Airline Dodge the First Bullet

WAY Baaaaaak when the debate over Ancillary Services started. I made a noise about the issue of Ancillaries actually costing the Government money.

It seems that at least someone was listening to the old Professor.

However it seems that the IRS ruled first that these services are not part of the ticket which set the scene for a government money grab. Well the airlines have dodged the first bullet.

Sen. Max Baucus one of the senators from the Great State of Montana says FAA bill won't include bag-fee tax. The Government Accountability Office said that a tax on baggage fees charged by airlines could raise roughly $240 million each year for the Airport and Airway Trust Fund. The Senator is chairman of the Senate Finance Committee, he said that he will not propose such a tax as part of a bill reauthorizing the Federal Aviation Administration.

Dont expect this situation to last that long. I am sure that there are many States who are looking at this from a revenue perspective. With the DoT now in the process of finding ways to monitor the ancillaries - we can be assured that as soon as they figure this out - they will indeed then work out a way to tax it.

Cheers



With thanks to ChukyPita for the great image


The sure things in life are death and taxes.

Will the States Get Greedy And Use New Legislation to Tax Ancillary Services?

Just as a new standards group called OpenAxis emerges from the group aligned with Farelogix - there are a few clouds on the horizon.

The first was the hissy fit that Mike Premo of ARC had earlier this week on the slow adoption of EMD.

The other is the looming issue of taxation.

A new bill has just been introduced into the US Congress. The “Main Street Fairness Act” was formally introduced in the U.S. House of Representatives on July 1st 2010. If passed into law, it would require e-commerce companies to collect sales taxes, and thereby undoing judicial rulings and previous Administrations promises that exempted Internet and catalog retailers from collecting sales taxes in states where they do not have a physical presence. Sponsored by Massachusetts Congressman William Delahunt, the legislation ostensibly is in response to increasing pressure from state and local governments to increase tax revenues. As Ancillary Revenues are clearly subject to such taxation regimes it would cement the how a local jurisdictions could indeed demand tax.
If it is enacted, i expect a ripple out effect. The vast majority of e-commerce sites will begin collecting sales taxes, thereby reducing the perceived price advantage of shopping online.
Legislation would require sales tax collections on B2C Internet sales that are not exempt or otherwise accounted for.. The proposed legislation would require almost all online retailers to collect sales taxes in the states that adopt the Streamlined Sales Tax Project, an effort to simplify disparate tax laws and ease compliance. However it is safe to assume that there will be a period of time for adoption and their eminences (the judiciary ) will want to exert some form of stamp on this.

Interesting twist… stay tuned

Is a Fee a Tax? The Aussies now know

The Australian Federal Court ruled in court this week that a Fuel Surcharge is not a tax (even though it has been listed in the fare rules as a tax like item). As a result of the ruling - the Australian agents will get a windfall of commissions due during the time the surcharges were first filed.

Whether the ruling is appealed (highly likely) and it makes its way all the way up to the Australian Supreme Court remains to be seen. But we are now seeing that the issue of what is a fare, what is a fee and what is a tax will need to have greater scrutiny.

For the US environment - the USA Internal Revenue Service actually ruled on this last year, declaring that ancillary revenues are not a fare and not a tax. Thus opening up the opportunity for every jurisdiction where an airline product is sold (absent pure airline transportation fares) or delivered to be taxed.

As you can tell the airlines are none too pleased with this ruling. But unbundling the fare into these buckets of fees etc was hardly likely to escape the scrutiny of the lawyers and the tax authorities. Indeed anyone who unbundles their products will be under scrutiny. (er hummm GDSs - are you paying attention here?)

I would caution on too much celebrating by the agents at this point. They will of course have to pay their own tax on this!

Cheers

The US Government Has Spoken

Way back when Ancillary Revenue charges were new, I opined that there was an issue of taxation. I argued that if the original bundled ticket was taxed then the unbundled elements should also be taxed.

Well the US Government in the form of the IRS has now spoken. And guess what - the charges are not taxable.

Specifically below you will find what is and what is not taxable according to the IRS. So I have pleasure in presenting the potted version of the rules below. However this is likely to send the Congress rushing to the legislation table. if last year $2Billion was generated in these fees by US airlines and this year projected to rise to $10 Billion - all without tax - then the government is going to find that WAY to easy a target to ignore.

So for the formal Air Transportation Excise Tax - Audit Technique Guide click on the link.

Per the IRS, the following services and fees are not taxable:

• Assistance in making travel plans, purchasing tickets and requesting seat assignments, either in person or on the telephone (as opposed to on carrier’s website).
• Applying the fare paid for an unused nonrefundable ticket to a new ticket.
• Standby fees
• In-flight purchase of food, alcoholic beverages and headsets.
• Checked-bag fees, including overweight and oversized baggage.
• Purchase of airport lounge access, on daily or annual basis.
• Purchase of nonrefundable gift cards.
• Optional custodial services to children traveling without an adult.
• Fee for transference of miles to another account.
• Extending the expiration date of miles in a member’s account.
• Fee for redeeming miles for the purchase of air transportation.
• Fee for canceling and changing a ticket purchased with redeemed miles.
• Purchase of elite status in a loyalty program.
• Providing a printout of account details to a member or third party.
• Providing password protection for account inquiries made by telephone.
• Providing personalized luggage tags.

But the following services and fees are taxable:

• Enabling the purchase of upgrades that are paid for at check-in at automated kiosks.
• Enabling the purchase of upgrades to a higher class of service, at check-in or in advance, with money or miles.
• Fuel surcharges added at the time a customer purchases tickets or acquires tickets by redeeming miles.
• Mandatory custodial services to children traveling without an adult.
• A member's purchase of frequent-flyer miles for his or her frequent-flyer account or another member's account.
• A member's purchase of bonus miles for his or her account.

The government however likes to leave itself a little wiggle room.

Here is the disclaimer which means that they can change their mind...

"NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date."

And this is off IRS.GOV!!!!

Cheers

ARC Sales - Stay down

January my friends was not a blip.

But lets be clear here - we are accounting for some aberration.

While total $ value sales were down 26% you have to really look at the number of tickets and the number of days.

So the extra day accounts for 3.6% extra activity. There are other considerations if you want to split hairs such as the number of work days. But in all we should expect that transactions are off a net 15% Y/Y. The falling off in yield is another example of the issues facing everyone. The airlines and the hotels are experiencing some pretty heft yield drops.

This is now exposing a soft underbelly of politicians. IE that the taxation model comes out pretty clearly. Taxes can make up a large chunk of the price now. We have fares across the Atlantic for nearly close to what RyanAir has been proposing. We have fares on legacy carriers between European Capitals for less than Ryanair (just have a look FRA-LON).

So still not healthy. But read between the lines.

Cheers

Fuel Surcharges - part of the ticket or not?

It seems the airlines want their cake and eat it too.

Good case in point is the UK where the airlines are upsetting the Corp Travel people with their imposition of the fuel surcharge process. We have known for some time that this is a problem yet it is really only now starting to appear as a major issue.

http://www.abtn.co.uk/Confusion_over_status_of_fuel_surcharges

It seems the airlines want to treat the fuel surcharge as part of a ticket for the purposes of the rule of the ticket or in general to collect the cash and then not refund it. But not to collect or pay tax on it that is due IF it is part of the ticket.

Now perhaps will someone in the tax authorities please think about this and decide for the airlines who are clearly not thinking straight on this issue.

I have tried to find any rules on the subject of refunds of these fees and surcharges and cannot find any.

Cheers

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 .

PHEW!

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.

Cheers

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