Internal Revenue Bulletin: 2006-43
October 23, 2006
Table of Contents
Resellers of air transportation. This ruling explains the tax consequences under section 4261 of the Code when a traveler purchases a ticket for taxable transportation from a third party intermediary other than the airline. Rev. Ruls. 75-296 and 80-31 distinguished.
In the situation described below, what is the amount paid for taxable transportation for purposes of the tax imposed by § 4261 of the Internal Revenue Code, which person is liable for the tax, and which person is responsible for collecting the tax, filing the required return, and paying over the tax to the government?
Traveler wants to travel between two cities in the United States on a scheduled commercial airline (Airline). Instead of contacting Airline directly for a ticket, Traveler contacts Intermediary, which is in the travel services industry. When Traveler orders a ticket, Traveler pays Intermediary Price X plus Fee Y. Traveler also pays Intermediary the amounts Airline charges on account of the tax imposed by § 4261 and the passenger facility charge (PFC) imposed under § 1113(e) of the Federal Aviation Act of 1958. (See Rev. Rul. 91-61, 1991-2 C.B. 377, for additional information regarding the PFC.) Traveler could have bought a ticket with the same itinerary and class of service from Airline without using Intermediary.
Intermediary is neither related to Airline nor under its supervision or control; thus, each transaction between Intermediary and Airline is made at arm’s length. Intermediary neither operates nor charters aircraft. The amount of Fee Y is set solely by Intermediary. Fee Y compensates Intermediary for the service of facilitating Traveler’s purchase of an airline ticket. Intermediary is not compensated by Airline for any services Intermediary provides.
Intermediary passes on to Airline Price X and the amounts Airline charges on account of the tax imposed by § 4261 and the PFC. Intermediary retains Fee Y. Price X and the amounts Airline charges on account of the tax imposed by § 4261 and the PFC are the only amounts required to be paid to Airline as a condition to Traveler receiving air transportation from Airline, and Airline issues a ticket to Traveler in exchange for Intermediary’s payment of these amounts.
Section 4261(a) imposes a tax on the amount paid for taxable transportation (as defined in § 4262) of any person by air and § 4261(b) imposes a tax on the amount paid for each domestic segment of taxable transportation. The § 4261(a) tax is a percentage of the amount paid and the § 4261(b) tax is a fixed dollar amount for each segment. “Taxable transportation” generally includes air transportation that begins and ends in the United States.
Section 4261(d) provides that the tax imposed by § 4261 shall be paid by the person making the payment subject to tax and § 4291 generally provides that any person receiving any payment for taxable air transportation must collect the amount of the tax from the person making the payment. The collector is generally required by regulations to make deposits, file returns, and pay over the tax to the government.
Rev. Rul. 75-296, 1975-2 C.B. 440, considers the application of the § 4261 tax to two situations involving travel agencies. One travel agency (Agency A) is an independent broker that charters an aircraft from an airline and sells tours to individuals and groups. The other travel agency (Agency B), which represents an airline and is under the supervision and control of that airline, is not licensed as a broker. When Agency B sells tours it retains a commission and remits the remainder of the amount collected to the airline. The ruling holds that Agency A is operating as a principal and is required to collect the tax and pay it over to the government. Agency B, because it operates under the control of the airline, is an agent of the airline. As the airline’s agent, Agency B must collect the tax and remit it to the airline, which, in turn, must pay it over to the government.
Rev. Rul. 80-31, 1980-1 C.B. 251, considers the application of the § 4261 tax to a service charge added by an airline to the price of a ticket for the administrative costs involved in the use of that ticket by another person in another city. The ruling concludes that the charge was not an amount paid for taxable transportation because the service is optional, not reasonably necessary to the air transportation itself, and bears a reasonable relation to the cost of providing the service.
S. Rep. No. 105-33, at 158 (1997), 1997-4 C.B. 1067, 1238 (relating to the legislation that became Pub. L. 105-94, 1997-4 (Vol. 1) C.B. 1, which made numerous changes to the air transportation tax), notes that the “air passenger transportation excise taxes are imposed on passengers; transportation providers (generally airlines) are responsible for collecting and remitting the taxes to the Federal Government.”
Under the facts of this revenue ruling, Airline is providing the transportation to Traveler. Intermediary is not providing transportation either directly or indirectly; it is simply facilitating the purchase of taxable transportation. Intermediary is simply a conduit through which Traveler pays Airline for taxable transportation. Thus, Traveler is the person that makes the payment subject to the § 4261 tax and Airline is the person that receives the taxable payment.
An airline’s costs associated with selling tickets are generally necessary to the air transportation the airline provides. This includes the airline’s costs of selling tickets through an unrelated third party. However, Intermediary’s selling costs and profit, if any, are not charged by, or passed on to, Airline and are not reasonably necessary to the air transportation Airline provides to Traveler.
Fee Y is not received by Airline or by an agent of Airline, and is not an “amount paid” for taxable transportation. Rather, Fee Y compensates Intermediary for the service of facilitating Traveler’s purchase of an airline ticket. Therefore, Price X is the amount paid for taxable transportation and is the base on which the § 4261(a) tax is calculated.
Rev. Rul. 75-296 is distinguishable from this case since that ruling addresses only situations in which a travel agent is either acting as a principal on its own behalf by chartering an entire aircraft or acting as an agent of the airline in selling individual tickets. It does not address the situation here in which Intermediary is not under the supervision or control of Airline and is acting on behalf of, and receiving compensation from, Traveler.
Rev. Rul. 80-31 is distinguishable from this case because that ruling did not involve amounts paid to an independent third party that is not under the airline’s supervision or control.
Price X is the amount paid for taxable transportation, Traveler is liable for the tax imposed on Price X, and Airline is responsible for collecting the tax from Traveler, filing the required return, and paying over the tax to the government. Airline may collect the tax and the PFC through Intermediary as part of the transaction in which it receives payment of Price X.
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