The aviation market segment
includes all persons involved in commercial
and noncommercial air transportation. This
group includes but is not limited to
Scheduled commercial
airlines,
On-demand air taxi
services,
Charter airlines,
Integrated package
delivery companies,
Travel agencies and
tour brokers,
Businesses and
individuals that operate aircraft for
their own use,
Individuals who
purchase airline tickets, and
Marketers of fuel that
is used in aircraft.
The Internal Revenue Code
(IRC) imposes taxes on both commercial and
noncommercial aviation. For flights in
commercial aviation, a tax is imposed on
amounts paid for the transportation of
persons by air (IRC section 4261) and
property by air (IRC section 4271). Also,
commercial aviation is burdened by a
relatively small fuel tax on aviation
gasoline (IRC sections 4081 and 6421) and
aviation fuel (other than gasoline) (IRC
section 4091). For flights in noncommercial
aviation, a much higher rate of tax on fuel
is imposed.
Whether commercial or
noncommercial aviation taxes apply is
determined on a flight-by-flight basis.
Determining which set of taxes applies to
which flights is a recurring audit issue.
Determining the amount paid for commercial
transportation is another recurring audit
issue.
Aviation taxes go into the
Airport and Airway Trust Fund (IRC section
9502). Expenditures from the fund support
the Federal Aviation Administration (FAA).
This document serves as a
self-study text and a market segment
specialization guide for examiners. The
contents of this document are not to be used
or cited as authority for setting or
sustaining a technical position.
Great caution should be
used in applying existing regulations and
revenue rulings to present fact situations.
The IRC section 4261 regulations, which were
last revised in 1963, do not reflect the
many changes in the Code since that time.
Similarly, many revenue rulings contain
out-of-date tax rates and do not reflect the
significant changes made in the Code in 1996
and 1997.
The types of certificates
(licenses issued by the FAA) are:
Part 91: Noncommercial
(that is, no profit motive rather than
the IRS definition of no compensation),
Part 121: Large
carriers of passengers and freight,
Part 125: Large
corporate aircraft and large aircraft
used for gambling junkets,
Part 129: Foreign
carriers, and
Part 135: Small
carriers of passengers and freight.
The FAA defines commercial
aviation as the carriage of persons or
property by air for profit. Compare this to
the IRS definition, which simply requires
that the carriage be undertaken for
compensation. The differing definitions have
caused confusion among some aircraft
operators. Flight departments often assume
that, since a flight is not considered
commercial for FAA purposes, the flight is
not considered commercial for tax purposes.
However, the IRS is not bound by other
agencies' definitions. Rev. Rul. 78-75,
1978-1 C.B. 340 states that the status of an
aircraft operator as a "commercial operator"
under FAA regulations does not determine the
commercial or noncommercial status of the
operator in the application of the aviation
fuel and air transportation taxes.
Air Transportation Excise
Issue Specialist Program
The November 1991 Excise
Tax Task Force Report addressed the need to
move to a market segment approach in the
excise tax arena. Corporate decisions were
made to integrate market segment approaches
throughout all compliance activities. The
establishment of a work group to address the
air transportation industry was the
beginning of the implementation of the
market segment approach to excise tax.
Members of the work group were selected on
the basis of their work, technical
experiences, training, and background.
Each member of the work
group is responsible for providing advice,
assistance, and technical expertise to
agents in the planning and conduct of
examinations. Please feel free to request
assistance from the work group whenever you
feel it would be appropriate. This
assistance can be in the form of
information, advice, or if necessary,
physical assistance at the examination
sites. The workgroup members develop market
segment audit techniques and guidelines,
update and revise the Internal Revenue
Manual, lead or participate in technical
conferences, and submit articles to trade
publications. In addition, the group advises
IRS Headquarters on issues and practices in
the application of the law, emerging issues,
changes in technology, and innovative audit
techniques from the field.
Forms 720, Quarterly
Federal Excise Tax Returns, for aviation
fuels taxes (both aviation gasoline and
aviation fuel other than gasoline) are
required for each calendar quarter. They are
due on the last day of the month following
the close of the quarter. (Treas. Reg.
section 40.6071(a)-1(a)(1))
Air Transportation
Taxes
Returns are due 2 months
after the close of the quarter when other
Forms 720 are due one month after the end of
the quarter. (Treas. Reg. section
40.6071(a)-2)
Multiple Taxes
If a taxpayer is required
to file returns for two or more taxes with
different due dates, the return is due on
the later of the due dates. For example, if
a taxpayer is required to file a return for
both aviation fuel and transportation of
persons by air, the return is due on the
last day of the second month after the close
of the quarter. Treas. Reg. section
40.6071(a)-1(a)(2))
The Electronic Federal Tax
Payment System (EFTPS) must be used to make
electronic deposits. If the taxpayer is an
employer required to use EFTPS, he or she
must also use EFTPS to deposit excise taxes.
Taxpayers who are not
required to make electronic deposits may
voluntarily participate in the EFTPS
Program.
Federal Tax Deposit
Coupons
If the taxpayer is not
required to use EFTPS and does not
voluntarily participate in the EFTPS
Program, he or she should deposit federal
excise taxes at an authorized depository or
the Federal Reserve Bank servicing the area
in which he or she is located.
When To Make Deposits
Taxes that are required to
be deposited are grouped into the following
classes:
9-day-rule taxes
30-day-rule taxes (not
covered in this guide)
Alternative method
taxes
14-day-rule taxes
If the taxpayer deposits
more than one tax in a class, he or she
should combine all the taxes in the class
and make one deposit for the semimonthly
period.
