Headwinds Still Blowing In IRS Battle Over Aviation Taxes

June 12--The Internal Revenue Service has granted relief to some flight services but is still at odds with the Alaska Air Carriers Association and the state's congressional delegation over taxes and audits the Alaskans claim have been arbitrarily applied.

IRS Commissioner John Koskinen wrote in a letter to Sen. Mark Begich dated May 30 that the agency is extending excise tax exemptions for flightseeting and day tours through the end of the year. Originally implemented for just several weeks in March, the exemption had already been extended once through the end of June. It is now effective until Dec. 31.

The extra relief time will give air carrier operators time to figure out if they should be applying the tax, according to Koskinen.

The letter followed a May 15 meeting between Begich and the IRS chief.

Begich has led the Alaska delegation's two-year battle with the IRS over the excise tax issue. He, along with Sen. Lisa Murkowski and Rep. Don Young have demanded the audits be stopped until it is made clear to the flight service operators how the tax should be applied.

For qualifying flights, a $4 excise segment tax is applied for each leg of a flight, along with a 7.5 percent tax on each charged fare on a scheduled flight. On nearly all flights that a per passenger excise tax is not charged, a 19-cent per gallon fuel tax is applied.

Alaska Air Carriers Association government affairs coordinator Jane Dale said she spoke with Alaska IRS officials June 6 and was told that "safe harbor" from audits requested by the association for carriers that determine they should be applying the tax and begin to do so will not be granted.

However, "they do believe their staff in Alaska is going to be busy working on other things and they won't be initiating new audits but there is no moratorium," formally on the audits, Dale said.

Since 2010, eight Alaska flight service businesses are known to have been audited or are in the process of being audited for application of the federal aviation excise tax, according to the association.

Of the businesses audited, three have been sold or closed, and others have taken out loans to cover tax liabilities that have approached $2 million in some cases, Air Carriers Executive Director Joy Journeay has said. It is unclear why the audits started, as many of the flight services had been operating the same way for decades, she has said repeatedly.

The air carriers claim that it is unclear when the taxes should be applied. Many in Alaska do not fly traditionally scheduled flights and routes, and subsequently have not charged their customers for the tax.

Some carriers have found it difficult to determine when they are exempt for flying small aircraft, designated by the IRS as those under 6,000 pounds gross weight, but by the Federal Aviation Administration as those under 12,500 pounds maximum gross weight.

Dale said carriers offering walk-up service and those with mixed fleets often don't know which plane will be used until after the seats are sold or how much the plane weighs, making it difficult to correctly apply the tax.

Further complicating matters, Dale said the IRS classifies all turboprop aircraft -- such as some de Havilland Beavers, a popular bush plane -- as jet-powered and therefore worthy of the excise tax regardless of weight.

Begich has asked Koskinen that the IRS use FAA guidelines and terminology, which the carriers are familiar with, to clear up the mess.

In his letter to Begich, Koskinen wrote that the internal revenue code does not provide coordination between the agencies regarding taxes and that the FAA is a safety-based organization that doesn't deal in funds.

"Since the 1950's, the Congress has made dozens of reauthorizations and amendments to the statutory provisions for air transportation excise taxes, none of which require the IRS to rely on the FAA's rules and regulations," he wrote.

Begich's spokeswoman Heather Handyside wrote in an email to the Journal that the senator is pleased to have an open dialogue with the IRS, but that "he is far from satisfied with their response to date."

According to Handyside, Begich is waiting -- along with the Air Carriers Association -- for a response to the association's request for clarifications on tax implications in specific fact patterns and scenarios.

Dale said she was told by IRS staff that there it is unclear as to when a response will come.

In a June 9 letter to the congressional delegation members, Air Carriers Association leader Journeay asked for terminology consistent with that used by the FAA; a moratorium on audits "until the language is clear and defensible;" and forgiveness by the IRS for current audit findings and protection from past excise tax discrepancies until clear regulations are in place.

Dale noted that the main goal behind adhering to FAA language for taxes is to simplify the situation for all involved, not avoid paying.

"There's a sense that the carriers are in total disagreement with the IRS because they don't use FAA terms, but it's really kind of a misnomer," she said. "The issue isn't that they don't use FAA terms and that (the carriers) are mad about it; I mean they're going to pay their tax obligation and they're happy to pay their tax obligation if they understand it."

Carriers wishing to apply for an excise tax credit or refund can do so using IRS forms 720, 720-X or 8849, according to the agency.

Copyright 2014 - Alaska Journal of Commerce, Anchorage

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