Tax Refunds Sought On Unused Flights

Have you bought a non-refundable airline ticket and not used it? In addition to being out the price of the fare, you also lost what you paid in federal taxes on the ticket.

The IRS doesn't refund the 7.5% excise tax on the price of the airline ticket or the $3.70 tax imposed on each leg of the flight, because the taxes are applied when the ticket is bought rather than when the flight is taken.

That means you're out about $35 in taxes on the $364 price of an average round-trip ticket in the U.S. last year.

Some consumer advocates say that should change so passengers can collect possibly tens of millions of dollars in tax refunds for trips they never take.

Jack Corbett of AirlinePassengers.org is one of them. Corbett has pressed lawmakers on the issue for years and suggested last month that a Transportation Department advisory panel for consumers should ask Congress to change it.

"It irritates passengers who have purchased non-refundable fares on tickets that they don't use that Treasury keeps all of the federal ticket taxes that have been prepaid by the passengers," Corbett said.

"The amount of money the (U.S.) Treasury keeps from prepaid and unused taxes is really large," he said. "It can be as much as $50 on a long-haul flight."

Nobody publishes the number or value of canceled non-refundable tickets. But the excise tax for all tickets last year yielded $10.2 billion, according to industry group Airlines for America.

"Now I wonder how much money I have left on the table over the years," says Joyce Gioia, a management consultant from Austin who flies frequently.

The issue is even more significant for companies with large travel budgets, because taxes would add up on numerous cancellations of non-refundable tickets.

"This is an issue of concern going back years for corporate travel managers," says Kevin Mitchell, chairman of the Business Travel Coalition, a group for corporate travel managers.

Not refunding the excise tax is long-standing IRS policy. It's not a decision by the Transportation Department or the airlines, which collect the taxes and pass the money on to Treasury.

"The airlines are not the bad guys in this instance," said Ruth Wimer, a Washington tax lawyer and certified public accountant at the firm McDermott Will & Emery.

In a 1989 ruling, the IRS said that excise taxes could be refunded in the same proportion that a ticket price is refunded. As a result, there would be no tax refund with a non-refundable ticket.

"The fact that the transportation never takes place does not affect the taxability of the payment," Paul Kugler, then-associate chief counsel of IRS, explained in a 2001 letter responding to a congressional query.

"The tax that is collected but not refunded is to be paid over to the government," he said.

A group of passengers demanded in a 2004 federal lawsuit a refund of taxes on non-refundable tickets that go unused. But in February 2007, the First U.S. Circuit Court of Appeals upheld the dismissal of the case.

"We, too, conclude that the plaintiffs are fruitlessly endeavoring to fly in unfriendly skies," the court said.

The policy gets trickier, however, with other federal charges on airline tickets.

The Transportation Security Administration fee, which is $2.50 for each leg of a flight and capped at $5 each way, can be refunded if the passenger makes a request. The TSA on its website directs passengers to the airline to seek a refund.

Airlines reported refunding about $100 million in security fees last year, says TSA spokesman Dave Castelveter. The TSA says it doesn't know how much of that was for non-refundable tickets.