9-Day Rule
The deposit of tax for a
semimonthly period is due by the 9th day
following that period. Generally, this is
the 24th day of a month and the 9th day of
the following month. The 9-day rule applies
to all taxes in Part I of Form 720 except
for
Gasoline and diesel
fuel tax (IRS Nos. 14, 60, 62, 58, 73,
74, 59, 75, and 76), if deposits by
qualified persons are made using EFTPS.
(See "14-Day Rule" below.)
Air transportation
taxes (IRS Nos. 26, 27, and 28) if
deposits are based on amounts billed or
tickets sold, rather than on amounts
actually collected. (See "Alternative
Method" below.)
Deposits of communications
and air transportation taxes may be based on
amounts billed or tickets sold during a
semimonthly period instead of on taxes
actually collected during the period. Under
the alternative method, the tax included in
amounts billed or tickets sold during a
semimonthly period is considered collected
during the first 7 days of the second month
following semimonthly period. The deposit of
tax is due by the 3rd banking day after the
7th day of that period.
For example, the tax
included in amounts billed or tickets sold
for the period from December 16, 1997, to
December 31, 1997, is considered collected
from January 16, 1998, to January 22, 1998,
and must be deposited by January 27, 1998.
To use the alternative
method, you must keep a separate account of
the tax included in amounts billed or
tickets sold during the month and reported
on Form 720. The tax is included in amounts
billed or tickets sold, not the amount of
tax that is actually collected. For example,
amounts billed in December, January, and
February are considered collected during
January, February, and March and are
reported on Form 720 as the tax for the 1st
quarter of the calendar year.
Deposits of the gasoline
and diesel fuel tax for a semimonthly period
by an independent refiner or any person
whose average daily production of crude oil
for the preceding calendar quarter did not
exceed 1,000 barrels may be made by the 14th
day following the semimonthly period. The
deposits must be made using EFTPS. If the
14th day is a Saturday, Sunday, or legal
holiday, the due date is the immediately
preceding day that is not a Saturday,
Sunday, or legal holiday. The 14-day rule
does not apply to dyed diesel fuel used in
trains (IRS No. 71) or to dyed diesel fuel
used in certain intercity or local buses
(IRS No. 78).
Delayed Deposits
The following deposits have
a delayed deposit due date of October 5,
1998:
Deposits of fuel taxes
(IRS Nos. 60, 62, 58, 69, 73, 74, 59,
75, 76, 14, 69, and 77), and
transportation of property by air (IRS
No. 28), that would be due after July
31, 1998, including the September rule
deposit due September 28 or 29, 1998,
and before October 1, 1998
Deposits of
transportation of persons by air (IRS
No. 26) and use of international travel
facilities (IRS No. 27) that would be
due after August 14, 1998, including the
September rule deposit due September 28
or 29, 1998, and before October 1, 1998
Deposits of taxes for a
semimonthly period must be at least the net
tax liability for that period, unless one of
the safe harbor rules applies. The safe
harbor rules apply separately to deposits
under the 9-day rule, the 30-day rule, the
alternative method, and the 14-day rule.
The net tax liability for a
semi-monthly period is the total liability
for the period plus or minus any adjustments
for the period. Net tax liability for a
semimonthly period may be figured by
dividing the net tax liability for the month
by 2, provided this method of computation is
used for all semimonthly periods in the
calendar quarter.
Under the alternative
method, the deposit of tax for any
semi-monthly period must not be less than
the net amount of tax that is considered
collected during the semi-monthlyperiod. The
net amount of tax that is considered
collected during the semi-monthly period
must be
The net amount of tax
reflected in the separate account for
the corresponding semimonthly period of
the previous month, or
One-half of the net
amount of tax reflected in the separate
account for the preceding month.
For the safe harbor rules
to apply, the taxpayer must:
Make each deposit
timely at an authorized Government
depository, and
Pay any underpayment
for the current quarter by the due date
of the return.
However, if the due date of
the return is extended because the taxpayer
reports taxes with different return due
dates, he or she must deposit on the earlier
due date any underpayment for taxes
ordinarily reported on the earlier date.
The Look-Back Quarter
Liability Safe Harbor Rule
The look-back quarter safe
harbor rule applies to persons who filed a
Form 720 for the look-back quarter (the 2nd
calendar quarter preceding the current
quarter). Persons who filed for the
look-back quarter are considered to meet the
semimonthly deposit requirement if the
deposit for each semimonthly period in the
current quarter is at least 1/6 (16.67
percent) of the net tax liability reported
for the look-back quarter.
For the semi-monthly period
for which the additional deposit is
required, the additional deposit must be at
least 12.23 percent (11.12 percent
non-EFTPS) of the net tax liability reported
for the look-back quarter. Also, the total
deposit for that semi-monthly period must be
at least 1/6 (16.67 percent) of the net tax
liability reported for the look-back
quarter.
Exceptions
The look-back rule does not
apply to:
The 1st and 2nd
quarters beginning on or after the
effective date of an increase in the
rate of tax unless the deposit of taxes
for each semi-monthly period in the
calendar quarter is at least 1/6 (16.67
percent) of the tax liability that would
have been incurred for the look-back
quarter if the increased rate of tax had
been in effect for that look-back
quarter; or
Deposits of any tax if
the tax was not in effect throughout the
look-back quarter.
The current liability safe
harbor rule applies to all filers of Form
720. Filers are considered to meet the
semi-monthly deposit requirement if the
deposit for the semi-monthly period is at
least 95 percent of the net tax liability
for the semi-monthly period.
