrast, the transportation of property by air tax applies to flights between ports or stations in Alaska and the Aleutian Islands, as well as between ports or stations in Hawaii, even though a portion of the flight is over international waters or over Canada. This is because no point on these flights is more than 225 miles from the U.S., and thus no portion of these flights can meet the requirements stated in section 4262(b).
It is also important to point out another exception which may come into play for flights between the continental United States and Alaska. When a flight to Alaska involves a stopover in Canada within the 225-mile zone, only the portion of the flight from the stopover point to the Alaskan border can be excluded from the application of the tax. This is contrary to the general rule that would exclude all transportation from the Canada/U.S. border to the Canada/Alaskan border.
Cites: IRC § 4272(b)(1); IRC § 4262(b); Facilities and Services Excise Taxes Reg. §49.4262(b)-1; and Rev. Rul. 75-27, 1975-1 C.B. 355.
As noted previously, the section 4271 tax does not apply to amounts paid for transportation partially or entirely by air that (1) begins in the United States and ends outside the United States or (2) begins outside the Untied States and ends in the United States. Therefore, air shipments of property imported into the United States and air shipments of property exported out of the United States are not subject to the section 4271 tax. The domestic segments of a flight to transport property being exported are not taxable as long as the exportation is evidenced by listing the property by weight and destination on a freight manifest or on a through airwaybill. Cite: Facilities and Services Excise Taxes Reg. § 49.4271-1(c).
When the transportation of property begins outside the United States using a method other than air transportation, and then is transported by air from one point in the United States to another point within the United States, the amount paid for such transportation is taxable under section 4271. This is because the transportation begins and ends in the United States. Cite: Facilities and Services Excise Taxes Reg. § 49.4271-1.
When two or more modes of transportation, such as over-the-road trucking, shipments by rail, and/or shipments by water, are used within the course of transporting property for exportation, the air transportation portion is exempt from tax. Even though the transportation of property by air begins and ends in the United States, the tax does not apply if the property is being transported in the continuous course of exportation. Cite: Facilities and Services Excise Taxes Reg. § 49.4271-1(d).
Continuous movement in the course of exportation shall be evidenced by (a) the execution of the Form 1363, Export Exemption Certificate, and (b) proof that exportation has actually occurred. Cite: Facilities and Services Excise Taxes Reg. § 49.4271-1(d)(2)(i).
Delays caused by circumstances beyond the control of the shipper, such as labor disputes or natural disasters, will not interrupt the continuous movement of the property. Property arriving by air at a gateway city to export may be repacked or consolidated with other property without interrupting the continuous movement of the property. Cite: Facilities and Services Excise Taxes Reg. § 49.4271-1(d)(1). Note that imported property is not subject to these rules.
Company E hires Transportation Company F to pick up a shipment of raw materials and deliver it to its manufacturer in Mexico. Transportation Company F contracts with Railroad A, Trucker B, and Air Transporter C to provide portions of the movement of the shipment to Mexico. At each stop and transfer, the shipment is commingled with other shipments moving to the next location and is reloaded on the next transportation provider for the next leg of the overall movement to Mexico. In this case, the tax does not apply to the air transportation portion of the overall movement of the shipment since the shipment has been a part of a continuous movement resulting in export.
The transportation of property by air excise tax is a collected tax. The person who pays for the property to be transported is the taxpayer and the air transporter is the collecting agent responsible for filing the return and forwarding the collected tax to the Government. The tax is reported on Form 720, IRS No. 27.
The tax is imposed whether the amount is paid inside or outside the United States for the taxable transportation. If the payment is made outside the United States and no tax is collected, then the person to whom the property was delivered is liable for the tax and the person furnishing the last segment of the taxable transportation shall collect the tax. Cite: IRC § 4271(b)(2).
Unlike the transportation of persons by air excise tax, there is no provision which allows the tax to be assessed against the air carrier when the tax is not paid by the taxpayer . As a result, the facts of the case must be carefully determined by the examiner and a decision must be made:
Whether to assess a penalty against the air carrier under section 6672 for failing to collect the tax. The amount of this penalty is 100% of the amount not collected.
Whether the tax was actually paid by the taxpayer but the collector has failed to remit the tax over to the Service. In this instance, the agent is to proceed against the collector citing IRC §§ 4291, 6672, and 7501. or
Whether the actual taxpayer should be pursued for the underpayment of transportation of property by air tax via a direct assessment. These assessments are to be made citing IRC § 4271. Reference the IRM for procedures for “Direct Assessments.”
Generally, a freight forwarder is an entity that organizes the safe, efficient movement of goods on behalf of the shipper. Sometimes this service includes dealing with packing and consolidating the shipments as well as storage of shipments. Additionally, freight forwarders are able to arrange the best means of transport that meets the shipper’s and shipment’s needs, such as truck service, rail service, air service, or water transportation. They may also assist the shipper by agreeing to prepare necessary documents related to the transportation.
As noted above, the tax applies to amounts paid to a person engaged in the business of transporting property by air for hire. Facilities and Services Excise Taxes Regulation § 49.4271-1(b)(3) states,
Since the tax imposed by section 4271 applies only to amounts paid to persons engaged in the business of transporting property by air for hire, the tax applies to amounts paid to an air carrier by a freight forwarder or express company for the transportation of property by air. The tax does not apply to amounts paid by a shipper to a freight forwarder or express company.
Therefore, amounts paid to a freight forwarder who is not in the business of actually transporting the property by air are not subject to tax. The tax is imposed upon payment from the freight forwarder to the air transportation provider.
Because the tax is imposed on the amount paid by a “freight forwarder” to an air carrier, as opposed to the amount paid to the freight forwarder, examination issues have arisen regarding whether or not an entity is a “freight forwarder”. In fact, S. Rep. No. 91-706, 91st Cong. 2nd Sess., 1970-1 C.B. 386, 395, stated:
In the case of freight forwarders, express companies, and similar persons (since the forwarder, etc., is not the person engaged in transporting the property by air for hire), the tax is to be imposed upon, and measured by, the amount paid by the forwarder, etc., to the air carrier. In such a situation, the tax is not imposed upon the shipper, although it may be presumed that the amount charged by the forwarder, etc., to the shipper will take the tax into account.
Most commonly, examination issues arise when an entity related to an air carrier claims to be a freight forwarder and the tax should be imposed on the amount it pays its related air carrier. Generally, the Service considers the related entity, such as the parent corporation, to be operating as an integrated air transportation company, not a freight forwarder. If a person provides its own transportation, it is not a freight forwarder. Shippers Cooperative, Inv. v. Interstate Commerce Commission, 308 F.2d 888, 891 (9th Cir. 1962). As a result, the entity claiming to be a freight forwarder was actually in the business of transporting property by air and responsible for collecting the tax from the shippers.
Once the taxpayer and collector have been identified, it becomes important to determine the “amount paid” which is subject to tax. Although it might initially be expected that the amount paid is reflected on the airwaybill or other document, this is not always the case. Calculations may be needed to determine the amount paid when there are:
Payments for “accessorial services”
Services provided by “integrated transportation companies”
Mixed loads of persons and property, and
IRC § 4271(c) states:
For purposes of this section, in any case in which a person engaged in the business of transporting property by air for hire and one or more other persons not so engaged jointly provide services which include taxable transportation of property, and the person so engaged receives, for the furnishing of such taxable transportation, a portion of the receipts from the joint providing of such services, the amount paid for the taxable transportation shall be treated as being the sum of (1) the portion of the receipts so received and (2) any expenses incurred by any of the persons not so engaged which are properly attributable to such taxable transportation and which are taken into account in determining the portion of the receipts so received.
Thus, when a true freight forwarder works jointly with an air carrier to provide transportation of property by air, it is possible to attribute “expenses incurred” by the freight forwarder as an amount paid for transportation.
The most information on this area comes from the Finance Committee amendments in 1970, which clarified the “amount paid” when there is a joint provision of services. The Committee indicated that in addition to the amount “Air Express” remitted to the air carrier, the amount paid would also include “a portion of the expenses for cooperative advertising which are deducted before the division of receipts is made between the parties.” Cite: S. Rep. No. 91-706, 91st Cong. 2nd Sess., 1970-1 C.B. 386, 395.
Accessorial services are taxable where they can only be provided by the carrier, either directly or subcontracted, and if all who use the service are charged for it. The amounts are taxable whether the air carrier provides the accessorial services directly or through an independent contractor. On the other hand, if the service could also be provided by another party, such as a freight forwarder, the amounts paid for the service performed by the air carrier are not considered to be amounts paid for the transportation of property by air, and are therefore not subject to the tax, if the charges for such services are separately stated.
Examples of accessorial services that would be taxable include:
Charges for “stopping in transit”
Charges for “proof of delivery requests”
Excess valuation charges, and
Charges for transporting items in the refrigerated portion of an aircraft.
