You may pay to have your suitcases loaded onto a plane, but airline bags fly tax-free. That's the word from the IRS.
In a private letter ruling (that's a determination made at the request of a taxpayer, corporate or individual, on a particular situation), the Internal Revenue Service told the inquiring airline that "charges for transportation of baggage" aren't subject to excise taxes.
That's a hefty chunk of change that's going to escape tax. A recent report found that the five largest airlines will collect $1.76 billion to check first and second bags, a $117 million increase over last year.
The bag charges, as I'm sure all of you are painfully aware, started showing up as airlines looked for ways to boost income when air travel stalled during the recession. So most of the carriers turned to charging us for all sorts of things that used to be part of our ticket price, such as food, blankets -- Yes, I was on a flight where they wanted us to buy those crappy coverlets! That's just plain tacky! -- and, of course, our bags.
"We sought clarification from the IRS on issues of taxably related to ancillary fees," American Airlines spokeswoman, Mary Frances Fagan, said in an e-mail to Bloomberg. "We are obligated to make sure that we do not overcharge nor undercharge taxes that we collect from our customers for the government."
American's request for an official IRS ruling also was probably prompted by concern from some in Congress about the possibility that some flight fees, including baggage charges, mean that money isn't going to the federal aviation fund, which is replenished by airline-related excise taxes.
The industry spin (from everyone but Southwest, which still doesn't charge for the first two checked bags and uses that position as the theme for some of its commercials), is that the no-tax ruling is good not only for the airlines but also travelers, whom they say have benefited from baggage fees being separated from fares and therefore not subject to the 7.5 percent excise tax.
"It’s like going into a restaurant and the sales tax applies to the entrée, but not to other elements of the meal," said Jay Sorensen, president of the airline consulting firm IdeaWorks.
OK, that's technically true. No excise tax levy means you and I pay a little less when we fork over the fee in the hopes that our checked bags will arrive at our ultimate destination. But I still don't like being told how lucky I am that the airlines are sticking it to me when I can't cram everything into a carry-on.
And about those other ancillary flight side dishes. The IRS ruling also said that a la carte food, alcohol and headsets purchased in flight also aren't taxable.
I'm presuming, although it wasn't explicitly stated, that any in-flight blankets we buy are tax-free, too.
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