For the semi-monthly period
for which the additional deposit is
required, the additional deposit must be at
least 69.67 percent (63.34 percent
non-EFTPS) of the net tax liability for the
semi-monthly period. Also, the total deposit
for that semi-monthly period must be at
least 95 percent of the net liability for
the semi-monthly period.
If the air carrier elects
to report the tax and make deposits based on
the alternative (tickets sold) method,
Treas. Reg. section 40.6302(c)-3(b)(ii)(2)
requires that the carrier separately account
for the tax. For each month, the account
must reflect all items of tax that are
included in amounts billed or tickets sold
during the month and items of adjustment
relating to the tax for the prior months.
The carrier then reports and deposits the
net, which is referred to as a "blind
credit."
Two types of
aviation-related fuels are taxed by the IRC:
aviation gasoline and aviation fuel (other
than gasoline).
"Aviation gasoline" (avgas)
is a high octane specialty gasoline product
that is usually used only in small,
piston-driven aircraft. Most avgas is dyed
blue or green.
"Aviation fuel" (other than
gasoline or diesel fuel) is usually
kerosene-based and is often referred to as
"jet fuel," "kero-jet," or "jet-A." Aviation
fuel, which is always clear, is used in all
commercial jets, corporate jets, and
turbo-prop commercial aircraft. References
in this document to "aviation fuel" are
references to aviation fuel other than
gasoline.
Before April 1, 1988, IRC
section 4041(c) imposed a tax when any
liquid other than gasoline was sold by a
retailer and delivered into the fuel supply
tank of an aircraft in noncommercial
aviation or used as such a fuel by a buyer
who purchased the fuel in a nontaxable
transaction.
Since April 1, 1988, tax
has been imposed by IRC section 4091 on the
sale of aviation fuel by the producer or
importer thereof. Producers include
registered wholesale distributors.
Registered producers may make tax-free sales
to other registered producers. Thus, in
practice, the tax usually is not imposed
until a registered wholesale distributor
sells the fuel to a retailer at an airport
(often referred to as a "fixed-base
operator" or "FBO") or to the user of the
fuel.
There are no regulations
under IRC section 4091. Instead, agents and
taxpayers may rely upon the following
notices for guidance:
Notice 88-30, 1988-1
C.B. 497, which provides rules for
making tax-free sales of aviation fuel
to producers of aviation fuel
Notice 88-132, 1988-2
C.B. 552, which provides rules for
making tax-free and tax-reduced sales of
aviation fuel for certain aviation fuel
uses
Notice 89-38, 1989-1
C.B. 679, which defines wholesale
distributor
Notice 89-17, 1989-1
C.B. 647, which defines aviation fuel
for periods before March 14, 1996 (The
notice was declared obsolete on that
date in T.D. 8659.)
Aviation Fuel. Any
liquid (other than gasoline or diesel fuel)
that is suitable for use as a fuel in an
aircraft. (IRC sections 4093(a), 4081(a),
and 4083(a)(1))
Importer. A person
who brings aviation fuel into the United
States from a source outside the United
States or who withdraws aviation fuel from a
customs-bonded warehouse for sale or use in
the United States. If the nominal importer
of the fuel is not its beneficial owner (for
example, the nominal importer is a customs
broker engaged by the beneficial owner), the
beneficial owner is the importer of the
fuel. (Treas. Reg. section 48.0-2(a)(4) (i))
Producer. This
includes, but is not limited to, any person
who has been registered by the IRS with
respect to the IRC section 4091 taxes and is
(1) a refiner, blender, or wholesale
distributor of aviation fuel or (2) a dealer
who sells aviation fuel exclusively to
producers of aviation fuel. In addition, any
person to whom aviation fuel is sold at a
reduced rate is treated as a producer of
such fuel. (IRC section 4093(b))
Wholesale Distributor.
According to Notice 89-38, 1989-1 C.B. 679,
a person who meets one of the following
three tests:
The person holds
himself or herself out to the public as
being engaged in the trade or business
of selling aviation fuel to producers,
retailers, or users who purchase in bulk
quantities and accept delivery into bulk
storage tanks; and at least 30 percent
of the number of the person's sales of
aviation fuel during the year are to
producers, retailers, or users who buy
in bulk quantities for their bulk tanks.
The person actually
makes more than "casual sales" of
taxable fuel to producers, retailers, or
users who purchase in bulk quantities
and accept delivery into bulk storage
tanks. The person is considered to have
actually made more than casual sales if
(1) at least 30 percent of his or her
number of sales in the preceding 12
months were to such purchasers, or (2)
at least 50 percent of the volume of
aviation fuel is sold to such
purchasers, and at least 500 of his or
her sales during the year were made to
such buyers.
The person holds
himself or herself out to the public as
being engaged in the trade or business
of selling aviation fuel for nontaxable
uses (such as use on a farm for farming
purposes or use in foreign trade) and
sells at least 70 percent of his or her
volume of aviation fuel during the year
for such uses.
For tests 1 and 2, a bulk
storage tank is a container that holds at
least 50 gallons and is not the fuel supply
tank of any engine on an aircraft. The term
"bulk quantities" means 25 gallons or more.
Imposition of Tax
IRC section 409l(a)(l)
imposes a tax on the sale of aviation fuel
by the producer or the importer thereof or
by any producer of aviation fuel. If any
producer uses aviation fuel (other than for
a nontaxable use) on which no tax has been
imposed by IRC section 4091, then such use
is considered a sale.
The producer selling or
using the fuel is liable for tax.
Additionally, IRC section
4103 provides that, in any case in which
there is a willful failure to pay the tax,
each person:
who is an officer,
employee, or agent of the taxpayer who
is under a duty to assure the payment of
the tax and who willfully fails to
perform such duty, or
who willfully causes
the taxpayer to fail to pay the tax is
jointly and severally liable with the
taxpayer for the tax to which such
failure relates.
