As anyone who’s ever bought an airplane ticket home for the holidays knows, taxes and fees on air travel can be substantial. We’ve written before on how much gas taxes and tolls can cost for holiday travel on roads, but taking to the skies is little better.
For my own travel home for Christmas, I paid $48.44 in taxes on a $229.76 ticket: that’s a 21 percent tax rate. But, according to Airlines for America, an airline industry group, federal airline taxes for a ticket totaling $300 average $61.49. That’s 20 percent of the ticket price, or the equivalent of a 26 percent tax.
Airline Taxes, Example Round Trip Ticket from DC to Kentucky
Base Ticket Price
Passenger Ticket Tax
7.5% of base fare
Domestic Flight Segment Tax
$3.90 per flight segment
September 11th Security Fee
$2.50 per enplanement
Passenger Facility Charges
Varies by airport; up to $4.50
Total Taxes and Fees
*$3 for Charlotte airport, $4.50 paid twice for DCA arriving and departing
The list of federal airline taxes is long: 17 different taxes and fees, in fact. Some of these taxes and fees, like the Passenger Facility Charges (PFCs) that airports levy, can be seen as “user fees,” wherein airports bill passengers for the cost of expanding airport facilities and services. On my flight, I paid PFCs in Charlotte, and both going and coming at DCA in Virginia.
The passenger ticket tax, which works like a 7.5 percent sales tax on tickets, and the domestic flight segment tax, which is a $3.90 fee on each leg of a journey, both go to the Airport and Airway Trust Fund, which pays for the Federal Aviation Administration (FAA). These two taxes can also be seen as indirect user fees. The FAA oversees air traffic control, which is essential for air travel. However, the FAA is also a major regulator of the airline industry, which contributes to higher costs: so these aren’t “pure” user fees, any more than taxes that pay for a traffic cop’s salary is a “user fee” for highways.
The September 11th Security Fee (9/11 Fee) I paid, which will double to $5 per enplanement in 2014, is also only dubiously-defined as a user fee. Revenues raised from the 9/11 Fee fund Transportation Security Administration operations, especially security checkpoints at airports. On the one hand, it is true that passengers “use” these security services. On the other hand, probably very few of us wake up in the morning hoping we get to pay $2.50 (let alone $5) to walk through a full-body scanner and then get frisked.
There are even more taxes on international flights, and numerous taxes are applied to airline fuel which are baked into the price of the ticket. Thus, with airline taxes so high and set to go higher, taxes and fees represent a major share of air travel costs. Policymakers would do well to look into the “services” being provided, and decide if they are worth the cost, before they raise airline taxes and fees further.
“Automatic gratuities” added onto the restaurant bills of large parties will be treated as wages and not tips starting January 1, 2014, as a suspended IRS ruling finally takes effect. Many restaurants add these charges to groups of 5 or 6 or 8 or more to prevent their servers from being undertipped when handling large parties.
Under the IRS ruling, Rev. Ruling 2012-18, a sharper distinction is drawn between tips and service charges. Both are taxable but tips are reported and cashed out that day. Under the new rules, to be a tip:
(1) the payment must be made free from compulsion;
(2) the customer must have the unrestricted right to determine the amount;
(3) the payment should not be the subject of negotiation or dictated by employer policy; and
(4) generally, the customer has the right to determine who receives the payment.
Automatic gratuities don’t meet these criteria, so they would be classified as service charges. Employers would have to cycle these charges through their payroll system to distribute to servers, delaying payment by up to two weeks, and factor them into hourly wage rates.
The likely result is that restaurants will discontinue automatic gratuities for large parties, to avoid additional compliance costs and to allow employees to take their tips home on the day they get them. Getting servers to work large parties will probably be harder.
The IRS views this as the latest step in their effort to crack down on underreported tip income although previous enforcement efforts (employee and employer reporting requirements and high-profile investigations) and the shift from cash to credit for most payments has ended this evasion for the most part. To the IRS, it’s just a clarification “in the best interest of tax administration.” But one that will make life a little bit harder for restaurants and their waitstaff.
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