The IRS is expected to propose new rules that will mean an increased tax burden on airline and hotel loyalty programs, which will in turn reduce the value of points in those programs.
I noticed a brief mention this week in Politico
Four major travel associations today will send a letter to Treasury Secretary Jack Lew on the future of loyalty programs, calling for him to “reject including any projects related to the elimination of long-standing tax treatment of customer loyalty programs under r §451.” The groups — Airlines for America, U.S. Travel Association, the American Hotel & Lodging Association and American Resort Development Association — write that the IRS is currently considering a plan that would “negatively impact loyalty programs” by making changes to the accounting methods.
“Let us be clear, the IRS’ proposal to alter the tax treatment of loyalty programs will impose a significant new tax on existing and future loyalty points that travel customers enjoy and rely upon,” the letter reads. “… Ultimately, any change or clarification of loyalty program accounting should be made through the legislative process, not IRS promulgation.”
I hadn’t heard anything about this, so stuck this on the list of things to dig into over the holiday weekend. (It’s getting to be a long list.)
And then I was contacted by a reporter asking me about this, and I had to admit that I knew very little. But my interest was certainly piqued and I began digging.
First, the letter sent to the Treasury Secretary itself contains some clues.
Unfortunately, the Internal Revenue Service (IRS) currently has under consideration a plan that would negatively impact loyalty programs. On August 9, 2013, the U.S. Treasury released the 2013-2014 Priority Guidance Plan (“business plan”). Included in the business plan was a project aimed at making changes to loyalty program accounting methods prescribed by the Treasury Regulations under Code Section 451 (“§451”). As you may know, travel companies, including hotels, airlines, and many others, have complied with settled law in the area of loyalty program accounting for decades. These same companies, and those they serve, are now under the threat of wholesale changes to the longstanding tax treatment of their loyalty programs.
So it looks like the concern is over accounting treatment. It’s not that they’re going to ‘tax your miles’ but rather that they’re going to tax the programs.
Price Waterhouse Coopers offers some insight. (.pdf)
Based on public comments by government officials, this project, which likely will be proposed regulations, is intended to provide a single set of rules for all types of advance payments. Guidance issued by the IRS in recent years suggests that the IRS views the existing rules under Reg. sec.1.451-4, which address the treatment of trading stamps and premium coupons, as made obsolete by the economic performance rules under section 461(h). In order to address this issue, along with the differences in the existing rules under Reg. sec. 1.451-5 and Rev. Proc. 2004-34 for advance payments, the IRS appears to be contemplating one set of rules that would govern the timing of revenue recognition for advance payments and loyalty programs.
At the same time, these four industry groups are talking about a new tax on the loyalty programs.
I am not an expert in taxation or regulation. I think the argument is that when the airline or hotel awards or sells points, they book an expense and accrue a liability related to the redemption of those points. And it’s only when the redemption actually occurs or points are expired that the income off of the transaction is fully recognized.
The IRS is presumably looking to speed that up, tax the transaction on the front end. That would mean more taxes paid sooner, an increased burden on airline and hotel loyalty programs. But that would largely change the timing of the tax, rather than creating a new tax.
Since no rules have yet been promulgated, it’s difficult to ascertain what the IRS is likely to propose. I suppose it’s possible there could even be a new, separate tax as seems to be suggested here.
I’m not sure it matters either way, it certainly looks like pending IRS rulemaking will push for an increased tax burden on loyalty programs. And that likely means a lower value for the points in those programs.
We aren’t there yet. The IRS will come out with a proposed rule, there will be a notice and comment period, and the IRS will then consider and respond to those comments and potentially amend the rule before it goes final (if anything makes it that far).
But the timing of the letter from industry to the Treasury Secretary suggests they believe this is a live issue. And if the IRS wants to tax points as they’re awarded (effectively at the 35% corporate income tax rates) that could be a very big deal, and one we’re going to have to watch.