18 September 2008

Airlines Defrauding Governments out of Millions?

Well that got your attention didn’t it.

If this blog entry doesn’t send you to sleep you are a better person than most! But I do encourage you to read this. It is a pretty detailed analysis of the taxation system. It should be considered that we as involuntary tax payers are being charged fees and the airlines who are benefiting from the imposition of charges are actually diverting money away from the government.

My supposition seems to be that in the rush to address revenue schemes of various sources, some airlines may be defrauding the US government. How so? Kudos to Professor A&P for bringing this one to my attention.

I am no lawyer and certainly no expert on the US tax code. But as a US tax payer, I think that the US government - for example and others also - could be cheated out of millions dollars in airline ticket taxes. This may not be the most popular statement, and no one in an official capacity may really want to examine this issue that carefully. With airlines now unbundling their services, things that we use to pay for that was part of the air fare that WAS taxed is no longer taxed, especially for domestic US travel. A little background. The current funding mechanism for the AATF – this is the federal tax revenue to fund infrastructure that supports air transport in the USA - (http://www.faa.gov/airports_airtraffic/trust_fund/ ) is however pretty specific that unless the charge is directly related to the ticket then it is not taxable. Fine. But I am not as I said earlier a lawyer (and I am really am not one nor ever want to be one) however I could argue that a requirement to pay for a service which is ancillary to my basic ticket and which I cannot avoid (like the first bag charge) could be construed as covered by the ticket cost. But then again I could be wrong.

Let me give you a simple example and its impact. We were not charged extra to check a bag in days gone by. The service was included as part of the base fare of the ticket that was taxed 7.5%. Now the service is no longer part of the base fare that is taxed. United Airlines is now charging (as are several other airlines) $15.00 for the first checked bag and $50.00 for the second checked bag. For the average Joe, UA would charge an additional $130.00 for a round trip. Voila there is no airline tax being collected on that amount. Since they didn’t actually lower the fare for this but used it to raise their revenues the airlines are effectively defrauding the tax authorities (specifically the FAA) out of that taxable income. There are other items now that have been spun out of the basic ticket price. But you get my point. What about other things that use to be included in the cost of a ticket that they now charge for – reservations, meals, etc etc

Judging by the current programs alone – United claimed in their first attack on the ancillary revenue pot that the second bag revenue @$25 would have yielded in excess of $100 million gross additional revenue. At the current tax rate of 7.5% domestic ticket tax that would be $7.5 million that has now escaped the US taxman. (Note I am speaking of the specific US domestic airline tax here). At the current new program charge scheme that taxation gross number has probably escalated to over $20 million for United alone on this single line item.

I consulted with several folks on the matter who process tax fees on a regular basis. And there are a number of “tax” charges that are not indeed taxes yet are calculated as such. Here are some good resources on the subject which hopefully you can use to further educate yourself. Clearly when you see the boxes on Kayak, Orbitz, Expedia or even the airlines direct sites – you could be lulled into believing that the charges are all taxes.

Rick Seaney who runs FareCompare.com has lots of lovely notes on fares. He really is a fare geek! http://rickseaney.com/2007/09/28/tax-free-domestic-airline-ticket-party/ .
The UK CAA has a nice little explanation on their website on the matter: http://www.caa.co.uk/default.aspx?catid=589&pagetype=90&pageid=2449.
One of the most comprehensive descriptions of the whole arcane ticket and tax process I have seen is on the Advantage Agency group pages. This is an association of travel agents in the UK. In this entry they actually show the raw GDS screens and how the taxes are charged and implemented. Here is the full link: http://www.advantagetravel.co.uk/Travel-Articles/Airline_Taxes.html

The insidious nature of this is that everyone is confused. (See my post earlier on obfuscation http://t2impact.blogspot.com/2008/09/trickery-obfuscation-is-this-politics.html#links ).

I could get really obtuse and give you a whole host of different explanations but just for illustration look at the YQ or YR type of “tax and surcharge” code. This is used as a catch all for things like fuel surcharges. Delta for example is very clear about this although the information is buried DEEP inside their website and can only be seen easily once you are in the purchase flow: https://www.delta.com/planning_reservations/plan_flight/online_reservations/fares_ticketing_rules/taxes_fees/index.jsp
Here is one airline’s YQ table. (this is a PDF file from BMI): http://www.flybmi.com/downloads/trade/BD_YQ_Intent_Trade_2008-09-04.pdf .


So one last comment is that since the gross airline departure ticket taxes are likely to decrease in total revenue terms due to a reduction in passengers flying, as a result the FAA in the US in my example is likely to experience a short fall in its collections. I am not a fan of big government and collecting extra taxes but addressing this problem could be away to make up that short fall. I am sure now that I will be labeled a tax and spend kind of guy. My sentiment here though is that I don’t like stealth taxes. I don’t like complicated taxes and I don’t like being charged for things that are not fairly applied. We should all be paying a simplified tax and surcharge supplement to the ticket. CLEARLY SEPARATED INTO TAXES AND AIRLINE IMPOSED FEES It seems hypercritical of ALL the taxation authorities that we are constantly bombarded with extra fees and charges because we the travelling public are a captive audience. The Europeans have now implemented a new regime of a total tax amount. Perhaps the US should do the same and be clear and transparent about it. I know – dream on.


Timothy J O'Neil-Dunne
Managing Partner - T2Impact Ltd
Global Travel eBusiness
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