Collection Division
guidelines for IRC section 4103 are found in
section 56(50) of the IRM 5600.
Tax Rates
The following table lists
the tax rates on aviation fuel since 1994.
All taxable sales of aviation fuel are
entered on IRS No. 69, unless a sale was for
use by the buyer in commercial aviation (IRS
No. 77). The discussion under "Exemptions"
below explains when the rate for commercial
aviation applies.
Under IRC section 4092(c),
tax is not imposed on aviation fuel sold to
a producer of such fuel. Section IIIB(1)(c)
of Notice 88-30 provides that, "This
provision applies only if --
Both the seller and the
buyer are registered under IRC section
4101 with respect to the tax imposed by
IRC section 4091;
The buyer has notified
the seller in writing with which
district director the buyer is
registered and the Certificate of
Registry number (now letter of
registration number) of the buyer; and
The buyer's
registration number appears on the
invoice for each tax-free sale made to
the buyer."
In this context, invoice
includes an invoice, purchase order, or
other record of sale that is maintained by
the seller in the normal course of business.
(Section IA of Notice 88-30)
Producers apply for
registration by the IRS on Form 637,
Application for Registration (For Certain
Excise Tax Activities). A bond may be
required as a condition of registration. The
bonding rules are set forth in section V of
Notice 88-30. A taxpayer registered by the
IRS as a producer of aviation fuel is
assigned a registration number with an "H"
suffix.
Sales for Nontaxable
Uses
Under IRC section 4092(a),
tax is not imposed on a producer's sale of
aviation fuel for use by its buyer for a use
that is exempt from the tax imposed by IRC
section 4041(c)(1). These uses are:
Use other than as a
fuel in an aircraft;
Use as a fuel in an
aircraft on a farm for farming purposes
(as that term is defined in Treas. Reg.
section 48.6420-4);
Use as a fuel in an
aircraft in foreign trade (as that term
is used in Treas. Reg. section
48.4221-4) or trade between the United
States and any of its possessions;
Use as a fuel in an
aircraft owned by the United States or
any foreign nation and constituting
equipment of the armed forces thereof;
Exclusive use of a
state or local government;
Export or shipment to a
possession of the United States;
Exclusive use of a
nonprofit educational organization (as
that term is defined in Treas. Reg.
section 48.4221-6);
Use as a fuel in an
aircraft by an aircraft museum (as
described in IRC section 4041(h)(1)) for
the procurement, care, or exhibition of
aircraft of the type used for combat or
transport in World War II; and
Use as a fuel in an
aircraft of the type and for a purpose
described in IRC section 4261(e) or (f).
The IRC section 4261(e)
exemption applies to helicopters engaged in
the exploration for or the development or
removal of hard minerals, oil, or gas and in
timber (including logging) operations if the
helicopters neither take off from nor land
at a facility eligible for Airport Trust
Fund assistance or otherwise use federal
aviation services during flights. In the
case of helicopter flights for hard
minerals, oil, or gas, each flight segment
is treated as a distinct flight.
The IRC section 4261(f)
exemption applies to any air transportation
for the purpose of providing emergency
medical services (1) by helicopter or (2) by
a fixed-wing aircraft equipped for and
exclusively dedicated on that flight to
acute care emergency medical services.
The IRC section 4261(e) and
(f) rules were modified in 1996 and 1997. In
a case involving such issues, be aware of
the dates on which the aviation fuel in
question was sold.
Section IV of Notice 88-132
generally provides that a producer may make
a tax-free sale for any nontaxable use if
the producer receives a described exemption
certificate from the buyer.
Reduced Rate Sales for
Domestic Commercial Aviation
Under IRC section 4092(a)
and (b), tax is imposed at a reduced rate on
a producer's sale of aviation fuel for use
by a buyer in domestic commercial aviation.
Section IV of Notice 88-132
generally provides that a producer may make
such reduced-rate sales if the producer
receives a described exemption certificate
from the buyer. As an additional
requirement, the buyer (the airline) must be
registered by the IRS.
Airlines apply for
registration by the IRS on Form 637. A bond
may be required as a condition of
registration. The bonding rules are set
forth in section V of Notice 88-30. A
taxpayer that is registered by the IRS as a
buyer of aviation fuel for use in commercial
aviation is assigned a registration number
with a "Y" suffix.
Note that some large
commercial airlines that are registered as
producers of aviation fuel have registration
numbers with an "H" suffix. These airlines
may buy all their aviation fuel tax free. If
one of these airlines then uses the fuel in
domestic commercial aviation, the airline is
liable for the aviation fuel tax at the
reduced rate.
A producer that makes a
sale subject to this rate of tax enters
gallons and tax on Form 720, IRS No. 77.
Credits and Refunds
A credit or refund is
allowable to the ultimate purchaser of taxed
aviation fuel if the aviation fuel is used
in a nontaxable use. Such refund claims are
made on Form 8849, Claim for Refund of
Excise Taxes, and generally must be made by
the last day of the quarter following the
last quarter included in the claim. A refund
claim for the claimant's fourth quarter of
its income tax year is not allowed, even if
the claim is made on Schedule C of Form 720.
Claims not taken as refund claims may be
allowable as income tax credits on a Form
4136, Credit for Federal Tax Paid on Fuels.
Also, IRC section 4091(d)
provides that if a registered producer buys
aviation fuel on which tax has been paid to
the Government (and not credited or
refunded), then an amount equal to the tax
is allowable as a refund (without interest)
to the producer just as if the amount were
an overpayment of the IRC section 4091 tax.