Cites: S. Rep. No. 91-706 91st Cong., 2d Sess., 1970-1 C.B. 386 at 395; Rev. Rul. 71-398, 1971-2 C.B. 373.
Examples of accessorial services that are potentially nontaxable (if separately stated) because they could be provided by someone other than the air carrier:
COD (Collect on Delivery) shipments – a service provided by carriers whereby the carrier will collect COD amounts from the consignee and forward payment to shippers;
RFC (Remittance Following Collection) shipments – a service basically similar to the COD service described above, but provides for the extension of credit to the consignee for the amounts due on RFC shipments and for remittance following collection by the carrier;
Assembly or distribution services – two distinct services. In providing the assembly service, the carrier will accept two or more parts of a shipment from one or more shippers at a point of origin and will provide special assembling of the parts for shipment. At a destination point, the carrier will provide distribution service that involves separating parts of a shipper’s shipment and delivery of the parts to different consignees;
Containers for live animals – a service where containers are rented or sold by carriers for use in the air transportation of animals;
Signature service – a service providing for a person to person receipt by individuals involved in the handling of specific freight shipments;
Charge for the use on an insulated container – a service where a carrier furnishes insulated containers for carriage of special air freight shipments;
Terminal service charges – a service where the carrier prepares export and entry documents and processes customs clearance;
Proof of delivery request – a form of terminal service charge assessed by carriers when proof of delivery is requested by the shipper. The carrier furnishes to the shipper a photocopy of the airbill or manifest signed by the consignee, or his agent;
Charge for packing shipments – a service where the carrier, using special packaging materials, packages electronic machines and office machines for the shipper; and
Charge for the use of a container – a service where the carrier furnishes multiple-use containers or single-use containers, including containers that are designed as “fish-pack” containers for fin fish and shell fish.
In order for the charges for the accessorial services listed above to not be taxable, they must be separately stated to the customer purchasing the air transportation. Cite: Rev. Rul. 71-398, 1971-2 C.B. 373.
Allocation between Air and Ground Costs
With the change in regulatory requirements over the years, many companies have become integrated transportation companies that provide both ground and air transportation. For example, it is not uncommon for an entity to send a truck to pick up a package from a customer, then transport that customer’s package between the origination city to another city via its own aircraft, then deliver the shipment to the recipient via truck. As this integrated transportation generally involves nontaxable accessorial services, complex calculations are usually made by the transportation company in arriving at the amount they deem taxable.
If an examination involves such an entity, contact the SBSE EIS or Policy Analyst for Air Transportation Excise Taxes or the LMSB Air Transport Technical Advisor for assistance.
In general, all users are subject to the taxes on the amounts paid for taxable air transportation of persons and property. However, exemptions from the tax are provided as follows:
The taxes imposed by section 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. Cite: IRC 4281. 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 regularity between definite points. For additional information, see Chapter 2, Exemptions to the Section 4261 Tax.
The taxes imposed by section 4271 are not imposed on excess baggage accompanying a passenger traveling on an aircraft operated on an established line. Cite: IRC § 4272(c).
The amounts paid for attendants accompanying shipments such as guards, or couriers are amounts paid for the transportation of persons, and it is held that the amounts are subject to the tax imposed by section 4261 rather than the tax imposed by section 4271. Cite: Rev. Rul. 71-398, 1971-2 C.B. 373. See Facilities and Services Excise Taxes Reg. § 49.4261-8(b) for an exception to this rule.
The air freight tax does not apply to amounts paid for aerial services such as:
aerial fire fighting services, or
the use of helicopters in construction to settle heating and air conditioning units on roofs of buildings,
to dismantle tower cranes
of power lines or
of ski lifts.
Cites: Rev. Rul. 72-156, 1972-1 C.B. 331; Rev. Rul. 74-496, 1974-2 C.B. 370; S. Rep. No. 91-706, 91st Cong. 2nd Sess., 1970-1 C.B. 386,395.
The air freight tax does not apply on any air transportation for the purpose of providing emergency medical services:
Cite: IRC § 4261(g). The exemption applies even if the helicopter or fixed wing aircraft takes off or lands at aviation facilities that receive federal assistance. The most common use of this exemption is for shipments of donated human organs. However, it is important to remember the transportation of human organs will not be exempt if they are transported on a fixed wing aircraft with other passengers or shipments.
No tax shall be imposed by section 4271 on any air transportation exclusively for the purposes of skydiving. Cite: IRC § 4261(h).
Beginning on October 1, 2005, the transportation of property by air is not imposed on air transportation by seaplanes. In order to be exempt, the segment flown by the seaplane must consist of a take-off from, and a landing on, water. However, the tax will be imposed if the places at which the takeoff and landing occur have received or are receiving financial assistance from the Airport and Airway Trust Fund. Cite: IRC § 4261(i).
The affiliated group exemption under section 4282 also applies to the transportation of property by air. Reference the discussion of affiliated groups.
Often large shippers may charter an aircraft to transport property. In these cases, the section 4271 tax is still imposed on the amount paid for the transportation. Therefore, the section 4271 tax is imposed on the sum of:
The amount paid for the flight(s), plus
The amount paid for crew expenses such as: pilot meals, pilot and crew lodging, and waiting time,
The cost of a deadhead flight which includes all costs for returning an empty plane to the base hangar,
Fuel surcharges, and
Any other amount related to the charter flight to transport the property.
Determining the Amount Paid for Mixed Load of Persons and Property
A singe amount paid for the air transportation of a mixed load of persons and property must be allocated between the portion of the flight for the transportation of persons and the portion of the flight for the transportation of property. A reasonable basis for this allocation must be used and the allocation must be supported by adequate records. Once the allocation is made, the applicable taxes under section 4261 are imposed on the amount allocated to the transportation of persons by air and the tax under section 4271 is imposed on the amount allocated to the transportation of property by air. Cite: Rev. Rul. 72-585, 1972-2 C.B. 578.
Examination techniques for transportation of property by air exams are mostly the same as techniques for transportation of persons by air. The techniques listed below are not all-inclusive and should not be deemed as mandatory but rather as a starting point or points to consider when conducting these examinations.
Obtain and review complete transcripts of the Taxpayer. This will provide the information concerning the type of entity you are dealing with. The taxpayer may be a subsidiary of a large corporation. In this case, the LMSB Case Manager is to be consulted.
Review the filed Form 720. Look for abstracts on which tax is being reported. For instance, if tax is only reported on abstract # 028, then there is a possibility that the Taxpayer may be combining multiple abstracts into one line entry on the Form 720;
Review the Form 720, Schedule C, noting the types of fuel claims. Note that some taxpayers will combine all fuel claims on one line;
Review the Form 720, Schedule A, to determine the method of tax deposits used by the Taxpayer. This is important because it is not unusual for a Taxpayer to report under the regular method when in fact, the Taxpayer is actually using the alternative method. The alternative method is much simpler to use and normally the accounting systems can be set up to track FET under the system. The regular method requires a greater detail of information and most accounting systems are not set up to efficiently track the FET as it is collected. The regular method generally requires the Taxpayer to track collections on separate workpapers;
Compare the tax due on the income reported on the income tax returns and with the amount of tax reported on the Form 720 for the same period. While this will not match perfectly, large differences should be questioned during the initial interview;
Review all refund claims filed on Form 8849, Form 843, and Form 4136;
Perform an Internet search on the taxpayer. Note the kind of services being provided by the Taxpayer. Most charter and aircraft management companies have very elaborate websites and provide numerous services;
Go to the FAA website and search for the aircraft the Taxpayer may own and note the type of operator’s certificates held by the Taxpayer;
Do a search on Accurint for the Taxpayer. This will give you some basic information about the Taxpayer.
In examinations of large companies, note that most are publicly held and issue annual reports to their stockholders. Reviewing these reports for 1 or more years will give important information about the taxpayer’s overall activities;
Another source of information on large companies is the Securities and Exchange Commission Form 10K (annual report and related documentation), if required to be filed. Large companies may produce their own newsletters, which are valuable tools for learning about changes in company functions and everyday business practices. Large companies may also produce trade magazines or other publications.
During the initial contact call, verify the information on the Form 720. Additional information to be secured from the Taxpayer at this time includes:
The types of services that the Taxpayer offers. For instance does it offer international flights? Do they offer transportation of persons? Often companies will provide transportation of persons on the same flights as their property flights but will combine the tax on one abstract.
What type of FAA certificate does the Taxpayer operate under?
In preparing the appointment letter and initial IDR, the following items are to be considered in order to save time by requesting them up front:
Copies of any workpapers used to prepare the return.
A copy of the chart of accounts. The chart of accounts will provide clues into accounts that may be taxable but are being missed by the air transportation provider.
