Guidance from the IRS infers if you buy a Jet Card now, you can save the 7.5% Federal Excise Tax for flights next year, maybe
Get ready for a possible flood of email offers from private jet companies. The offer is to buy a jet card now for flights in 2021 and beyond. The goal is to save the 7.5% Federal Excise Tax for those post-New Year’s trips.
As part of the CARES Act, the collection of the tax is suspended through Dec. 31, 2020. Unless new legislation is put into place, it will snap back into effect on Jan. 1, 2021. The tax applies to domestic flights and those that begin or end within 225-miles of the Canadian and Mexican borders.
The tax holiday began on March 28. Yet, only a couple of private aviation providers were touting FET-free flying in 2021. NetJets and Nicholas Air were the first two operators we became aware of. The idea is stocking up on jet card hours before the clock strikes midnight on New Year’s eve.
Now, in the last few days, both Magellan Jets and Jets.com have sent out offers. Airstream Jets, another broker confirmed they are also pitching the idea. A half dozen other jet card providers tell Private Jet Card Comparisons they are strongly looking at extending similar offers.
Aviation attorneys are ringing up billable hours as you read this. Companies each look for some surety that the taxman won’t come later looking to collect the excise tax.
The memo covers purchases both before and after the COVID-19 relief measures went into effect.
In the first example, the IRS poses the question, “If I purchased an airline ticket before the excise tax holiday for travel during or after the excise tax holiday, can I receive a refund of the taxes imposed on the ticket?”
The answer: “No. The excise tax holiday applies only to tickets purchased between March 28, 2020, and December 31, 2020.”
Looking forward, the IRS writes, “If I purchase an airline ticket during the excise tax holiday for travel after the excise tax holiday, is tax imposed on the purchase?”
The answer, “No. No tax is imposed on the purchase of the ticket because the purchase occurred during the excise tax holiday.”
Does this apply to private jet charter flights, including jet cards that operate under the FAA’s Part 135 regulations?
The FAQ covers commercial aviation. The FAQ states, “Commercial aviation is, generally speaking, any use of an aircraft in the business of transporting persons or property by air for compensation or hire.”
That’s what happens when you buy a jet card, so on the surface, the answer seems clear.
However, Hoover warns the devil is in the details.
He says to also look at a 2015 memorandum from the Office of the Chief Counsel at the IRS. The internal memo has the subject of Prepaid Air Travel Cards. It begins with the caveat, “This advice may not be used or cited as precedent.”
You might be considering wiring several hundreds of thousands of dollars to buy a jet card before year’s end.
You and your lawyer should without doubt read it. I copied and pasted the notice in full below the image of its header with some analysis and comments from an IRS spokesperson, Hoover, and the National Business Aviation Association following.
Subject: Prepaid Air Travel Cards
Airline is a commercial air carrier that provides regularly scheduled flights. Purchaser purchases a prepaid gift card denominated in dollars from Airline. The gift card can only be used as payment toward commercial flights provided by Airline. The gift card is not issued in the exact amount of the fare, does not state an itinerary, and does not itself entitle the bearer to air transportation.
All Airline flights originate from within the United States and all destinations are also within the United States. Airline’s gift cards cannot be redeemed for cash.
Issue 2 involves three parties:
- Seller – Entity that sells prepaid flight cards for a fixed number of flying hours.
- Operator – Independent third party that owns an aircraft and operates the flights paid for with the prepaid flight cards
- Purchaser – Card purchaser.
Seller sells non-refundable “jet cards” that typically offer a fixed price for 25 hours of flying time on a specific type of aircraft operated by a third party, the Operators. Seller acts as agent for Purchasers by booking charter flights with Operators. Typically, once a charter flight is booked, Operator invoices Seller for the flight, and Seller must remit payment for the flight to Operator within 30 days.
