Saturday, July 23, 2011

Get Airline Tickets With Reduced Federal Taxes?

As of midnight today, the Federal Aviation Administration has been partially shut down due to Congressional failure to pass an extension of the agency's operating authority. Partisan bickering over labor provisions and air services subsidies to rural communities are the main reasons for the deadlock, and there doesn't seem to be an end in sight.

What this means for us consumers is as of half an hour ago, the FAA is no longer able to collect portions of the federal taxes charged on airline tickets. About half of the taxes goes to a trust fund that pays for FAA programs and employees (including the excise tax, international arrival/departure tax, and the flight segment tax). This is the half that the government can no longer collect. The other half goes towards airport and security fees that will continue to be charged.

According to the Virgin America FAQ regarding the federal tax situation found here, the following is the breakdown of which taxes are still being charged and which are no longer being collected:

Which taxes have expired – and which ones still exist?

  • The federal taxes that will temporarily expire at 12:01am Pacific time on July 23, 2011 are:
    • The 7.5% tax that applies to domestic transportation (as well the 7.5% tax on the sale of frequent flyer miles)
    • The $3.70 domestic segment tax
    • The $16.30 international arrival/departure tax

  • The federal taxes still in place:
    • Commercial Fuel Tax
    • PFCs (tax code XF)
    • September 11 Passenger Security Fee (tax code AY)
    • APHIS passenger inspection fee (tax code XA)
    • APHIS aircraft inspection fee (tax code XA)
    • Customs passenger inspection fee (tax code YC)
    • Immigration passenger inspection fee (tax code XY)

The issue gets a little more complicated, however. What isn't clear is whether or not people who purchased tickets earlier paying full federal taxes will now be owed a refund if they fly during this period of time. And what's more, if you purchase a ticket now and don't pay a portion of the federal taxes, no one knows for sure if you will then owe that amount when the time comes for you to fly - assuming the dispute is resolved and the compromise bill is passed beforehand. Since federal taxes are based on your date of travel, this becomes a big question mark. The IRS will need to issue a guidance soon to clarify all of this.

But for now, I'm seeing reductions in airlines fares all around, starting with an email from Virgin America urging us to "Grab a seat with fewer federal taxes for a limited time only." United Airlines also appears to have stopped charging portions of the federal tax. Other itineraries I've been keeping track of have dropped $20-$60. Beware though, because unless there is a guarantee from the airline, which seems to be the case with Virgin America's promotion, there is no promise you won't be required to pay the taxes at a later date.

Finally, what's also interesting in the list above is that it states the 7.5% federal tax on the sale of frequent flyer miles has also been suspended. I'm not aware of any big promotions right now like the US Airways 100% bonus on purchased miles that just ended last month, but if anyone knows of any other promotion going on, it might be a good time to buy.

(EDIT: Unfortunately, it looks like all good things must come to an end. Most airlines have already adjusted their prices upwards to offset the savings from the eliminated federal taxes. As of midnight 7/24/2011, only Virgin America and Alaska Airlines are still offering reduced fares, but I don't expect these to last very much longer either.)

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