A written narrative of how they account for and track FET along with who performs each function. Have the taxpayer provide a flow chart of the process from the time a contract for the movement of property is quoted and purchased to the report that shows the tax due. Obtain an explanation of how the air transportation provider determines what charges are taxed and what charges are not taxed. Obtain the reports which are prepared which detail the various charges taxed.
Obtain a list of services the taxpayer provides that are considered to be taxable.
Obtain a list of services the taxpayer provides that are considered to be non-taxable.
Obtain an explanation of how the taxpayer accounts for all fuel purchased and used.
Note how the taxpayer determines the number of gallons of fuel that have been taxed and at what rate the fuel was taxed at.
Note how the taxpayer determines the number of gallons of fuel used for foreign trade and the number of gallons used for other tax-exempt purposes.
Request supporting workpapers and verify that each fuel claim filed is allowable.
Perform a detailed examination of cost centers to determine whether the formulas are consistent with a proper allocation of the costs. To perform this function, considerable knowledge of the company's business practice is necessary. Flowcharts, charts of accounts, access to computer files, and an experienced computer audit specialist are needed on such exams.
When there are both air/ground or supplemental costs are incorporated in dedicated expenses, a study should be made of these cost centers if the integrated company has not made allocations in the original computation.
At the first on-site interview, the tax manager, along with all persons who are responsible for accounting for the tax and for selling the transportation of property by air are to be present.
Reconcile total property transportation tax collected per book to the tax on the Form 720 to verify that all tax collected has been remitted. Explain discrepancies.
Reconcile adjustment items on the Form 720 to verify that the air transporter is entitled to the adjustment. Review corresponding accounts for blind credits.
Review the general ledger and question the non-taxed revenue accounts to verify what the accounts do not contain taxable property revenue.
Review liability accounts, paying attention to all sources of tax, especially any unusual debits to the account. Reconcile the liability at the end of the last quarter to ensure that the accrued liability is correct.
Air transporters may make tax deposits based on amounts considered as collected (the “alternative method”) under Excise Tax Procedural Regulations § 40.6302(c)-3, and make adjustments the next month. Verify that the correct adjustment has been made and determine that the amounts considered as collected are accurate.
Make sure the companies are using only one method of deposits during the quarter, either the regular method or the alternative method is to be used. Cite: Excise Tax Procedural Reg. §§ 40.6302(c)-1 and 40.6302(c)-3.
Exemptions usually allowed to various organizations or governmental agencies are not allowed for the transportation of property by air tax. Verify that exemptions were not granted to state or local governments, the United States and its possessions, diplomats, nonprofit educational organizations, or human organ transplant teams.
Be alert to exemptions claimed for exported property especially when multiple stops are involved.
Be alert to exemptions claimed by freight forwarders. Determine who is the taxpayer in each flight situation.
An integrated company (having both air and ground business) may calculate the tax by allocating revenue between ground transportation and air transportation based on its costs. Ensure that the carrier correctly allocates costs as either nontaxable ground cost or as taxable air cost. Erroneous allocations may cause an understatement or overstatement of tax. (An overstatement of tax cannot be refunded to the carrier unless the carrier has refunded the amount to the customer or has obtained the customer's permission to claim the refund. Cite: IRC § 6415.
The company may have a complicated cost accounting system that requires detailed examinations of cost centers to determine whether the formulas utilized in determining revenue subject to section 4271 are consistent with a proper allocation of the costs. To examine such a cost accounting system, considerable knowledge of the company's business practice is necessary. Flowcharts, charts of accounts, access to computer files, and an experienced computer audit specialist are needed on such exams.
Direct air cost, direct ground cost, and indirect costs must be correctly allocated to arrive at the correct amount of tax. When there are both air/ground or other costs incorporated in dedicated expenses, a study should be made of these cost centers if the integrated company has not made allocations in the original computation.
Review the allocation of costs for sorting facilities or super hubs.
Review aviation fuel purchases. Only the ultimate purchaser of aviation fuel is entitled to the refund or credit if cargo taxes are collected and paid over to the Government.
Review claims and credits for aviation fuel. Large cargo companies may have a direct pipeline to the airport loading facilities at their main shipping locations. In this case, the fuel may be purchased in bulk fuel tax-free or at a tax-reduced rate using Form 637. Ensure that these purchases are not included with any credits claimed for away-from-home-base, tax-included purchases.
Collected Taxes and Deposits
The air transportation excise taxes are facilities and services excise taxes. Facilities and services taxes are imposed on the amount paid for the use of a facility or a service provided. These taxes are classified as collected taxes and are reported on Form 720. Collected taxes are paid by the person who receives the service or uses the facility. The term “collected tax” stems from the fact that the person furnishing the service or facility must act as a collecting agent for the tax imposed on the person paying for the service or facility. It is important to remember when dealing with air transportation taxes that the customer is the taxpayer and the air transportation provider is the collecting agent.
Form 720, Quarterly Federal Excise Tax Return, is used to report and pay excise taxes and it is required for each calendar quarter. Cite: Excise Tax Procedural Reg. §40.6011(a)-1.
The essential difference between a collected and a noncollected excise tax is that a noncollected excise tax is imposed directly on the seller (taxpayer) who must pay it whether or not the customer ultimately pays it. Most excise taxes are noncollected taxes. The exceptions are collected taxes under facilities and services excise taxes. As noted above, a collected tax is levied against the party paying for the service or use of the facility. However, the provider of the service or facility must collect the tax from the taxpayer, file the Form 720, and remit the collected tax to the Government.
The person paying for the service or facility is liable for the tax at the time of payment. Once payment is made to the collector, the amount of tax so paid is to be held in trust for the United States. If the collector furnishing the facility or service does not collect the tax, the tax may be assessed directly against that person.
Air Carrier Liability as Taxpayer
The Taxpayer Relief Act of 1997 amended section 4263(c) to provide that, if the air transportation of persons tax under section 4261 is not paid at the time the payment for transportation is made, the tax is to be paid by the carrier providing the initial segment of transportation that begins or ends in the United States. This provision is generally effective for amounts paid on or after October 1, 1997, for travel on or after October 1, 1997. The section 4263(c) liability provision only applies to taxes imposed under section 4261. Therefore, it does not apply to the section 4271 tax imposed on the transportation of property by air.
There are two methods of accounting that can be used by the collecting agent to account for collected taxes: the regular method and the alternative method. Once the alternative method is elected, the collector must continue to use the alternative method to account for the collected excise taxes. Should the collector wish to change to the regular method, the collector will need to request permission to change its accounting method from the Service.
Under Excise Tax Procedural Regulations § 40.6302(c)-1, the Regular Method treats the collected tax as a tax liability incurred during the semimonthly period in which that tax is actually collected. Cite: Excise Tax Procedural Reg. § 40.6302(c)-1(a)(2)(i). The deposit of tax for a semimonthly period is due by the 14th day following the period in which the tax is collected. Generally, this is the 29th day of a month for the first semimonthly period and the 14th day of the following month for the second semimonthly period. If the 14th or the 29th day falls on a Saturday, Sunday, or legal holiday, the collector must make the deposit by the immediately preceding day that is not a Saturday, Sunday, or legal holiday. In order to determine the amount of the semimonthly deposit, the amount may be figured by dividing the net tax liability for the month by two. If this method of computation is used then it must be used for all semimonthly periods in the calendar quarter.
The collector reports the total liability for the period on the line for the tax being filed. Any claims or adjustments are usually shown on Schedule C (Form 720). The net tax liability for a reporting period is then reflected in Part III of the Form 720.
Under Excise Tax Procedural Regulations § 40.6302(c)-3, the Alternative Method treats the tax as a tax liability incurred during the semimonthly period in which that tax is considered as collected. Cite: Excise Tax Procedural Reg. § 40.6302(c)-1(a)(2)(ii). Under this method, the tax included in tickets sold during a semimonthly period is considered collected during the first 7 days of the second month following semimonthly period. The deposit of tax is due by the 3rd banking day after the 7th day of that period.
The tax included in tickets sold for the period from December 16, 1997, to December 31, 1997, is considered collected from January 16, 1998, to January 22, 1998, and must be deposited by January 27, 1998.
See Publication 509, Tax Calendars, for the due dates of these deposits for the current year.
The tax for the period is the amount included in tickets sold, not the amount of tax that is actually collected. For example, tickets sold in December, January, and February are considered collected during January, February, and March and are reported on Form 720 as the tax for the 1st quarter of the calendar year.
If the air transportation provider elects to report the tax and make deposits based on the Alternative Method, the regulations require the air transportation provider to separately account for the tax. Cite: Excise Tax Procedural Reg. § 40.6302(c)-3(b)(ii)(2). To use the alternative method, the collector must maintain a separate account in which the tax included in tickets sold during the month is accounted for. For each month, the account must reflect all transactions with the air transportation taxes, including:
Items of tax that are included in tickets sold during the month, and
Items of adjustment relating to the tax for the prior months (within the statue of limitations on credits or refunds).