IRC section 4091(d) applies to fuel acquired
by the producer after September 30, 1997.
Potential Audit Issues
Potential audit issues
include:
Failure of the producer
to pay the tax in a "daisy chain"
evasion scheme;
Sales of fuel for
noncommercial aviation on which tax was
paid at the commercial aviation rate
(Taxpayers frequently dispute whether a
particular flight is in commercial or
noncommercial aviation.);
Improper credit or
refund claims, including claims made for
taxable uses, claims for the same fuel
made on both Form 8849 and Form 4136,
claims made for the claimant's fourth
quarter, and blind credits taken on Form
720; and
Failure to include a
credit or refund in gross income if the
claimant claimed the amount as an
expense deduction that reduced his or
her income tax liability.
Because the federal excise
tax (FET) for aviation fuel is imposed on
either the seller or the user and there is a
potential for many persons to incur this
liability, consider some of the suggestions
listed below under "Seller" and "User"
during your examination.
Seller
If tax-free aviation
fuel sales were made, verify that (1)
the sales were made to registered
purchasers or (2) the sales were
accompanied by appropriate exemption
certificates.
Inspect the business
location.
Inspect the retained
copy or copies of the dealer's state
returns when appropriate.
Look at the nontaxable
sales reported.
Check for large bulk
sales. Follow through to the purchaser.
Verify reporting of FET
on all fuels being sold.
Make a secondary FET
computation by using the dealer's state
returns and total pump reading sales. If
the dealer is selling in more than one
state, check the dealer's returns for
all states.
Determine whether (1)
the business or owner(s) operate any
aircraft or (2) the owner(s) operate any
aircraft that would be subject to
special fuels tax.
Determine if (1) the
state allows an evaporation deduction
and (2) if an evaporation deduction has
been entered on the Federal return.
User
Inspect purchase
invoices for tax-paid or tax-free
purchases and note where the fuel is
being purchased.
Determine how the
information on use is being recorded.
Inspect retained copies
of the user's state returns if
applicable.
If your state's fuel
records are available to you, they
should periodically be checked against
your annual alphabetical listing of Form
720 filers. Some districts have this
done by a computer audit specialist;
others do it manually. Whichever method
is used, you will find that checking
state records is a productive method of
obtaining delinquent returns. Moreover,
in some states, you may be able to gain
access to state records and compare the
gallons reported to the state with the
gallons reported on the Form 720.
The required periodic
compliance checks of Form 637
registrants provide an opportunity to
find out to whom a registrant has been
selling aviation fuel tax-free. The
sales should then be followed to ensure
that the buyers filed Forms 720 if there
was a taxable use.
While inspecting the
purchase invoices for aviation fuel of a
person who is not registered on Form
637, determine whether his or her
supplier has passed on these taxes to
the buyer. If the taxes have not been
passed on, there are generally no excise
tax consequences to the buyer; but you
may consider auditing the supplier since
this may indicate that the supplier is
not paying the tax.
Determine whether any
claim for refund was filed. If the
claimant used tax-paid aviation fuel in
commercial aviation, then a credit or
refund is available.
Under IRC section 4081,
certain removals, entries, or sales of
gasoline (including aviation gasoline) are
subject to tax. Before January 1, 1996,
gasoline that was used in noncommercial
aviation was taxed not only by IRC section
4081 but also by IRC section 4041. The IRC
section 4041 tax generally was imposed when
the gasoline was delivered into the fuel
supply tank of the aircraft, and the seller
was liable for tax. If the buyer bought the
gasoline in a nontaxable transaction and
then used it in noncommercial aviation, then
the buyer was liable for the retail level
tax.
Effective August 27, 1996,
the IRC section 4041 tax was repealed, and a
specific rate of tax was imposed on aviation
gasoline by IRC section 4081. Thus, tax now
is imposed on aviation gasoline only by IRC
section 4081, but the rate imposed on
aviation gasoline is different from the rate
imposed on highway gasoline.
Imposition of Tax
IRC section 4081 imposes
tax on certain removals, entries, or sales
of aviation gasoline. In practice, tax is
imposed when the gasoline is removed from a
terminal at the terminal rack. The position
holder with respect to the gasoline is
liable for this tax. Rules for gasoline tax
liability are set forth in Treas. Reg
sections 48.4081-1 through 48.4081-3.
The rules of IRC section
4103, which are described under "Aviation
Fuel," also apply to aviation gasoline.
Tax Rates
The following table lists
the rate of tax on gasoline and aviation
gasoline since 1994:
As with all gasoline (other
than gasoline blendstocks), there are no
exemptions from the IRC section 4081 tax on
aviation gasoline based on the intended use
of the gasoline.
Credits and Refunds
Claims by Taxpayers and
Wholesale Distributors
Generally, if aviation
gasoline is sold for a use listed below
under "Use on a Farm for Farming Purposes,"
a credit or refund is allowable to the
person who paid the tax to the Government,
as indicated in IRC section 6416(b)(2).
However, see IRC section 6414(a)(4) and
Notice 89-29 for the conditions under which
such claims must be made by a gasoline
wholesale distributor.
The uses to which this rule
applies include:
Use by a state or local
government,
Use by a nonprofit
educational organization,
Use in military
aircraft, and
Use in foreign trade.
Alternatively, IRC section
6420(c) allows these claims to be made by
the ultimate purchaser of the gasoline.
Use on a Farm for
Farming Purposes
Under IRC section 6420, an
income tax credit is allowable to the
ultimate purchaser of aviation gasoline used
on a farm for farming purposes. The term
"used on a farm for farming purposes" is
defined in Treas. Reg. section 48.6420-4.
