Table of Contents
- Chapter 1: Introduction to the Aviation Market Segment
- Chapter 2: Return Filing and Deposit Requirements and Blind Credits
- Filing Requirements
- Deposit Requirements
- Electronic Deposit Requirements
- Electronic Federal Tax Payment System
- Federal Tax Deposit Coupons
- When To Make Deposits
- 9-Day Rule
- Alternative Method (IRS Nos. 22, 26, 27, and 28)
- 14-Day Rule (IRS Nos. 14, 60, 62, 73, 74, 59, 75, and 76)
- Delayed Deposits
- Amount To Deposit
- Safe Harbor Rules
- Requirements To Be Met
- The Look-Back Quarter Liability Safe Harbor Rule
- Exceptions
- The Current Liability Safe Harbor Rule
- Blind Credits
- Chapter 3: Fuel Taxes
- Chapter 4: Collected Taxes
- Chapter 5: Transportation of Persons by Air
- Chapter 6: Commercial Airlines/Scheduled Flights
- Chapter 7: Air Charter
- Chapter 8: Corporate Flight Departments
- Chapter 9: Tour Operators and Travel Agencies
- Chapter 10: Air Transportation of Property
- Appendix: Synopsis of Tax Rules
- Glossary
Chapter 10 - Air Transportation of Property
Introduction
IRC section 4271 imposes a tax on amounts paid for taxable transportation of property by air, but only if they are paid to a person engaged in the business of transporting property by air for the person. (Profit is not a motive).
IRC section 4271 imposes a 6.25 percent tax on property being transported within the United States and its boundaries. The tax applies to amounts paid to an air carrier by a freight forwarder or express company for the transportation of property by air.
The amount paid includes actual amounts paid for the flights plus any payments made for crew expenses such as pilot meals, lodging, waiting time, deadhead time (empty plane returning to base), sales taxes, landing fees, parking, and any other amounts related to the charter flight.
The user tax on air transportation of property imposed by IRC section 4271 applies to all users. It is reported on Form 720, and deposit requirements apply.
Liability for Tax
IRC section 4271(a) provides that the tax applies only to amounts paid to persons engaged in the business of transporting property by air for compensation.
The term "property" does not include excess baggage accompanying a passenger traveling on an aircraft operated on an established line.
The term "transportation" includes layover or waiting time and movement of the aircraft in deadhead service.
The term "taxable transportation" is defined in IRC section 4272 as transportation by air that begins and ends in the United States.
If the payment is made outside the United States and no tax is collected, then the person to whom the property was delivered is liable for the tax.
The tax does not apply to amounts paid for transportation partially or entirely by air that (1) begins in the United States and ends outside the United States or (2) begins outside the United States and ends in the United States.
The domestic portion of an international cargo flight is not taxable.
For payments made outside the United States, collection of the tax is to be done by the person furnishing the last segment of the air transportation.
The tax on transportation of property by air does not apply to amounts charged for the non-U.S. portion of a flight from the continental United States to Alaska on either a nonstop flight or a flight with a scheduled stopover in Canada beyond the 225-mile zone. However, if the flight includes a scheduled stopover within the 225-mile zone, only the portion of the flight from the stopover point to the Alaskan border can be excluded from the application of the tax. (Rev. Rul. 75-27)
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Exemptions
The exemptions applicable to other excise taxes, such as communications taxes, do not apply to the taxes on transportation of property by air.
The 6.25 percent air cargo tax does not apply to amounts paid for the transportation of property by air if the transportation is furnished on an aircraft having a maximum certificated takeoff weight of 6,000 pounds or less, unless the aircraft is operated on an established line. See IRC section 4281.
The affiliated group exemption under IRC section 4282 also applies to the transportation of property by air. See the discussion under "Transportation of Persons."
Computation of Property Tax
Excise tax is imposed only on the amount paid to a person engaged in the business of transporting property by air for compensation as defined in IRC section 4272.
Amounts paid for accessorial services for transported property provided by the air carrier (either directly or through an independent contractor) are taxable if (1) such services can be provided only by the airline directly or indirectly, and (2) the charge for the service is applicable to all those using it. For example, if the service can be provided by a freight forwarder, the amounts paid for the service performed by the air carrier are not considered amounts paid for the transportation of property by air, but only if the charges for such services are separately stated.
Some accessorial service charges are for:
- Collections made C.O.D.,
- Terminal handling service,
- Packing a shipment, and
- Stopping in transit.
Terminal handling and shipment packing accessorial services performed by the air carrier are services that, by their nature, could be performed by a party other than the air carrier. It is held that amounts paid for these services are not subject to the tax imposed by IRC section 4271 if stated separately. (Rev. Rul. 71-398, 1971-2 C.B. 373)
Stopping in transit accessorial service is directly related to the transportation; it is a service that can be provided only by the carrier rendering the transportation service. Amounts paid for this service are subject to the tax imposed by IRC section 4271.
The rates for air transportation of property per IRC section 4271(c) are listed below.