The collector reports and deposits the net amount in the account at the end of the period. The negative adjustments to the Alternative Method account are often referred to as “blind credits” as these credits are not shown on a return but are netted directly against the tax collected. It is important to note that a negative adjustment to the alternative method account cannot be made for a refusal to pay or inability to collect unless the refusal has been reported to the IRS under section 4291. Additional information on section 4291 is discussed later in this Chapter.
Under the Alternative Method, the deposit of tax for any semimonthly period must not be less than the net amount of tax that is considered collected during the semimonthly period. The net amount of tax that is considered collected during the semimonthly period must be:
The net amount of tax reflected in the separate account for the corresponding semimonthly period of the previous month, or
Generally, semi-monthly deposits of excise taxes are required. A semimonthly period is the first 15 days of a month (the first semimonthly period) or the 16th through the last day of a month (the second semimonthly period). Schedule A (Form 720), notes the deposits made during the quarter.
Deposits for a semimonthly period generally must be at least 95% of the net tax liability for that period unless the safe harbor rule applies. The safe harbor rules apply separately to deposits under the Regular Method and the Alternative Method.
For the safe harbor rule, the collector must have filed a Form 720 for the second calendar quarter, called the look-back quarter, that precedes the current quarter. If the collector filed for the look-back quarter, the collector will have met the semimonthly deposit requirement for the current quarter if all of the following conditions are met:
The deposit of tax for each semi-monthly period in current quarter is not less than 1/6 (16.67 percent) of the net tax liability reported for the look-back quarter.
Each deposit is timely made at an authorized Government depository, and
The collector pays any underpayment for the current quarter by the due date of the return.
For the semimonthly period for which the additional deposit is required (September Rule), the additional deposit must be at least 12.23% or 11.12% for non-EFTPS of the net tax liability reported for the look-back quarter. Also, the total deposit for that semimonthly period must be at least 1/6 (16.67 percent) of the net tax liability reported for the look-back quarter.
Exceptions to the Safe Harbor Rule
The 1st and 2nd quarters beginning on or after the effective date of an increase in the rate of tax unless the deposit of taxes for each semimonthly period in the calendar quarter is at least 1/6 (16.67 percent) of the tax liability that would have been incurred for the look-back quarter if the increased rate of tax had been in effect for that look-back quarter; or deposits of any tax if the tax was not in effect throughout the look-back quarter.
Any quarter, if the tax liability includes any tax not in effect throughout the look-back quarter, or
Any quarter under the alternative method, if the tax liability includes any tax not in effect throughout the look-back quarter and the month preceding the look-back quarter.
Note: The collector’s right to make deposits of tax using the safe harbor rule can be withdrawn from the collector for not complying with these rules.
All excise taxes that must be deposited are subject to special September rules. Under these rules, an additional deposit is required in September. A different deposit date may apply if the collector is required to make electronic deposits. Taxes for the part of the period not covered by the special September rule should be deposited by the normal due date. Cite: Excise Tax Procedural Reg. §§ 40.6302-2 and 40.6302-3.
Additional deposit of taxes in September 2007
Deposit Due On
EFTPS1
Non-EFTPS
Most collectors must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits. If the collector is an employer required to use EFTPS, it must also use EFTPS to deposit excise taxes. The collector must make electronic deposits for all depository taxes if it had to make electronic deposits in the prior year or if total deposits of income tax withheld and Social Security, Medicare, and Railroad Retirement taxes were more than $200,000 in the prior year. If it does not meet these conditions, electronic deposits are voluntary.
If the collector is not required to use EFTPS and does not voluntarily participate in the EFTPS Program, deposits of federal excise taxes are made using Form 8109, Federal Tax Deposit Coupon, at an authorized financial institution.
The taxes are reported on Form 720. The Form 720 must be filed by the following due dates:
If any due date falls on a Saturday, Sunday, or legal holiday, the return can be filed on the next business day.
Under section 6402, the Secretary has the authority to make a refund or credit of any overpayment of any tax to the person who made the overpayment. Section 6415(a) states that a credit or refund of any overpayment of tax imposed by section 4261 or 4271 may be allowed to the person who collected the tax and paid it to the Secretary if such person establishes, under such regulations as the Secretary may prescribe, that he has repaid the amount of such tax to the person from whom he collected it, or obtains the consent of such person to the allowance of the credit or refund.
Section 6415(b) states that any person entitled to a refund of tax imposed by section 4261 or 4271 paid, or collected and paid, to the Secretary by him may, instead of filing a claim for refund, take a credit therefore against taxes imposed by such section due upon any subsequent return.
There are no regulations under section 6415. Therefore, we also look to Excise Tax Procedural Reg. §§ 40.6302(c)-1, 40.6302(c)-2 and 40.6302(c)-3 for claims involving air transportation taxes. If the collector elects to use the alternative method for accounting for the tax, under Excise Tax Procedural Regulations § 40.6302(c)-3, the collector is allowed to adjust its alternative method account for adjustments arising from refunds of monies for tickets. Cite: IRC 6415 and Excise Tax Procedural Reg. § 40.6302(c)-3.
Usually, when the collector refunds any portion of a ticket, it will also adjust the air transportation excise tax imposed on the original ticket sale and include the excise tax refund in the amount refunded to the customer/taxpayer. The excise tax refunded will be a negative adjustment to the alternative method account and will reduce the amount of tax considered billed or sold during that period.
Where the collector uses the Regular Method to account for the tax, the only person allowed to file a claim for refund of air transportation taxes is the actual taxpayer, unless the collector meets certain requirements. The collector that uses the regular method is only allowed to file for a claim if written permission is received from the actual taxpayer or the collector has already refunded the tax to the taxpayer. Cite: IRC § 6415(a).
Additional care is needed when dealing with collected taxes. Collected taxes have the ability to present unique situations where the collecting agent fails to collect the full amount of tax and include the correct tax amount on a filed return. This failure raises questions concerning upon whom the Service will assess the tax, whether penalties can be applied, and how to protect the statute of limitations on a filed return case.
The important thing to remember is that the duty to collect transportation taxes is imposed on the collector. However, the consumer/taxpayer is not relieved of his or her liability for the tax. Even though a collector may fail to collect the tax, liability for the tax does not automatically shift to the collector for those situations under section 4263(c) for taxes imposed under section 4261. When it is determined that the air transportation provider is liable, the deficiency will be proposed against the carrier under section 4263(c).
In the case of an air transportation provider who fails to collect taxes imposed under section 4271 for the transportation of property by air, the Service will request the collector to collect “back taxes” due from the individual customers/taxpayers. In this case, most collectors try to comply with this request as they do not want to have their customers contacted by the Service for the additional tax. If the collector attempted to collect the “back taxes” and is not successful, then the Service can proceed with direct assessments against the customer(s).
As noted previously, the duty to collect transportation of property taxes is imposed on the provider of the air transportation. If the collector fails to collect and remit the section 4271 tax, or if an air transportation provider fails to collect and remit the section 4261 tax and, in addition, follows the procedures outlined in section 4291, as discussed below, the Service will directly assess the unpaid tax against the consumer of the air transportation service. The procedures for a direct assessment can be found in IRM 4.24.4.8.2 (2/1/2003).
IRC 4291 Notifications for Inability to Collect Tax
The regulations under section 4291 allow for the air transportation provider to be able to notify the Service of the inability to collect the air transportation tax from any party. If the requirements of the regulation are met then the air transportation provider is relieved of their liability for the tax so reported. The Service will proceed to collect the tax from the person to whom the air transportation was provided. Facilities and Services Excise Taxes Regulations § 49.4291-1 states:
If the person from whom the tax is required to be collected refuses to pay it or if for any reason it is impossible for the collecting agent to collect the tax from the person, the collecting agent is required to report to the Commissioner the name and address of that person, the nature of the facility provided or service rendered, the amount paid therefore, and the date on which paid.
The notification is due to the Commissioner by the due date of the return on which the item of adjustment relating to the uncollected tax would be reflected for those collecting agents using the alternative method of reporting the tax. For those collecting agents not using the alternative method, the notification is due to the Commissioner by the due date of the return on which the tax would have been reported.
Section 6672 provides for a 100-percent penalty when the collector willfully fails to collect, truthfully account for, or remit collected taxes. When willfulness is indicated, the case is referred to the Collection Division for a determination of the applicability of section 6672.
If the Collection Division accepts the case, it will assess the penalty. The penalty is used as a collection device, and no tax is assessed if the penalty is collected.
With collected taxes, special care is needed to ensure that all aspects of the statute of limitations for filed returns are protected. The forms and wording needed to accomplish this task depends upon the type of entity under audit.
For Collectors, the following forms are to be secured:
Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty, is to be secured for each tax period under audit. The form can be prepared for the entity or for each responsible official depending upon the facts and circumstances of the case. This form will protect the statute for the imposition of the Trust Fund Recovery Penalty under section 6672.
Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes, is to be secured to protect the liability for collected taxes under section 7501. The wording to be used depends upon the type of tax being protected. The underlined items are the entries which must be entered onto the form.
For the transportation of persons by air tax, the form is to specify the following:
The amount of liability for collecting remitting IRC 4261 Taxable Transportation by Air tax, imposed on the taxpayer(s) by section 7501 and 4291 of the Internal Revenue Code.
For the transportation of property by air tax, the form is to specify the following:
The amount of liability for collecting remitting IRC 4271 Taxable Transportation by Air tax, imposed on the taxpayer(s) by section 7501 and 4291 of the Internal Revenue Code.
For Taxpayers the following forms are to be secured:
Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes, is to be secured to protect the liability for the taxes imposed under section 4261 and 4271. The wording to be used depends upon the type of tax being protected. The underlined items are the entries which must be entered onto the form.
The amount of liability for Taxable Transportation by Air tax, imposed on the taxpayer(s) by section 4261 of the Internal Revenue Code.
The amount of liability for Taxable Transportation by Air tax, imposed on the taxpayer(s) by section 4271 of the Internal Revenue Code.
For Air Carriers the following forms are to be secured:
Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes, is to be secured to protect the liability for the tax imposed on the air carrier under section 4263. The underlined items are the entries which must be entered onto the form.
The amount of liability for IRC 4261 taxes not paid or collected under any other provision tax, imposed on the taxpayer(s) by section 4263 of the Internal Revenue Code.
Cite: Memorandum from Sharon M. Oliver, Director of Reporting Compliance, dated May 23, 2001, entitled Collected Taxes – Statute of Limitations. The memorandum references Field Service Advice 200101032.
IRM Part 4, chapter 4.24, Excise Tax Handbook, sections 4.24.6.3, 4.24.4.8.2, 4.24.9.5, 4.24.9.5.1, 4.24.9-1, and 4.24.9-2.
IRC § 6302, Excise Tax Procedural Reg. §§ 40.6302(c)-2 and 40.6302(c)-3,
IRC § 4261,
IRC § 4263,
IRC § 4291, Facilities and Services Excise Tax Reg. § 49.4291-1, Rev. Rul. 58-300, 1958-1 C.B. 454; amplified by Rev. Rul. 59-306, 1959-2 C.B. 422
IRC § 6601; Procedure and Administration Reg. § 301.6601-1
IRC § 6672; Procedure and Administration Reg. § 301.6672-1
Aviation Fuel Taxes, Credits, and Refunds
Two types of aviation-related fuels are taxed: aviation gasoline and aviation fuel other than aviation gasoline. Each is taxed at a different tax rate. Also at issue is whether the fuel is used in commercial or noncommercial aviation.
Aviation gasoline, also called “avgas”, is a high octane specialty gasoline product that is usually used only in small, piston-driven aircraft. Avgas has lead as an additive, unlike gasoline sold for over the road use. Avgas includes all special grades of gasoline suitable for use in aviation reciprocating engines and is defined by ASTM specification D910 or military specification MIL-G-5572.
Aviation Gasoline Taxable Events
Section 4081(a)(1) imposes an excise tax on certain removals, entries, or sales of aviation gasoline. In practice, tax is imposed when the gasoline is removed from a terminal at the terminal rack. The position holder with respect to the gasoline is liable for the tax. All removals of aviation gasoline are taxed at $.194 per gallon, which includes the $.001 per gallon Leaking Underground Storage Fund tax (LUST), .If the aviation gasoline is later used for an exempt purpose, a claim may be filed for refund. The rules for filing claims are discussed below in Credits and Refunds of Aviation Gasoline. Refer to Manufacturers and Retailers Excise Taxes Regulations §§ 48.4081-1 through 48.4081-3 for gasoline tax liability rules.
There are no exemptions from the section 4081 tax on aviation gasoline based on the intended use of the gasoline at the time of removal from the terminal. In other words, the aviation gasoline excise tax is imposed on all aviation gasoline that is removed at a rack. If the aviation gasoline is later consumed in an aircraft flown for an exempt purpose, then a claim for refund may be filed.
Note that for aviation gasoline used or purchased after October 1, 2005 a claim for the .01 cent per gallon LUST tax may not be made, except for gasoline used in foreign trade or exported.
Aviation Gasoline Claims by Registered Ultimate Vendors
Claims for fuel used by a state or local government, or by a nonprofit educational organization, may be made by the gasoline ultimate vendor as long as the ultimate vendor is registered under section 4101 and the purchase is not made on a credit card. The ultimate vendor must have purchased the aviation gasoline on which the section 4081 tax has been paid and must sell the aviation gasoline to an ultimate purchaser for use by a state or local government or by a nonprofit educational organization. Cite: IRC § 6416(a)(4). The claim is made on Schedule 2 (Form 8849).
Aviation Gasoline Claims by Registered Credit Card Issuers
If gasoline is purchased with a credit card issued to an exempt user (that is, a state or local government for its exclusive use or a nonprofit educational organization for its exclusive use), section 6416(b)(4)(B) provides that the credit card issuer is the person that makes the claim if:
the credit card issuer is registered under section 4101;
the amount of tax has not been collected from the person who purchased the gasoline, or the credit card issuer has obtained written consent from the ultimate purchaser to the allowance of the credit or refund, and
the credit card issuer has repaid or agreed to repay the amount of the tax to the ultimate vendor, has obtained the written consent of the ultimate vendor to the allowance of the credit or refund, or has made arrangements which provide the ultimate vendor with reimbursement of the tax.
The claim is made on Schedule 8 (Form 8849) or on Schedule C (Form 720).
Aviation Gasoline Claims by the Ultimate Purchaser
Generally, if neither the ultimate vendor nor the credit card issuer may claim a credit or refund of tax paid on aviation gasoline, the ultimate purchaser is the claimant. The gasoline must have been sold for a use listed below. Cite: IRC § 6421(c).
Used in commercial aviation (other than foreign trade).
Used in an off-highway business use.
Used in certain aircraft as described in sections 4261(f) and (g). (See the discussion of these provisions under Aviation Fuel later in the chapter.)
Used in an aircraft owned by an aircraft museum.
Used in a military aircraft.
Used on a farm for farming purposes (Credit only; see the discussion under Aviation Gasoline Claims – Use on a Farm for Farming Purposes later in the chapter.)
Exclusive use by a state, political subdivision of a state or the District of Columbia (but only if the registered ultimate vendor or credit card issuer does not make the claim).
Exclusive use by a non-profit educational organization (but only if the registered ultimate vendor or credit card issuer does not make the claim).
The claim is generally made on Schedule 1 (Form 8849).
The ultimate purchaser of aviation gasoline for use on a farm for farming purposes may claim a credit of tax imposed, but not a refund. Under section 6420, an income tax credit is allowable to the ultimate purchaser of aviation gasoline used on a farm for farming purposes. The term “used on a farm for farming purposes” is defined in Manufacturers and Retailers Excise Taxes Regulations § 48.6420-4. The credit is claimed on Form 4136, Credit for Federal Tax Paid on Fuels.
There is a special rule for the use of aviation gasoline in the aerial application of fertilizer, pesticides, or other. If a person using the gasoline is an aerial applicator, and is the ultimate purchaser of the gasoline, then the applicator, and not the owner, tenant, or operator of the farm is treated as having used the gasoline on the farm for farming purposes. See 6420(c)(4)(B).
Aviation fuel, other than gasoline or diesel fuel, is usually kerosene-based and is often referred to as “jet fuel,” “kero-jet,” or “jet-A” aviation fuel. It is clear of color and is used in all commercial jets, corporate jets, and turbo-prop commercial aircraft. References in this document to “aviation fuel” are references to aviation fuel other than gasoline.
Before April 1, 1988, section 4041(c) imposed a tax when any liquid other than gasoline was sold by a retailer and delivered into the fuel supply tank of an aircraft in noncommercial aviation, or was used as such a fuel by a buyer who purchased the fuel in a nontaxable transaction.
From April 1, 1988, to December 31, 2004, tax was imposed by section 4091 on the sale of aviation fuel by the producer or importer thereof. Producers included registered wholesale distributors. Registered producers (Form 637 “H” Registrants) could make tax-free sales to other registered producers. Thus, in practice, usually the tax was not imposed until a registered wholesale distributor sold the fuel to a retailer at an airport (often referred to as a “fixed-base operator” or “FBO”) or to the end user of the fuel.