The jet card’s cost to Purchaser includes the § 4261 (excise) tax based on the total cost of the 25 hour jet card. The jet card is valid for 12 months from the date Seller receives the funds from the Purchaser, which locks in the hourly rate for one year. If there are any hours remaining after the 12 month period, Purchaser can use them, but will have to pay any difference between the jet card’s rate at the time Purchaser purchased the card and the rate then offered by Seller. The additional cost will be charged to Purchaser’s credit card rather than Purchaser’s jet card. All flights originate from within the United States and all destinations are also within the United States.
Purchaser also has the option to book other aircraft size categories, other than the specific type of aircraft designated by Purchaser’s jet card. When booking an aircraft with a rate higher than the rate specified by Purchaser’s jet card, the difference will be charged to Purchaser’s credit card rather than Purchaser’s jet card. When booking an aircraft with a rate lower than the rate specified by Purchaser’s jet card, the difference is credited to Purchaser for use against any incidental charges for the flight. For all domestic flights, one hour is debited from Purchaser’s jet card account balance for each hour of flying time.
Section 4261(a) imposes a tax on the amount paid for taxable transportation of any person a tax equal to 7.5 percent of the amount so paid.
Section 4261(d) provides that except as provided in § 4263(a), the taxes imposed by § 4261 are paid by the person making the payment subject to the tax.
Section 4263(a) provides that if the payment upon which the § 4261 tax is imposed is made outside the United States, the person furnishing the initial transportation pursuant to such order must collect the amount of the tax.
Section 4263(c) generally provides that where any tax imposed by § 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter such tax shall be paid by the carrier providing the initial segment of such transportation which begins or ends in the United States.
Section 4263(d) provides that the tax imposed by § 4261 shall apply to any amount paid within the United States for transportation of any person by air unless the taxpayer establishes, pursuant to regulations prescribed by the Secretary, at the time of payment for the transportation, that the transportation is not transportation in respect of which tax is imposed by § 4261.
Section 49.4261-4(a) provides that the tax imposed by § 4261 shall apply to any amount paid within the United States for the transportation of any person, unless the taxpayer establishes in accordance with the provisions of this section that at the time of payment the transportation is not transportation in respect of which tax is imposed by § 4261(a).
Section 49.4261-7(b) provides examples of payments subject to tax.
Rev. Rul. 56-157, 1956 C.B. 523, considers the application of § 4261 to amounts paid for travel gift certificates. Under the facts of the revenue ruling, the recipient of the gift certificate has the right either to use the certificate for the purchase of transportation (receiving in cash any excess in value of the certificate over the cost of the transportation) or to take the entire face value of the certificate in cash without the purchase of any transportation. The revenue ruling holds that since the gift certificates are nothing more than obligations accepted by the issuing agency or carrier to pay a sum certain in money to the designated payee upon demand, the amount paid for the purchase of such a gift certificate is not an amount paid for transportation within the meaning of § 4261. Therefore, the tax on transportation of persons does not apply to the purchase of the gift certificate. Instead, tax is imposed when the gift certificate is used for the purchase of taxable transportation.
Rev. Rul. 73-508, 1973-2 C.B. 366, was issued after the Civil Aeronautics Board authorized the airlines to add a charge to their existing passenger tariffs to cover the expenses involved in certain security procedures. It holds that, since the described security charge is required to be paid as a condition to receiving air transportation, such charge is part of ‘the amount paid’ for taxable air transportation within the meaning of § 4261(a) and is subject to the tax imposed by that section.
Rev. Rul. 80-31, 1980-1 C.B. 251, holds that an airline agency service charge added to the price of a ticket for taxable transportation to cover administrative costs involving use of the ticket by a different person in a different city is not subject to the tax imposed by § 4261. It further holds that the tax imposed by § 4261 should not apply to a separate charge made by an air carrier or an airline agent for a service not reasonably necessary to the air transportation itself, provided the service is optional and the charge bears a reasonable relation to the cost of providing the service.
Analysis & Conclusion
Section 4261(a) imposes a tax on the amount paid for the taxable transportation of any person. “Taxable transportation” is defined in § 4262(a)(1) to generally include transportation by air that begins and ends in the United States. The flights described in Issue 1 and Issue 2 meet the definition of taxable transportation.
