IRS Asks Airlines to Refund Tax on Tickets Sold Pre-July 23

Air passengers who bought plane tickets before the airlines had to stop collecting U.S. ticket taxes for travel on or after July 23 may be entitled to a refund of tax paid.

The Internal Revenue Service, in a notice posted today on its website, said it has asked the airlines to repay eligible customers who request refunds. Those who don’t receive one from the airlines can submit claims to the IRS under procedures being developed, according to the statement.

“We agree that passengers are entitled to a refund based on precedent and case law from previous tax lapses,” Steve Lott, a spokesman for the Air Transport Association, said about uncollected ticket levies.

“But we are puzzled by the IRS guidance on how to most efficiently get the refund. We believe it’s the IRS’s responsibility because ultimately it’s the Treasury that has the tax money, not the airlines,” Lott said in a phone interview.

ATA Chief Executive Officer Nicholas Calio wrote to IRS Commissioner Douglas Shulman today urging him to “revise the public guidance to instruct taxpayers to seek refunds directly from the service as has been the practice in the past.”

The airlines suspended collection of ticket taxes, and most raised fares by similar amounts, when the Federal Aviation Administration’s revenue-raising authority expired at midnight July 22, after Congress failed to extend the agency’s funding. The FAA had been operating under a series of short-term extensions since its last multi-year funding bill expired on Sept. 30, 2007.

IRS Position

Carriers aren’t required by law to issue refunds, Frank Keith, a spokesman for the IRS, said. The agency would prefer they do, Keith said by phone. “The airline is in the best position to make that happen” because carriers have the needed records about customers’ ticket purchases and travel dates, he said.

The IRS may have difficulty devising refund procedures because electronic tickets do not leave a paper trail that a passenger may need to prove a purchase, Keith said.

“There is absolutely no loss” to the airlines, Keith said. They would be able to reduce the amount of taxes they owe in their next quarterly filing by the amount of repayments they make, he said.

Legal Precedent

The U.S. Supreme Court in November 1997 let stand two appeals court rulings that airline passengers must seek refunds from the IRS if the carriers don’t provide them. The ruling thwarted efforts to revive class-action lawsuits against Southwest Airlines Co. (LUV) by ticket buyers who complained they were charged for a 10 percent U.S. airline tax that was no longer in effect when they used their tickets.

United Continental Holdings Inc. (UAL), the world’s largest carrier, is referring customers who call or write seeking a tax refund to the IRS so the agency can handle the matter, saidMike Trevino, a spokesman for the Chicago-based carrier. He didn’t know how many passengers have requested a tax refund.

“At this point, we are recommending passengers contact the IRS for a refund, since the tax funds are allocated to the IRS at the time of purchase, not travel,” said Brandy King, a spokeswoman for Dallas-based Southwest.

JetBlue Refunds

JetBlue Airways Corp. (JBLU), based in New York, posted a note on its website telling passengers it would provide refunds upon e- mail request for people traveling within the next seven days. It advised customers to check back later if they are traveling after the seven-day period.

“We have just seen the IRS updates and we’re in the process of reviewing our next steps,” said Tim Smith, a spokesman for AMR Corp. (AMR)’s American Airlines Inc., based in Fort Worth, Texas. The carrier is not getting a lot of calls from passengers on the matter, he said.

The IRS move comes a day after Senators Jay Rockefeller, a West Virginia Democrat, and Maria Cantwell, a Washington Democrat, urged the airlines in a letter to their Washington- based trade group to “put all of the profits that they are making from the lapse of aviation taxes into an escrow account” to return when Congress reinstates them.

The FAA estimates it is losing $30 million a day in uncollected taxes. They comprise a 7.5 percent tax on the base ticket price, $3.70 per takeoff and landing on connecting flights, $16.30 per person for international flights starting and ending in the U.S. or $8.20 per person for flights that begin or end in Alaska and Hawaii, and the 6.25 percent tax on air cargo.

‘Deeply Perplexed’

Rockefeller, chairman of the Commerce, Science and Transportation Committee, and Cantwell, chairwoman of the panel’s aviation subcommittee, said they were “deeply perplexed” by the industry’s move to raise fares by the amount of uncollected taxes.

They expressed their views in a letter yesterday to Richard Anderson, chief executive officer of Delta Air Lines Inc. (DAL) and chairman of the Air Transport Association, the carriers’ Washington-based trade group.

The airlines “are merely seeking to function as responsible businesses that are able to cover their costs,” Calio, the association’s chief executive officer, responded today in a letter to Rockefeller and Cantwell. “I would note that customers are paying the same prices as were in place before funding was allowed to lapse.”

Calio noted “the extreme financial strain under which airlines operate” and that “airlines are not able to pass all taxes and fees onto their customers.”

Congress deadlocked last week after Senate Democratic leaders rejected the House-passed bill to keep FAA programs operating through Sept. 16.

Democrats opposed the House bill because it would end subsidized air service to 13 rural communities, including an airport in Nevada, which is represented by Senate Majority Leader Harry Reid, and another in Montana, whose senior senator is Democrat and Finance Committee Chairman Max Baucus.

To contact the reporter on this story: Lisa Caruso in Washington at lcaruso7@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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