There were no regulations under section 4091. Instead, agents and taxpayers relied upon the following notices for guidance:
Notice 88-30, 1988-1 C.B. 497, which provides rules for making tax-free sales of aviation fuel to producers of aviation fuel
Notice 88-132, 1988-2 C.B. 552, which provides rules for making tax-free and tax-reduced sales of aviation fuel for certain aviation fuel uses
Notice 89-38, 1989-1 C.B. 679, which defines wholesale distributor
Effective January 1, 2005, The American Jobs Creation Act of 2004 (AJCA), Section 853, amended the code sections that controlled the taxation of aviation fuel. It also revised provisions for the filing of claims for aviation fuel used for a nontaxable purpose. This law repealed code section 4091 and 4092 plus the applicable notices.
The most notable change made by AJCA is that the point at which tax on aviation fuel is imposed is moved to the terminal rack. If the fuel is not removed from a terminal directly into the fuel tank of an aircraft, it is taxed at the over-the-road fuel tax rate of 24.4 cents per gallon.
Now, taxpayers engaged in commercial aviation can file a claim for refund or credit for the difference between the over-the-road rate of 24.4 cents per gallon and the commercial rate of 4.4 cents per gallon. Cite: IRC § 6427(l)(4).
For fuel sold for use in non-commercial aviation, the ultimate purchaser may make the claim or give a waiver to the ultimate vendor. For fuel used in nonexempt, noncommercial aviation, the ultimate vendor is the only permissible claimant for the 2.5 cents per gallon. Cite: IRC § 6427(l)(4).
Because of these changes the following discussions concerning aviation fuel will be limited to changes in the law effective January 1, 2005, and after.
For periods before January 1, 2005, refer to the applicable Pub 378, section 4091, 4092, 4041, the regulations and the above notices. From January 1, 2005, to September 30, 2005, refer to Notice 2005-04, 2005-2 I.R.B. 289. Subsequent changes were made to Notice 2005-04 by Notice 2005-24, 2005-1 C.B. 757,, Notice 2005-62, 2005-2 C.B. 443, and Notice 2005-80, 2005-2 C.B. 953. Finally, Tax Relief and Health Care Act of 2006, Section 420, Pub. L. 109-432, made additional changes to the code concerning aviation fuel and aviation fuel claims. Some of these changes were retroactive back to October 1, 2005.
Generally, kerosene is taxed at 24.4 cents per gallon unless a reduced rate applies. Cite: IRC §§ 4081(a)(2)(A)(iii) and 4081(a)(2)(B).
For kerosene removed directly from a terminal into the fuel tank of an aircraft for use in nonexempt, noncommercial aviation, the tax rate is 21.9 cents per gallon. Cite: IRC §§ 4081(a)(2)(C) and 4081(a)(2)(B). The rate of 21.9 also applies if kerosene is removed into any aircraft from a qualified refueler truck, tanker, or tank wagon that is loaded with the kerosene from a terminal that is located within an airport. The airport terminal does not need to be a secured airport terminal for this rate to apply. However, the refueler truck, tanker, or tank wagon must meet the requirements discussed under Certain Refueler Trucks, Tankers, and Tank Wagons, Treated as Terminals, later.
For kerosene removed directly into the fuel tank of an aircraft for use in commercial aviation, the rate of tax is 4.4 cents per gallon if the requirements discussed under Rate of Tax/Commercial Aviation are met. For kerosene removed into an aircraft from a qualified refueler truck, tanker, or tank wagon, the 4.4 rate applies only if the truck, tanker, or tank wagon is loaded at a terminal that is located in a secured area of the airport. Reference Terminal Located within a Secured Area of an Airport, later.
For kerosene removed directly into the fuel tank of an aircraft for a use exempt from tax under section 4041(c), such as use for the exclusive use of a state or local government, the rate of tax is 0.1 cents per gallon for the LUST tax. However, LUST does not apply to kerosene used in foreign trade and kerosene destined for export.
The exemption (a partial exemption) applies to exempt uses in which the removals are from a qualifying refueler truck, tanker, or tank wagon loaded at a terminal located within a secured area of an airport. See Terminal Located within a Secured Area of an Airport, later. In addition, the operator must provide the position holder with a certificate similar to Model Certificate K, located in Appendix A. The position holder is liable for the LUST tax of 0.1 cents per gallon. Cite: Manufacturers and Retailers Excise Taxes Reg. § 48.4081-2(c)(1).
For purposes of the tax imposed on kerosene for use in aviation removed directly into the fuel tank of an aircraft for use in commercial aviation, certain refueler trucks, tankers, and tank wagons are treated as part of a terminal. Cite: IRC § 4081(a)(3). The carriers are treated as a part of a terminal if the following conditions are met:
Such terminal is located within a secure area of an airport. Cite: IRC § 4082(e).
Any kerosene for use in aviation which is loaded in a truck, tanker, or tank wagon at a terminal is for delivery only into aircraft at the airport in which the terminal is located.
Except in the case of exigent circumstances identified by the Secretary in regulations, no vehicle registered for highway use is loaded with kerosene for use in aviation at the terminal.
The refueler truck, tanker, or tank wagon meets the following requirements of section 4081(a)(3)(B) which requires that the truck, tanker, or wagon: Has storage tanks, hose, and coupling equipment designed and used for fueling aircraft,
Is operated by the terminal operator or a person that makes a daily accounting to the terminal operator of each delivery of fuel from the refueler truck, tanker, or tank wagon. Under section 4201(d), information reporting is required by terminal operators regarding this provision. Cite: IRC § 4081(a)(3)(C). (Note that until the format of this information reporting is issued, taxpayers are required to retain records regarding the daily accounting, but are not required to report such information.)
The following table summarizes the current tax rates on aviation fuel. Taxable sales of aviation fuel are entered on IRS No. 69 of Form 720, unless a sale was for use by the buyer in commercial aviation, which is reported on IRS No. 77. Aviation fuel used in exempt uses (other than foreign trade or export) is reported on IRS No. 111.
Fuel Used for exempt uses (other than foreign trade or export)
If kerosene is removed directly into the fuel tank of an aircraft for use in commercial aviation, the operator of the aircraft is liable for the tax on the removal at the rate of 4.4 cents per gallon. Cite: IRC § 4081(a)(4).
For the aircraft operator to be liable for the .044 rate, the position holder must meet the following requirements:
Is a taxable fuel registrant under section 4101,
Cite: Notice 2005-4, 2005-1 C.B. 289.
The position holder is also not liable for the tax in a flash title transaction as described in Notice 2005-62, Section 6, paragraph (a)(2), if certain conditions are met. In a flash title transaction, the position holder sells the kerosene to a wholesale distributor (reseller) that in turn sells the kerosene to the aircraft operator as the kerosene is being removed from a terminal into the fuel tank of an aircraft. In this case, the position holder will be treated as having a certificate from the operator of the aircraft if:
The reseller statement is signed at the bottom or on the back of the certificate, under penalties of perjury, by a person with authority to bind the reseller. In addition, the reseller statement must contain the reseller’s name, address, and employer identification number, the position holder’s name, address, and employer identification number, along with a statement that the reseller has no reason to believe that any information in the accompanying aircraft operator’s certificate is false. The certificate may be included as part of any business records normally used for a sale. See Model Certificate K located at Appendix A.
A certificate expires on the earliest of the following dates:
The buyer must provide a new certificate if any information on a certificate has changed. The IRS may withdraw the buyer's right to provide a certificate if the buyer uses the kerosene for use in aviation to which a certificate relates other than as stated in the certificate.
Commercial aviation means any use of an aircraft in a business of transporting persons or property for compensation or hire by air, unless properly allocable to any transportation exempt from the taxes imposed by sections 4261 and 4271, by reason of section 4281 or 4282, or by reason of subsection (h) or (i) of section 4261. Cite: IRC § 4083(b).
Commercial aviation does not include any of the following uses:
Certain air transportation by seaplane.
Any use of an aircraft owned or leased by a member of an affiliated group and unavailable for hire by nonmembers.
Any use of an aircraft that has a maximum certificated takeoff weight of 6,000 pounds or less, unless the aircraft is operated on an established line. An aircraft is not considered operated on an established line at any time during which the aircraft is being operated on a flight the sole purpose of which is sightseeing.
The fuel used for the above uses is subject to the tax on fuel used in noncommercial aviation.
Kerosene removed directly into the aircraft for use in the following flights is taxed to the position holder at the 0.1 cents per gallon LUST tax:
For use on a farm for farming purposes;
For use in certain helicopter and fixed-wing air ambulances as described in sections 4261(f) and (g).
For exclusive use by a nonprofit educational organization;
For exclusive use of a state;
For use in military aircraft;
Exclusive use by a qualified blood collectors organization.
Cite: Manufacturers and Retailers Excise Taxes Reg. § 48.4081-2(c)(1) and Notice 2005-80, Section 4, paragraph (d).
To support aircraft operator liability for tax on removal of kerosene for use in aviation directly into the fuel tank of an aircraft in commercial aviation; or
For all other exempt uses.
See Appendix A for a model of Certificate K.