The use of gasoline in the
aerial application of fertilizer,
pesticides, or other substances is use of
gasoline on a farm for farming purposes. If
someone other than the farmer performs this
service, the farmer is still considered the
ultimate purchaser of the gasoline. However,
the farmer may waive the right to obtain the
credit as described in Treas. Reg. section
48.6420-4(1).
Other Uses
A credit or refund is
allowable to the ultimate purchaser of
aviation gasoline that is used in commercial
aviation, used in an off-highway business
use, or used in certain aircraft as
described in IRC sections 4261(e) and (f).
(See the discussion of these provisions
under "Aviation Fuel.") All of these claims
may be for the full amount of tax that was
imposed on the aviation gasoline except for
aviation gasoline used in commercial
aviation.
Examination Techniques
The audit techniques
suggested for aviation fuels other than
gasoline may also be used for sellers of
aviation gasoline.
Before October 1, 1995,
there was no tax on fuel used in commercial
aviation. The Omnibus Budget Reconciliation
Act of 1993 (OBRA 93) imposed the 4.3 cents
per gallon deficit reduction rate on these
fuels for the first time, but the tax on
commercial aviation fuels did not go into
effect until October 1, 1995.
Keep in mind that the
exemption for supplies for vessels and
aircraft applies to international commercial
flights.
Under IRC section 4092(b),
aviation fuel may be sold at a reduced rate
of 4.3 cents per gallon for use in an
aircraft used in commercial aviation.
Producers cannot sell at
the reduced tax rate to commercial aircraft
operators after January 31, 1989, unless
such operators are registered on Form 637
(Category Y).
Effective October 1, 1997,
the 4.3-cent tax goes to the Trust Fund
instead of the General Fund.
Floor Stocks Tax
Fuel tax laws and rates
have changed many times over the past
decade. Any change in the point of taxation
or increase in rates creates a need to
impose a floor stocks tax. The most recent
floor stocks tax with respect to aviation
gasoline and other aviation fuels diesel
applies to inventories as of March 7, 1997.
This floor stocks tax was due on August 1,
1997.
Only the most recent floor
stocks tax is covered here.
A floor stocks tax is
imposed on previously taxed aviation
gasoline and nongasoline aviation fuel held
by any person at the first moment of March
7, 1997. A person holds fuel if the person
has title to the fuel (whether or not
delivery to that person has been made) at
such time. The rate is 15 cents per gallon
for aviation gasoline and 17.5 cents per
gallon for fuels other than gasoline.
The floor stocks tax does
not apply to fuel held exclusively for an
exempt use or fuel held for use in
commercial aviation.
The floor stocks tax does
not apply if the aggregate amount of fuel
does not exceed 2,000 gallons. Fuel held for
exempt use or for use in commercial aviation
is not counted for purposes of determining
the aggregate amount of fuel.
The facilities and services
taxes (communications taxes and air
transportation taxes) apply to an amount
charged for a facility furnished or a
service rendered. These taxes are reported
on Form 720 and are classified as collected
taxes. These taxes are paid by the person
who receives the service or uses the
facility, but they are collected and
remitted to the Government by the person
providing the service or use of the
facility.
Remember that the customer
is the taxpayer and the carrier is the
collecting agent.
Collected vs. Noncollected
Taxes
The essential difference
between a collected and noncollected tax is
that a noncollected tax is imposed directly
on the seller (taxpayer), who must pay it
whether or not the customer ultimately pays
it. All excise taxes are noncollected taxes
except those imposed on facilities and
services. A collected tax is levied against
parties paying for the service or use of the
facility, but the company or agency who
sells the service has the duty to collect
the tax from the parties and file the Form
720 reporting the tax.
The term "collected tax"
stems from the fact that the person
furnishing the facility must act as a
collecting agent for the tax imposed on the
person paying for the facility or service.
The person paying for the
service or facility is liable for the tax at
the time of payment. Once payment is made to
the person required to collect the tax, the
amount collected is held to be a special
fund in trust for the United States. The
amount of such a fund is assessed,
collected, and paid in the same manner and
subject to the same provisions applicable to
the taxes from which the fund arose.
If the person furnishing
the facility or service does not collect the
tax, the person who paid for the service or
the use of the facility is liable, and the
tax may be assessed directly against that
person.
The Taxpayer Relief Act of
1997 amended IRC section 4263(c) to provide
that, if the tax under IRC section 4261 is
not paid at the time the payment for
transportation is made, the tax must be paid
by the carrier providing the initial segment
of transportation that begins or ends in the
United States. Thus, the carrier is
secondarily liable for the tax on the
transportation of persons by air. This
provision is generally effective for amounts
paid on or after October 1, 1997, for travel
on or after October 1, 1997.
Transportation of
Persons by Air When the Carrier Is
Secondarily Liable
When it is determined that
the carrier is secondarily liable, the
deficiency will be proposed against the
carrier.
Transportation of
Property by Air or Transportation of Persons
by Air When the Carrier Is Not Secondarily
Liable
The duty to collect the
collected taxes is imposed on the collecting
agencies. However, the consumer or taxpayer
is not relieved of his or her liability for
the tax. Even though the collecting agency
has failed to collect the tax, liability
does not shift to the collecting agency. We
still must look to the consumer for the tax.
Generally, we will ask the
collecting agency to collect the "back
taxes" due from the customers. Most of them
try to comply.
The procedures can be found
in IRM 4742 (8-10-94).