In this case, the gift cards are similar to the gift certificates described in Rev. Rul. 56-157, except that the gift cards, in this case, cannot be redeemed for cash and may only be used to purchase a ticket from Airline. The amount paid for the gift card is not required to be paid as a condition to receiving air transportation. See Rev. Rul. 73-508. The gift card does not allow the bearer to board an airplane and can only be used to purchase a ticket. In essence, the gift card is a cash equivalent.
Based on the foregoing, we conclude that the § 4261 tax does not apply to the purchase of the gift card. Instead, tax attaches when Purchaser uses the gift card to purchase taxable transportation from Airline, and Airline must collect the tax at that time.
Section 49.4261-7 provides examples of payments for services that are subject to the § 4261 tax.
For services that are not addressed by the regulations, IRS published guidance limits the tax base to amounts paid for mandatory charges; in other words, amounts that must be paid to get on the airplane. All amounts paid as a condition to receiving air transportation are subject to tax unless the service is also optional and not reasonably necessary to the air transportation itself. See Rev. Rul. 73-508 and Rev. Rul. 80-31.
In this case, the jet cards entitle Purchaser (or the holder of the jet card) to get on a flight. They are essentially ticket substitutes. Based on the foregoing, we conclude that the § 4261 tax attaches when Purchaser buys a jet card from Seller, and Seller must collect the tax at that time.
End IRS memo
What does it all mean?
So, will your jet card flight purchased this year be FET-free next year?
A spokesperson for the IRS tells Private Jet Card Comparisons, “The question of whether an arrangement triggers the Federal Excise Tax in actual situations will depend on the facts-and-circumstances of that specific case.”
What about the memo reprinted above?
He noted, “The memo, which was provided to the office that determines policy in the excise tax area, is non-precedential. The memo is useful in that it contains some of the legal analysis in this area of prepaid travel cards.”
As the last point, he said, you can view it as, “Here’s how we understand the sets of issues to guide our staff. We don’t know all the facts and circumstances. It’s not cookie-cutter.”
Attorney Hoover says, “What I typically tell people is that published guidance from the IRS provides that any ‘amount paid’ during the tax holiday is free of Federal Excise Tax. Nevertheless, to minimize tax risk they should avoid making a 100% redeemable payment during the tax holiday that can be applied against flights at any time in the future. If you have a payment that provides you with X type of aircraft in a limited time period and irrevocable, or if there is at least a penalty if you decide to have the payment refunded, you are significantly safer.”
Should you worry?
Scott O’Brien is senior director for the NBAA. He says the trade group has been in contact with the IRS. He adds, “There’s no indication the IRS has some agenda (regarding FET).” He reiterated that the CARES Act and the excise tax holiday are meant to provide a boost to the troubled aviation industry. In other words, the goal is to encourage you to buy as much air travel as possible, and in effect, that’s what these offers are doing.
Experts say If the IRS does determine some cards are taxable at a later date, it’s a long road. There would likely be years of appeals and litigation.
I asked the IRS spokesperson if you would need to worry about the government knocking on your door. What if they want the money and can’t collect it via the operator or broker?
He pointed me to the Internal Revenue Code, Section 4263 (c). Under Payment of tax, reads, “Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter, such tax shall be paid by the carrier providing the initial segment of such transportation which begins or ends in the United States.”
I followed up to ask, if that means, you, the consumer, is in the clear?
He politely replied, he “would just point you back to the law (the internal revenue code § 4263(c)).”
So what’s the bottom line?
As far as the government is concerned, IRS § 4263(c) is the law, not just advice. It indicates that the buck stops at the operator, at least as far as the IRS is concerned.
Can your jet card provider come back to you attempting to collect the FET if the IRS decides it’s a taxable event?
Hoover says it depends on how your contract is written. He’s advising his operator and broker clients to write their contracts so they can come back to you. After all, that’s why you hire a lawyer to write your contracts.