Section 4103 states that in any case in which there is a willful failure to pay the tax imposed by section 4041(a)(1) or 4081, each person who is:
an officer, employee, or agent of the taxpayer who is under a duty to assure the payment of such tax and
who willfully fails to perform such duty, or
Thus, this is like the section 6672 penalty in that it allows the IRS to go beyond the entity liable for tax (such as a corporation) and obtain the tax from specified individuals who work for the entity. But note that unlike the 6672 penalty, section 4103 creates a liability for tax rather than impose a separate penalty.
Tax credits, filed on Form 4136, Credit for Federal Tax Paid on Fuels, and attached to the income tax return at the end of the tax year, and refunds, filed on Form 8849, Claim for Refund of Excise Taxes, or as adjustments on the Form 720, Quarterly Federal Excise Tax Return, have special rules.
Ultimate Purchasers
The ultimate purchaser of kerosene used in commercial aviation (including foreign trade) and noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia) is eligible to make a claim for credit or refund if the ultimate purchaser certifies that the right to make the claim has not been waived. Generally, the ultimate purchaser is the aircraft operator.
The following are the nontaxable uses of kerosene for which a credit or refund may be allowable to the ultimate purchaser:
Certain helicopter and fixed-wing aircraft uses as described is section 4261(f) and (g).
Fuel used on a farm for farming purposes includes fuel used in the application of fertilizer, pesticides, or other substances, including aerial applications. Generally, the applicator is treated as having used the fuel on a farm for farming purposes. For kerosene used in aviation, the ultimate purchaser may make the claim or waive its right to make the claim to the registered ultimate vendor.
Kerosene for Use Partly in Commercial Aviation and Partly in Nonexempt Noncommercial Aviation.
If fuel is used partly for use in commercial aviation and partly for use in nonexempt, noncommercial aviation, the operator may identify, either at the time of purchase or after the kerosene has been used, the amount that will be (or has been) used in commercial aviation. At the same time, the operator would either make the claim or waive the right to make the claim for credit or refund of the kerosene for use in commercial and nonexempt, noncommercial aviation.
If the operator does not identify the amount of kerosene that will be (or has been) used in commercial aviation, the operator may provide a certificate to the ultimate vendor similar to Model Certificate Q located in Appendix A. For kerosene purchased with the certificate, used in commercial aviation, and taxed at $.244 per gallon, use of the certificate will be treated as a waiver of the right to claim a credit or refund for the $.025 per gallon part of the tax. The ultimate vendor may make this claim. The operator may make a claim for the $.175 per gallon of the kerosene, but cannot waive the right to make the claim for the $.175 per gallon.
Kerosene for Use in Commercial Aviation or Noncommercial Aviation
The registered ultimate vendor of kerosene for use in commercial aviation (other than foreign trade) or noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia) may make this claim if the ultimate purchaser waives its right to the credit or payment by providing the registered ultimate vendor with a waiver. A sample waiver is included as Model Waiver L, located in Appendix A. The registered ultimate vendor must have the waiver at the time the credit or payment is claimed.
Noncommercial aviation means any use of an aircraft not described as commercial aviation. For the definition of commercial aviation, see IRC § 4083(b).
Kerosene for Use in Nonexempt, Noncommercial Aviation
Only the registered ultimate vendor may claim a credit or payment for sales of kerosene for use in nonexempt, noncommercial aviation. The ultimate vendor must be registered by the IRS (activity letter UA) and have the required certificate from the ultimate purchaser. A sample certificate is included as Model Certificate Q in Appendix A. The registered ultimate vendor must have the certificate at the time the credit or payment is claimed. These claims are for the difference between the over the road rate of .244 cents per gallon and the noncommercial rate of .219 cents per gallon.
Kerosene for Use in Aviation by a State or Local Government
Only the registered ultimate vendor may claim a credit or payment for sales of kerosene for use in aviation to a state or local government for its exclusive use (including essential government use by an Indian tribal government). The kerosene for use in aviation must be purchased by the state without the use of a credit card in order for the ultimate vendor to make the claim. The ultimate vendor must be registered by the IRS (activity letter UV) and have the required certificate from the ultimate purchaser. A sample certificate is included as Model Certificate P in Appendix A. The registered ultimate vendor must have the certificate at the time the credit or payment is claimed.
If taxed kerosene for use in aviation is purchased with a credit card issued to a state, the person who extended credit to the state (the credit card issuer) is treated as the person that paid the tax. The credit card issuer may make a claim for credit or refund if the credit card issuer:
Has repaid or agreed to repay the amount of the tax to the ultimate vendor, has obtained the written consent of the ultimate vendor to the allowance of the credit or refund, or has made arrangements which provide the ultimate vendor with reimbursement of the tax.
If the requirements above are not met by the credit card issuer, the credit card issuer must collect the tax from the ultimate purchaser. In this case, only the ultimate purchaser may make the claim for credit or refund of the tax.
Cite: IRC §§ 6416(a)(4)(B) and 6427(l)(5)(D)
AG = aviation gasoline
AF = aviation fuel
Ultimate Purchaser Claim
Ultimate Vendor Claim
Type of Claim Allowable for Aviation Gasoline (AG) or Aviation Fuel (AF)
AG (credit only); AF
AF (Waiver L)
AG or AF
Off-highway business use (Fuel used in a APU)
Export; claimants must include proof of export.
Certain Helicopter and fixed wing aircraft
AG(Certificate M) or AF (Waiver L)
AG(Certificate M) or AF (Certificate P)
Exclusive use by a state, political subdivision of a state or the District of Columbia
AG or AF (Waiver L)
In an aircraft owned by an aircraft museum
Aviation fuel used in Commercial Aviation taxed at 24.4 cents per gallon
Aviation fuel used in Commercial Aviation taxed at 21.9 cents per gallon
AF (Certificate Q)
Aviation fuel used in Non-Commercial Aviation taxed at 24.4 cents per gallon
Aviation Gasoline used in Commercial Aviation taxed at .194 cents per gallon
(The table above shows the types of claims that can be filed. The claim types are either Ultimate Purchaser Claims or Ultimate Vendor claims. Ultimate Purchaser Claims show in the first column. Ultimate Vendor claims are in the second column. AG indicates that the claim is for Aviation Gasoline and AF for Aviation Fuel. The type use is shown in the third column and the fourth column indicates what type of use is allowed for that type of claim.)
Note: When aviation fuel is removed directly into the fuel tank of an aircraft at an airport terminal for commercial aviation or for a nontaxable uses such as: use on a farm, for use in foreign trade; for use in certain helicopter and fixed wing air ambulance services; for use other than as a fuel in the propulsion engine of an aircraft; for the exclusive use of a qualified blood collector organization; for the exclusive use of a nonprofit organization; for the exclusive use of a state, for use in an aircraft owned by an aircraft museum; for use in military aircraft; or for use in commercial aviation (other than foreign trade) the aircraft operator buying the fuel must provide the seller a copy of Certificate K to certify the use for which the fuel is being purchased.
See Appendix A for examples of the certificates or waivers referenced above.
Potential audit issues with aviation gasoline and aviation fuel are noted below.
Claims Filed for Aviation Fuel Used in Aircraft Power Units (APUs)
The Office of Chief Counsel issued a Memorandum on April 9, 2007, in which they offered legal advice stating that the fuel consumed in an aircraft APU is an exempt use of aviation fuel. Accordingly, we are now receiving claims for refund and credit for the gallons consumed in APUs. [Note that this legal memorandum is not citable as authority but may assist you in understanding what legal sources and reasoning would be used by the IRS or examiner if presented with a similar question.]
Fuel Used in Foreign Trade
If an aircraft that departs from a city in the United States lands in another city in the United States and then departs from the second city and lands in a foreign country, the aircraft is considered to be engaged in foreign trade for all of the flight segments so long as at least one individual flew from the first city to the final foreign destination on the aircraft. Once an aircraft is actually engaged in foreign trade, it remains engaged even though it makes intermediate stops in the United States. Cite: Rev. Rul. 2002-50, 2002-32 I.R.B., 292.
An aircraft flies from San Francisco to New York. After refueling and exchanging passengers in New York, the aircraft continues to London, England. So long as one passenger is booked on the flight pattern flown by the aircraft, in this case, San Francisco to New York to London, and none of the stopovers exceed the 12 hour rule, then all the fuel used by the aircraft on the flight pattern is considered as used in a foreign trade. Therefore, the flight from San Francisco to New York and the flight from New York to London are considered to be in foreign trade.
Sales of Fuel for Commercial Aviation on which Tax was Paid at the Noncommercial Aviation Rate
Taxpayers frequently dispute whether a particular flight is being flown in commercial aviation or noncommercial aviation. Claims are filed for refund of the difference in tax rates between the purchased rate of noncommercial aviation and the use rate of commercial aviation when no liability for transportation taxes imposed on commercial aviation is being reported on Form 720. This may or may not be allowable. For further guidance refer to Rev. Rul. 79-364, 1979-2 C.B. 366.