IRC section 6672 provides
for a 100-percent penalty when the
collecting agency willfully fails to
collect, truthfully account for, or remit
collected taxes. When willfulness is
indicated, the case is referred to the
Collection Division for a determination of
the applicability of IRC section 6672.
If the Collection Division
accepts the case, it will assess the
penalty. The penalty is used as a collection
device, and no tax is assessed if the
penalty is collected.
If the Collection Division
declines to pursue the penalty, the examiner
is to proceed with the procedures in IRM
4742 (8-10-94).
IRC section 4261(a) imposes
a tax on the amount paid for taxable
transportation of any person. In the case of
amounts paid outside the United States for
taxable transportation, the tax imposed
applies only if such transportation begins
and ends in the United States. IRC 4261(b)
extends this tax to any amount paid for
seating or sleeping accommodations on or in
connection with transportation under IRC
section 4261.
The person who pays for the
ticket pays the tax. The person receiving
the payment must collect the tax and file
the return. Tax is reported on Form 720, IRS
No. 26.
For transportation on or
after October 1, 1997, IRC section 4261(c)
imposes a tax of $12 on any amount paid
(whether inside or outside the United
States) for any transportation of any person
by air for both the arrival in and departure
from the United States for international
travel beginning or ending in the United
States. This tax does not apply to any
transportation if all of the transportation
is taxable under IRC section 4261(a). Before
October 1, 1997, the tax was $6 on departure
only. Tax is reported on Form 720, IRS No.
27. See Rev. Rul. 72-107 for further
explanation.
Thus, domestic passenger
transportation and international passenger
transportation are subject to tax. The
Taxpayer Relief Act of 1997 made many
modifications to the "ticket" tax. The
following paragraphs summarize the law
before and after this change.
The tax on transportation
of persons by air is imposed on the amount
paid for transportation at the rates shown
below.
Date Travel
Begins
Rate of Tax
Dec 1, 1990,
through Dec. 31, 1995
10%
Jan. 1, 1996,
through Aug. 26, 1996
Expired
Aug. 27, 1996,
through Dec. 31, 1996
10%
Jan. 1, 1997,
through Mar. 6, 1997
Expired
Mar. 7, 1997,
through Sept. 30, 1997
10%
Oct. 1, 1997,
through Sept. 30, 1998
9%
Oct. 1, 1998,
through Sept. 30, 1999
8%
Oct. 1, 1999, and
thereafter
7.5%
For travel beginning August
27, 1996, through December 31, 1996, the tax
does not apply to amounts paid before August
27, 1996.
For travel beginning March
7, 1997, through September 30, 1997, the tax
does not apply to amounts paid before March.
7, 1997.
For travel beginning on or
after October 1, 1997, when payment was made
before that date, the 10-percent tax rate
applies.
Domestic Segment
In addition to the
percentage tax, each domestic segment is
taxed as follows:
Date of Segments
Tax Rate
Before Oct. 1, 1997
None
After Sept. 30,
1997, and before Oct. 1, 1998
$1
After Sept. 30,
1998, and before Oct. 1, 1999
$2
After Sept. 30,
1999, and before Jan. 1, 2000
$2.25
During 2000
$2.50
During 2001
$2.75
During 2003 and
thereafter
$3 multiplied by
the cost-of- living adjustment
determined under IRC section 1(f)(3)
The segment tax does not
apply when payment was made before October
1, 1997.
Definition of Domestic
Segment
A domestic segment is any
segment consisting of one takeoff and one
landing which is taxable transportation
described in IRC section 4262 (a)(1) --
(transportation which begins in the United
States or the 225-mile zone and ends in the
United States or the 225-mile zone).
Changes in Segments
If there is a change in
route between two locations on specified
flights that changes the number of domestic
segments but there is no change in the
amount charged for such transportation, the
tax is determined without regard to such
change in route. Two examples are (1) if the
plane is rerouted to another airport because
of weather before it arrives at its final
destination and (2) if the plane's schedule
is changed.
Rate on International
Travel
For international flights
beginning before October 1, 1997, the tax
applies to departures only. On or after
October 1, 1997, the tax rate on any amount
paid for transportation of any person by air
that begins or ends in the United States is
$12 for each arrival and departure, whether
the tax is paid inside or outside the United
States. The rate will be indexed to
inflation for amounts paid after December
31, 1998.
Date Travel
Begins
Rate of Tax
Applies to
Dec. 1, 1990,
through Dec. 31, 1995
$6
Departure Only
Jan. 1, 1996,
through Aug. 26, 1996
expired
N/A
Aug. 27, 1996,
through Dec. 31, 1996
$6
Departure Only
Jan. 1, 1997,
through Mar. 6, 1997
expired
N/A
Mar. 7, 1997,
through Sept. 30, 1997
$6
Departure Only
Oct. 1, 1997,
through Dec. 31, 1998
$12
Arrivals and
Departures
Jan. 1, 1999, and
thereafter
Indexed to
Inflation
Arrivals and
Departures
For travel beginning on or
after October 1, 1997, the tax applies to
amounts paid after August 12, 1997.
Alaska and Hawaii
As under prior law, on
flights between the U.S. mainland and Alaska
or Hawaii (or between Alaska and Hawaii),
there is a tax of $6 (rather than $12), and
it applies only to departures. The rate is
indexed to inflation for amounts paid after
January 31, 1998. Thus, for flights before
October 1, 1997, the tax is 10 percent of
the ticket price attributable to U.S. miles
plus $6. On or after October 1, 1997, the
tax is the applicable domestic tax rate
times the ticket price attributable to U.S.
miles plus $6 plus the applicable segment
tax.
