There is currently a new bill in the house of Representatives (HR 4374) titled “Frequent Flyer Tax-Free Liability Act of 2002.” It seems that Congressman Gregory Meeks (D-NY) and Congressman Mark Foley (R-FL) have gotten together to introduce legislation that would codify the treatment of travel-related benefits and make them tax-free. While labeled the Meeks-Foley Bipartisan effort, we’d suggest changing the name to the Me-Follies Bipartisan Act. They say implementation of this Bill will encourage people to travel, thus helping to stimulate our stagnant economy. Here are their findings: (1) Individuals should be able to receive and use frequent flyer benefits for business or personal use without incurring tax liability. (2) Taxation of frequent flyer benefits would raise a myriad of questions, including questions regarding timing, valuation, and foreign airlines, without obvious answers. (3) Taxation of frequent flyer benefits would result in additional paperwork for consumers, airlines, hotels, car rental companies, credit card issuers, and the Internal Revenue Service. (4) Clarifying that frequent flyer benefits are not taxable will encourage people to travel and aid the economy of the United States. (5) The traveling public pays too much in taxes for travel-related services.
In the past six months we have reported on two related issues. First, on December 28, 2001, President Bush signed into law the National Defense Authorization Act for Fiscal Year 2002. Section 1116 of this law allows federal employees to keep frequent flyer miles earned on official travel. Prior to passing this law, Federal Property Management Regulations required that frequent flyer miles earned on official travel were the property of the government. In effect, this law had no taxation implications. Then, on March 4 of this year, the Internal Revenue Service announced that travelers who use frequent flyer miles that were gained from business or official travel for their personal use won’t be expected to count them as income. In its statement, the IRS noted that there has always been an unanswered question in this area (business-related earned miles). Now, since the IRS has already issued this public statement, we’re scratching our head as to why we need an official act of Congress? Again, the IRS has officially stated that frequent flyer miles are not taxable as personal income and the facts remain that no one has ever gone to prison for tax avoidance as a result of not reporting frequent flyer miles earned in the 20 years these programs have been around.
The problem is not the IRS. The problem is the Treasury Department, which instituted a federal tax (not IRS tax) several years ago on the sale of frequent flyer miles by airlines to partners. Today, that federal tax (7.5%) is wrongly (our comment only) being passed onto customers. Most of the car rental companies, the phone companies and even Diners Club Club Rewards passes this tax along to consumers (so far hotel programs who allow members to convert points to miles have resisted passing along the fee). If these two Congressmen want to do something that makes a difference, then they should forget about this proposed legislation and go after this federal tax.
It’s debatable whether or not this federal tax actually ends paying for anything related to the airline industry. As many of you know, we pay the security fee when we use free awards and free awards are not always exempt from PFCs (Passenger Facility Fees), which airports charge for each passenger who uses the airport’s facilities. True, airlines often pay this tax on behalf of frequent flyers ,but nonetheless, a fee is assessed. When you use an award, it often has all or part of three different taxes assessed on it, none of which involve the IRS and personal taxation.
Seems to us that these two Congressmen have their hearts in the right place. If any of you live in either or their districts, could you have them call us — we really want to help also. We just know a bit more about frequent flyer programs than politics, whereas it seems they know quite a bit more about politics than frequent flyer programs.