Improper Credit or Refund Claims
In addition, this includes multiple claims for the same fuel that are filed on Form 8849, Form 720, Form 4136, and or taken as blind credits in the workpapers used to prepare the gallons reported on Form 720.
Fuel Purchased at a Foreign Location
Taxpayers may include fuel purchased at a foreign location in claims for fuel used in a foreign trade or for fuel consumed in an APU. Since no U.S. Federal excise tax has been imposed on fuel purchased at a foreign location, the claimant is receiving a refund of taxes not previously imposed.
Failure to Include a Credit or Refund Received In Gross Income
Since credits and refunds may be received outside of the normal accounting year and/or method of receiving income of the recipient, the recipient may fail to include the money received in gross income. An income tax adjustment is due if the claimant has included the amount as an expense deduction and reduced his or her income tax liability. In this case, an income tax referral would be warranted.
Because the federal excise tax (FET) for aviation fuel is imposed on the position holder or in some cases the end user, there is a potential for many persons to incur this liability. A consideration is to be made of the items listed below during an examination.
The required periodic compliance checks of Form 637 registrants provide an opportunity to find out to whom a registrant has been selling aviation fuel tax-free. Check for sales for use in foreign trade (see #4 below)
If the position holder does not have a Form 637 registration then you have taxable above the rack transactions.
If tax-free aviation fuel sales were made, verify that the sales were made to registered purchasers and the sales were accompanied by appropriate exemption or waiver certificates. You may have an issue with any purchaser who is purchasing fuel tax exempt for use in commercial aviation if the purchaser is not registered. Be particularly aware of who is liable for the tax, the position holder or the aircraft operator?
Check for large bulk sales. Follow through to the purchaser to ensure the purchaser is registered.
Inspect the retained copy or copies of the position holder's state returns when appropriate.
Make a secondary FET computation by using the position holder's state returns and total pump reading sales. If the position holder is selling in more than one state, check the position holder's returns for all states.
Determine if (1) the state allows an evaporation deduction and (2) if an evaporation deduction has been entered on the Federal return.
Determine whether the business or owner(s) operate any aircraft. If so, determine whether an issue with either transportation of persons or property is present.
Determine if the End User has a 637 registration. The required periodic compliance checks of Form 637 registrants provide an opportunity to find out if a registrant has been purchasing aviation fuel at reduced rates for use in commercial aviation, in foreign trade, or for other exempt purposes.
If the End User has a 637 registration, check all claims being filed.
If the End User has a 637 registration, and is filing claims on fuel used in commercial aviation, check to make sure tax was actually imposed on this fuel. The Taxpayer may be filing claims for fuel purchased tax exempt.
A 637 registrant can purchase fuel for use in commercial aviation and is then liable for the tax on those purchases. If this is the case, check to ensure the Taxpayer is paying and reporting the tax on Form 720 line 77 instead of filing a claim on Form 720, Schedule C.
Inspect purchase invoices for tax-paid or tax-free purchases and note where the fuel is purchased.
If the Taxpayer is claiming fuel used in commercial aviation, check to make sure the claim does not include fuel purchased tax exempt,
Determine how the information on use of the aviation fuel is being recorded.
Inspect retained copies of the user's state returns if applicable.
While inspecting the purchase invoices determine whether the supplier has passed on these taxes to the End User. If the taxes have not been passed on you may consider auditing the supplier since this may indicate that the supplier is not paying the tax.
When inspecting fuel claims for aviation fuel used in an APU. Ensure that none of the fuel from a claim involving fuel used in foreign trade or that was purchased at a foreign location is being included in the claim.
Make sure the fuel used in the APU has been calculated on the actual burn rate of the APU. These records are available and should be requested to substantiate any claims relating to the fuel used in the APU.
If the state's fuel records are available, they should periodically be checked against the annual listing of Form 720 filers. A computer audit specialist could be of assistance in accomplishing this task or it can be done manually. Discrepancies may indicate a delinquent or incorrect Form 720 return.
Summary of Model Certificates
Certificate of Person Buying Kerosene for Use in Aviation for Commercial Aviation for Nontaxable Use
Certificate for State Use or Nonprofit Educational Organization Use
(The table above shows the type of model certificate that is applicable in the first column. The second column shows the certificate title and the third column shows the page in the Audit Technique Guide where the model certificate can be locate. A PDF version can be located at Pub 510.
An alternative text version of Publication 510 can be located at Alternative Text.
CERTIFICATE OF PERSON BUYING KEROSENE FOR USE IN AVIATION FOR COMMERCIAL AVIATION OR NONTAXABLE USE
(To support operator liability for tax on removals of kerosene for use in aviation directly into the fuel tank of an aircraft in commercial aviation pursuant to §4081 of the Internal Revenue Code or to support a tax rate of zero under §4041(c) pursuant to §§4041(c) and 4082)
Name, Address, and Employer Identification Number of position holder:
The kerosene for use in aviation to which this certificate relates is purchased (check one): for use on a farm for farming purposes; for use in foreign trade (reciprocal benefits required for foreign registered airlines); for use in certain helicopter and fixed-wing air ambulance uses; for use other than as a fuel in the propulsion engine of an aircraft; for the exclusive use of a qualified blood collector organization; for the exclusive use of a nonprofit educational organization; for the exclusive use of a state; for use in an aircraft owned by an aircraft museum; for use in military aircraft; or for use in commercial aviation (other than foreign trade).
With respect to kerosene for use in aviation purchased after June 30, 2005, for use in commercial aviation (other than foreign trade), Buyer's registration number is . Buyer's registration has not been suspended or revoked by the Internal Revenue Service.
This is a single purchase certificate:Invoice or delivery ticket number
Expiration date: (period not to exceed 1 year after the effective date)
Buyer's account number:
If the kerosene for use in aviation to which this certificate relates is being bought for use in commercial aviation (other than foreign trade), Buyer is liable for tax on its use of the fuel and will pay that tax to the government.
If Buyer sells or uses the kerosene for use in aviation to which this certificate relates for a use other than the use stated above, Buyer will be liable for tax.
Buyer understands that it must be prepared to establish by satisfactory evidence the purpose for which the fuel purchased under this certificate was used.
Buyer has not been notified by the Internal Revenue Service that its right to provide a certificate has been withdrawn. If Buyer violates the terms of this certificate, the Internal Revenue Service may withdraw Buyer's right to provide a certificate.
Printed or typed name of person signing:
(To support vendor's claim for a credit or payment under §6427(l)(4)(C)(i) of the Internal Revenue Code)
The kerosene to which this waiver relates is purchased for--(check one): Use on a farm for farming purposes,
Use in foreign trade (reciprocal benefits required for foreign registered airlines),
Use in certain helicopter and fixed-wing air ambulance uses,
The exclusive use of a qualified blood collector organization,
The exclusive use of a nonprofit educational organization,
Use in an aircraft owned by an aircraft museum,
Use in military aircraft, or
Use in commercial aviation (other than foreign trade).
This is a single purchase waiver: Invoice or delivery ticket number
(To support vendor's claim for a credit or payment under §6416(a)(4) of the Internal Revenue Code)
Name, Address, and Employer Identification Number of Ultimate Vendor:
Buyer's account or order number:
(To support vendor's claim for credit or payment under section 6427 of the Internal Revenue Code)
Buyer will use the diesel fuel or kerosene to which this certificate relates for the exclusive use of a state or local government, or the District of Columbia.
This certificate applies to the following (complete as applicable): If this is a single purchase certificate, check here and enter: Invoice or delivery ticket number:
If this is a certificate covering all purchases under a specified account or order number, check here and enter: Effective date:
Expiration date: (period not to exceed 1 year after effective date)
If Buyer uses the diesel fuel or kerosene to which this certificate relates for a purpose other than stated in the certificate, Buyer will be liable for any tax.
Buyer acknowledges that it has not and will not claim any credit or payment for the diesel fuel or kerosene to which this certificate relates.
(To support vendor's claim for credit or payment under section 6427(l)(4)(C)(ii) of the Internal Revenue Code)
The kerosene to which this certificate relates is purchased for a nonexempt use in noncommercial aviation.
This is a certificate covering all purchases under a specified account or order number: Effective date:
Major Canadian Cities within the 225 Mile Zone
Lamloops, Br. Columbia
Kelowna, Br. Columbia
Manitoba Penticton, Br. Col
Port Hardy, Br. Col.
Powell River, Br. Col.
Major Mexican Cities within the 225 Mile Zone
Canarea, Sonora
Ciudad Jauarez, Chihuahua
Hermosilo, Sonora
Moncolova, Coahuila (Monterrey)
Peynosa, Tamaulipas
Tijiuana, Baja California