IRS Won’t Impose Retroactive Ticket Tax on Airlines, Fliers

The Internal Revenue Service won’t collect retroactive taxes for airline tickets purchased during a lapse in the government’s taxing authority, agency spokesman Frank Keith said.

President Barack Obama signed legislation today that ends a partial shutdown of the Federal Aviation Administration and reinstates the taxes retroactively to July 23, the day after they expired. Most airlines had raised fares by the amount of the taxes and didn’t charge the levy. The airlines weren’t authorized to collect the tax, and going back and getting the money now would be tough, Keith said.

“Administratively, it would be very difficult to collect those taxes,” he said today in a telephone interview.

The levies, including a 7.5 percent fare tax on domestic flights, generate about $28.6 million a day for the U.S. government. The IRS decision means that the airlines will be able to keep the revenue they generated by raising fares.

The airlines, including Southwest Airlines Co. (LUV), Delta Air Lines Inc. (DAL) and US Airways Group Inc. (LCC), must begin collecting the taxes by 12:01 a.m. Aug. 8, Keith said in a statement.

‘Orderly Restart’

“The IRS intends to provide guidance to the airlines which will allow for an orderly restart of the collection of ticket taxes,” the statement said.

Because the law makes the taxes retroactive to July 23, no taxpayers who flew during the shutdown and purchased their airline tickets before that will be owed refunds, Keith said. Before Congress broke an impasse over extending the taxes, the IRS asked airlines to refund the tax payments to fliers.

The four top tax legislators in Congress had written to the IRS, asking the agency not to retroactively collect the taxes.

“We encourage you to utilize all your discretion and authority to extend relief for passengers and airlines with respect to ticket taxes that were not paid or collected because of the lapse and provide the industry a three-day period of time to restart processes to collect the taxes,” they said in the letter, dated yesterday.

The letter was written by the top two members of the Senate Finance Committee, Democrat Max Baucus of Montana and Republican Orrin Hatch of Utah, and the top two members of the House Ways and Means Committee, Republican Dave Camp and Democrat Sander Levin, both of Michigan.

Tax Collection

The FAA’s authority to levy the 7.5 percent tax, as well as other aviation taxes, lapsed on July 22. Had Congress not acted, the total forgone taxes would have reached $1.3 billion by Sept. 7, when Congress is scheduled to return from its summer recess.

The Senate voted today to end the shutdown and reinstate the FAA’s taxing authority through Sept. 16. That action followed the House’s July 20 passage of the bill, which reinstates the taxes as of July 23. Enactment of the legislation was delayed because of disagreements between the House and Senate over issues unrelated to the taxes.

In the letter, the tax-writing lawmakers told IRS Commissioner Douglas Shulman that they are concerned about the effect retroactive taxes would have on consumers and the airline industry.

“Furthermore, we understand that the IRS has limited resources -- some of which will be required to restart systems and processes to begin collecting these taxes again going forward -- and that the retroactive collection of trust fund taxes would add further strain to those resources,” they wrote.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net Lisa Caruso in Washington at lcaruso7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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