Guest Blogger Prof. Donna Davis: Taxes and Checked Airline Baggage

February 1, 2010 at 4:45 pm | Posted in Aviation Law, Guest blogger | Leave a comment

by Donna Davis, Associate Professor of Law, University of Mississippi School of Law

The Internal Revenue Service recently ruled that airlines are exempt from certain services and facilities taxes on fees charged to check baggage. (PLR 118216-09). While at first glance this appears to be a boon to the airline industry, in fact, if the taxes were imposed, they would fall on air travelers and not the carriers. This tax, much like a sales tax, is imposed on the person purchasing the air transportation and is merely collected and paid over to the government by the airline.

The tax applies to amounts paid in the United States for transportation of any person by air (IRC 4262(d)), and it is imposed on the person making the payment subject to the tax. (IRC 4261(d)) The tax is a 7.5% excise tax imposed on amounts paid for taxable transportation. (IRC 4261) Taxable transportation means travel within the United States plus 225 miles into Mexico or Canada (unless there has been a waiver for the portions falling within Mexico and Canada). (IRC 4262) The responsibility of the airline is to collect the tax from the person making the payment. (IRC 4291) Thus, if the $20 baggage fee were not exempt, the traveler would pay $1.50 of tax, in addition to the taxes paid on the price of the ticket. In exempting the baggage fee from tax, the Service is consistently applying its definition of taxable transportation as excluding amounts paid for optional services that are not necessary for the provision of air transportation.

So why would the airlines bother requesting a ruling on this issue? If the baggage fee was subject to the tax, and the tax was not paid by the traveler, then the tax will be imposed on the carrier providing the initial segment of the transportation. (IRC 4263(c)) The ruling, therefore, provides definitive guidance that the carrier is not obligated to collect the tax from its passengers and that the failure to do so will not come back to haunt the carriers’ coffers.