Updated April 6, 2020 @7:16pm
One point of the 880-page CARES Act is a waiver of the 7.5% Federal Excise Tax (FET). The holiday lasts between March 28 and December 31, 2020. It’s normally levied for domestic Part 135 flights, which includes domestic jet card trips. It was also applied to U.S. flights that start or end within 200 miles of the southern and northern borders.
You might naturally assume that you won’t pay FET for flights during the rest of the year. You would be wrong. It depends on your program. So, how does this impact you?
If you bought into a broker jet card program, the broker isn’t paying the actual Federal Excise Tax.
Instead, they would typically pay the operator in conjunction with arranging your flight. The operator would then remit the FET to the IRS.
For that reason, brokers are handling the FET you already paid two ways.
Some are simply not charging you the FET because they don’t have to pay it to the operator. They are passing along the savings. Their thinking is that you get extra funds to fly, which helps both sides.
However, other jet card brokers are simply holding their hourly rates to previous FET-inclusive levels. They say the contract you signed allows them to do so. Their rationale is that arranging flights is becoming more time consuming with more price variations.
For jet card providers that sell fixed one-way rates with guaranteed availability, to make money, they win on some flights. They lose on others.
When you call and want to fly at 24 hours notice or less from Podunk to Sheep Mountain, the operator is going to charge your card company their expenses plus a margin.
Costs include ferrying your private jet to Podunk the night before for your 7 a.m. departure. Then there are the overnight expenses for the crew, and returning it to base after you get to Sheep Mountain.
There are 573 operators in the U.S. with at least one business jet available for charter, although 71% have five or fewer jets in their fleet. With business aviation projected to be down 60% or more in April, operators are furloughing pilots and mothballing planes.
That means more due diligence and time spent arranging every trip. Aircraft that have been sitting idle for a couple of weeks are more likely to have a mechanical. Pilots are more likely to be out of position as airlines cut back on flights.
Unlike on-demand charter, most jet cards guarantee service recovery without extra cost to the member. Some even provide credits based on any delays. So, in addition to coordinating your flight, they also have a backup plane.
Either way, several brokers are saying their contracts allow them to charge previous FET inclusive rates and use the extra money to offset increase expenses. Others are reducing your hourly rates by 7.5%
For operator jet cards the picture is fuzzy as well. For those with owned fleets, the process is to pay FET to the IRS when you buy your jet card. In other words, the horse is out of the barn. If you bought a card in January, your money is already in Washington D.C.
If the operator already paid the tax, Vedder Price aviation attorney David Hernandez says,
“The air carrier will have to request a refund when a flight is actually performed under the card via its quarterly IRS Form 720 filing. The charter operator should then credit the client’s account for the 7.5% and segment fee as applicable.”
(April 6, 2020 – Hernandez provides this update: “The IRS says that they will not refund FETs on prepaid cards during the holiday unless the cards are canceled.”
He says a workaround could be for the provider to cancel the current contract. The operator would then file with the IRS for a refund of the prepaid FET. At the same time, the customer would sign a new contract that would enjoy the FET holiday.)
However, it’s not clear operators are willing to do this. One Part 135 operator said he was concerned about extra time and expense in a period when revenues are plummeting.
A CFO and tax specialist from a non-related company said a customer cannot get a refund directly from the IRS. “The refund needs to be requested by the payer, which in this case was the operator,” he said.
Jamie Walker, CEO of Jet Linx, which has one of the largest Part 135 managed fleets, says, “The only reason an operator would have paid the FET at the time the card is purchased is if the program is non-refundable. If it’s refundable, they shouldn’t be applying FET until the time of flight as it’s deferred revenue and shouldn’t be recognized until time of flight and therefore FET shouldn’t be charged until then.”
What if your operator declines to process FET refunds paid to the IRS for flights during the tax holiday? (Updated April 7, 2020 – What if your operator declines to cancel your old contract and issue a new one, sans FET?) What if your broker is keeping their previous FET-inclusive rates to account for additional expenses? What’s the best strategy for flights between now and when the tax holiday is due to expire at year’s end?
First, check to see if your deposit has an expiration. Verify the term of your rate lock. If you envision being able to use that deposit in 2021 when the FET will likely be reinstated, you could put that card in a drawer. Buy a card from a program that has now discounted rates to reflect the tax holiday.
Of course, make sure the rules and policies meet your needs. Otherwise, you might end up paying more than you would have if you stuck with your current provider.
Another option would be to use on-demand charters for the rest of the year. That would avoid FET.
If you choose this route, bear in mind what you give up. You lose fixed one-way pricing and guaranteed availability on short notice. Gone is also service recovery guarantees, which is more valuable than ever.
In talking with more than a dozen companies, it’s quite possible some policies may shift in the next few days, or in fact, no hard decisions have been made.
The good news is that because demand over the next couple of weeks is expected to be depressed, there is some breathing room to get things sorted.
We are right now preparing a complete analysis of changes on a company by company basis. This includes updating data in our spreadsheets to reflect changes. We continue to provide our VIP Jet Card Decider assistance for paid subscribers.
During April, $75 of each $250 subscription price is being donated to Feeding America’s COVID-19 response efforts. Each $75 delivers over 750 meals to those impacted by the Coronavirus pandemic.