For transportation beginning:
- December 1, 1990, through December 31, 1995 = 6.25 percent
- January 1, 1996, through August 26, 1996 = expired
- August 27, 1996, through December 31, 1996 = 6.25 percent
- January 1, 1997, through March 6, 1997 = expired
- March 7, 1997, and thereafter = 6.25 percent
For transportation beginning between August 27, 1996, and December 31, 1996, the tax does not apply to payments before August 27, 1996.
For transportation beginning on or after March 7, 1997, the tax does not apply to payments made before March 7, 1997, unless one member of a controlled group made the payment to another.
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Examination Techniques
Examination techniques are listed below.
- In examinations of large companies, note that most are publicly held and issue annual reports to their stockholders. Reviewing these reports for 1 or more years will give important information about the taxpayers.
- Another source of information on large companies is the Securities and Exchange Commission Form 10K (annual report and related documentation) if the form is required to be filed. Large companies may produce their own newsletters, which are valuable tools for learning about changes in company functions and everyday business practices. Large companies may also produce trade magazines or other publications.
- Interview not only tax managers but also individuals who deal with the daily operations of the aircraft, such as chief pilots, maintenance personnel, and scheduling agents when appropriate. In Coordinated Examination cases, who you can interview may be limited. Be aware of the disclosure rules.
- Reconcile total property transportation tax collected per book to the tax on the Form 720 to verify that all tax collected has been remitted. Explain discrepancies.
- Reconcile adjustment items on the Form 720 to verify that the airline is entitled to the adjustment. Review corresponding accounts for blind credits.
- Review the general ledger and question the nontaxed revenue accounts to verify that the accounts do not contain taxable property revenue.
- Review liability accounts, paying attention to all sources of tax, especially any unusual debits to the account. Reconcile the liability at the end of the last quarter to ensure that the accrued liability is correct.
- Airlines may pay tax based on historical records with a corresponding reversal the next month. Verify that the correct reversal is made and determine that the estimates used are historically accurate.
- Make sure the companies are using only one method of taxation during the quarter, either the collected tax method or the alternative method or "billing method." See Treas. Reg. sections 40.6302(c)-1 and 40.6302(c)-3.
- Exemptions usually allowed to various organizations or governmental agencies are not allowed for this tax, which is considered a user charge. Verify that exemptions were not granted to state or local governments, the United States and its possessions, diplomats, nonprofit educational organizations, or human organ transplant teams.
- Review all refund claims filed on Form 8849, Form 843, and Form 4136. Request supporting workpapers and verify that each claim is allowable.
- An integrated company (having both air and ground business) must calculate the tax by allocating revenue between ground and air. Ensure that the carrier allocates correctly its nontaxable ground cost to taxable air cost. Erroneous allocations may cause an understatement or overstatement of tax. (An overstatement of tax cannot be refunded to the carrier unless the carrier has refunded the amount to the customer or has obtained the customer's permission to claim the refund. See IRC section 6415.)
The methodology consists of complicated cost accounting systems that require detailed examinations of cost centers to determine whether the formulas are consistent with a proper allocation of the costs. To examine such business practice, considerable knowledge of the company's business practice is necessary. Flowcharts, charts of accounts, access to computer files, and an experienced computer audit specialist are a must on such exams.
Direct air cost, direct ground cost, and supplemental or other costs must be correctly allocated to derive the correct amount of tax. When there are both air/ground or supplemental costs are incorporated in dedicated expenses, a study must normally be made of these cost centers if the integrated company has not made allocations in the original computation.
An area that requires scrutiny is the allocation of costs for sorting facilities known in the business as "package sorting facilities" or "super hubs." Another term used in the business is "terminal handling." On the books, it is known as "terminal handling charges." Such charges, which represent substantial costs to these companies, have a substantial effect on the allocation.
It is important to review Rev. Rul. 80-53, 1980-1 C.B. 252 on the terminal handling charge issue. Underlying this revenue ruling is a conclusion by the Department of Justice that the charges paid by the Postal Service were accessorial nontaxable charges because, under the facts in the particular case, it was held that (1) the charges were not for services that could be provided by the air carrier and (2) the charges were separately stated.
Many integrated companies are claiming that their terminal handling services or package sorting facilities are identical to those in the Postal Service case. Such cases must be determined on the basis of each company's facts and circumstances and must meet the two requirements raised in Rev. Rul. 80-53.
All supplemental air/ground costs must be excluded from the ratio to arrive at a correct excise tax rate. Some examples of these supplemental costs are international cost, cost of sales, administrative expenses, corporate expenses, and computer cost. Pay close attention to international cost since these expenses may be substantial and can easily be lost in ground cost.
- Remember that only the ultimate purchaser of aviation fuel is entitled to the refund or credit if cargo taxes are collected and paid over to the Government.
- Larger cargo companies have a direct pipeline to the airports at which they purchase bulk fuel tax-free or at a tax-reduced rate using Form 637. Be sure these purchases are not included with any credits claimed for away-from-home-base, tax-included purchases.
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Sources of Information
Sources of information include:
- Abstract listings,
- FAA listings,
- Airline Annual Reports and SEC Forms 10K,
- Telephone yellow pages, newspaper advertisements, etc.,
- Advertising brochures,
- Tours of airports in your areas or interviews with the president or owner of the airport,
- Federal Aviation Regulations (FAR), and
- Trade Associations.
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