Exception for Segments
Beginning or Ending at Rural Airports
In general, if any domestic
segment begins or ends at an airport that is
a rural airport for the calendar year in
which the segment begins, the segment tax
does not apply to that segment.
Definition of Rural
Airport
The term "rural airport"
means any airport if:
There were fewer than
100,000 commercial passengers departing
by air during the second preceding
calendar year from such airport; and
Such airport:
Is not located
within 75 miles of another airport
which had 100,000 or more commercial
passengers departing by air, during
the second preceding calendar year,
or
Was receiving
essential air service subsidies as
of August 5, 1997.
Chief Counsel issues an
annual revenue procedure that lists rural
airports. For 1997, it was Rev. Proc. 97-46
(as amended by Announcement No. 97-107).
Segments Beginning
Before October 1, 1999
The rate of tax applicable
to any domestic segment beginning or ending
at a rural airport is 7.5 percent.
Multiple Segments
When a flight involves
multiple segments of which at least one
segment does not begin or end at a rural
airport and at least one of which does, the
7.5-percent rate is applied by allocating
the amount paid based on the ratio of Great
Circle miles in domestic segments involving
a rural airport to total Great Circle miles.
A Great Circle is an imaginary circle around
the globe that divides the globe into two
equal parts. The shortest distance between
two points on a globe is a segment of a
Great Circle.
Example:
Transportation has two
segments, one of which begins or ends at a
rural airport and one of which does not.
Amount paid on January 1,
1998 = $400
Number of Great Circle miles in the domestic
segment involving a rural airport = 250
Number of total Great Circle miles = 1,200
Rural segment tax = $400 x
250/1200 = $83.32 x 7.5% = $6.25
Domestic tax = $316.68 x 9% = $28.50
Segment tax = 1.00
Total tax = $ 35.75
Taxable Transportation.
Transportation by air that begins in the
United States or in the portion of Canada or
Mexico that is not more than 225 miles from
the nearest point in the continental United
States and ends in the United States or in
the 225-mile zone. (IRC section 4262).
Taxable transportation includes layover or
waiting time, movement of the aircraft in
deadhead service, fees paid for landing,
sleeping accommodations, and any hourly
charges. (See "Air Charter," Chapter 7.) If
the domestic transportation is paid for
outside the United States, it is taxable
only if it begins and ends in the United
States.
Continental United
States. The 48 contiguous states and the
District of Columbia; it does not include
Alaska or Hawaii.
Uninterrupted
International Air Transportation. Any
transportation that (1) does not both begin
and end in the United States or in the
225-mile zone and (2) does not have a
layover time of more than 12 hours. See Rev.
Rul. 72-107, where payment was made outside
the United States.
Open Jaw Transportation
--Treas. Reg. Section 49.4264(e)-1(b)).
Round-trip air transportation is generally
considered to be two trips. When a round
trip includes international travel, the
departing and returning flights are
considered to be two separate trips. When
the return flight arrives at a point other
than the original departure point (fly from
point A to point B but return to point C) or
the return flight departs from a point other
than the destination (fly from point A to
Point B but return to point A from point C),
a determination must be made whether the IRC
section 4261(a) tax or the IRC section
4261(c) tax applies.
If the points of the "open
jaw" are within the continental United
States or the 225-mile zone, the distance
between the points of the open jaw cannot
exceed the distance of the shorter part
traveled to be considered two separate
flights. When the open jaw distance within
the continental United States is greater
than the shortest segment, the trip is
considered to be one trip. For example, New
York to New Orleans via Panama is considered
to be two flights since the open jaw (New
York to New Orleans) is smaller than the
shorter leg (Panama to New Orleans). The IRC
section 4261(a) tax does not apply to the
other flight. New York to Miami via Bermuda
is considered to be one flight because the
open jaw (New York to Miami) is larger than
the shorter leg (Bermuda to Miami). Thus,
the IRC section 4261(a) tax applies to the
trip from New York to Miami.
Examples of methods of
payment that are subject to tax unless
specifically exempted are listed below.
Cash fares: No ticket
issued.
Scrip books: Tax
applies to the amount paid when the
scrip book is purchased, not when it is
used.
Additional charges:
Amounts paid for changing the route or
destination, extending the time limit of
a ticket, changing the class of
accommodations, or providing exclusive
occupancy of a section, etc. are subject
to the tax.
Commutation or season
tickets: When a single trip is 30 miles
or more and the ticket is good for more
than 1 month, the cost of the ticket is
subject to tax. Tax is collected from
the purchaser at the time of payment,
not when the tickets are used.
Prepaid exchange or
similar order for transportation: Tax
applies to the amount paid.
Chartered conveyances:
Amount paid for the charter. (See "Air
Charter," Chapter 7.)
All-expense tours:
Taxable with respect to the portion that
represents transportation of persons.
Payments remitted to
foreign countries by persons in the
United States: Payments are considered
to be made within the United States, and
tax applies.
Frequent Flyer Miles in
General. Amounts paid after September
30, 1997, to an air carrier for the right to
provide mileage awards or other reductions
in the cost of any transportation of persons
are treated as amounts paid for taxable
transportation. For example, if a credit
card company pays a carrier for the right to
award frequent flyer miles to its customers,
the payment is taxable.
Mileage Awards Paid by a
Controlled Group. Any amount paid by a
member of a controlled group after June 11,
1997, and before October 1, 1997, for a
right described above, which is furnished by
another member of the group after September
30, 1997, is treated as paid after September
30, 1997. See IRC sections 52(a) and (2) for
the definition of a "controlled group."
Payments Not Subject to Tax
-- Treas. Reg. Section 49.4261-8
The following types of
payments are not subject to tax or are
exempt from tax:
