In my post highlighting the current 100% US Airways bonus for buying miles that’s open to many, John asked,

Why does US Air collect a 7.5% gov’t tax for shared miles promo? Delta does not. The feds DO NOT collect a tax for shared/transferred miles.

When you ‘share miles‘ (transfer your miles to someone else), US Airways charges you:

$0.01 per mile plus a processing fee of $30 and a tax recovery charge of 7.5%

(Emphasis mine.)

Should US Airways be charging tax, when nobody else does? Or is it a junk fee, lining their pockets, under the guise of a tax?

But I Thought Miles Weren’t Taxed? What’s This 7.5%?

Most frequent flyer miles are considered rebates, not income, so the IRS doesn’t tax them. And regardless of whether the miles could be considered income, the IRS has long said that the issues involved are so complex that they don’t pursue tax enforcement—even if there’s a plausible reading of the law that would allow them to do so.

That general approach doesn’t apply to buying the right to award miles to a frequent flyer account, for which there is explicitly a tax.

The Taxpayer Relief Act of 1997 created Internal Revenue Code section 4261(e)(3). Under that section, payments for the right to award frequent flyer miles are subject to the same 7.5% federal excise tax as domestic airline tickets. (And back in 2011 when the ticket tax expired for a month, so did the tax on the sale of miles.)

Any amount paid (and the value of any other benefit provided) to an air carrier (or any related person) for the right to provide mileage awards for (or other reductions in the cost of) any transportation of persons by air shall be treated for purposes of subsection (a) as an amount paid for taxable transportation, and such amount shall be taxable under subsection (a) without regard to any other provision of this subchapter.

And that’s been interpreted to mean that there is a 7.5% excise tax on the sale of miles by US airline frequent flyer programs. (It is not imposed on non-U.S. programs or hotel programs.)

When airlines sell you miles directly, they add in 7.5% to cover the cost of the tax. When you transfer American Express points, Amex will add a fee to offset this tax. Chase covers the tax themselves on points transfers (where they’re buying you miles).

When a credit card company or a rental car company (or other mileage partner) buys the right to award miles, they pay the tax to the airline selling the miles (which then pays the IRS).

The tax has generally been interpreted as applying to the sale, not the transfer, of US airline miles.

The tax is imposed on the right to award the miles, not on the receipt of the miles. But the company buying that right (credit card company, rental car company, etc) may choose to pass that cost along to the consumer as American Express does in part, and as rental companies generally do.

Other Airlines Don’t Charge This on Transferred Miles

That’s why United and Delta do not charge a tax recovery fee on transferred miles (they only charge it for purchased or gifted miles). (The only tax Delta imposes is a 5% GST for residents of Canada on the $30 processing fee only per their terms and conditions.)

And American doesn’t charge this 7.5% on transferred miles, either.

US Airways adds 7.5%. American AAdvantage does not. In fact, I haven’t found any airline other than US Airways which collects the 7.5% on miles transferred from one account to another.

Is US Airways Keeping the Money?

US Airways imposes a “tax recovery charge” and not a tax, since the tax isn’t actually imposed on the consumer in any case.

In other words, it’s a fee charged at the discretion of the airline, presumably imposed because they have to pay taxes. But since they do not represent it as “the tax amount” it’s not obvious this amount is even being remitted to the federal government.

Perhaps US Airways has had an idiosyncratic interpretation of IRC section 4261(e)(3), and is actually remitting taxes on transactions other airlines do not. Or perhaps they’re keeping the money.

I reached out to find out what’s going on here. All American’s spokesperson would say is, “We follow all applicable tax laws. Other than that, we can’t get into the details of the taxes.”

That Leaves Key Questions Unanswered

• Why does US Airways charge this 7.5% fee when the tax would not appear to apply, when no one else charges it, and when American doesn’t even?
  
• Since they are charging it, are they actually paying the tax (likely unnecessarily) or are they representing it as tax recovery while keeping the money and not paying tax?

There does appear to be a story here, although they’ve not been willing to clarify.

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