The Wall Street Journal
THE MIDDLE SEAT
By SCOTT MCCARTNEY
Another Reason Fliers May Feel Like Victims
Uncle Sam Takes Levies, Fees Even on Unused Tickets; 'Taxation for No Reason'
July 1, 2008; Page D1
Like many fliers, Jay Shecter ended up with nonrefundable airline tickets he couldn't use last year. So he tried to get the taxes and user fees refunded on the two tickets he had on two different airlines.
Request denied. Both AMR Corp.'s American Airlines and UAL Corp.'s United Airlines refused to refund the taxes and fees. Mr. Shecter had to pay a so-called Passenger Facility Charge for each airport he was departing from, though he wouldn't be using the facilities. He also had to pay the federal excise tax on his canceled tickets, even though he wasn't using the air-traffic-control services those taxes fund. And he had to pay the Sept. 11 security screening fee, even though he wasn't going through security screening.
The government is "confiscating fees for services not performed," says Mr. Shecter, a personal financial consultant in Nashville, Tenn., and the practice "represents to me a nasty, backdoor method of taking money from our pockets."
Many consumers share his outrage, but because of the way federal regulations and laws are written, they have no recourse. U.S. airlines, for their part, say they aren't keeping the taxes and fees; they have to forward them to government agencies even when customers don't fly.
"It's unethical, immoral, it's stealing, and it's unjust," says Paul Phillips, a frequent traveler. "Taxation without representation is one thing, but taxation for no reason is quite another."
Taxes and fees make up a sizable portion of air tickets, running as high as several hundred dollars on expensive international tickets. Last year, taxes and fees on U.S. domestic flights averaged $50 per ticket, with an effective tax rate of nearly 16%, according to a study by the aviation division of Daniel Webster College in Nashua, N.H. (The average domestic ticket cost $363 last year, including the $50 in taxes and fees, the study found.)
Many foreign airlines refund taxes and fees and even hefty fuel surcharges, currently $200 or more for many trans-Atlantic flights, when travelers cancel nonrefundable trips. Singapore Airlines, Air France, Lufthansa and British Airways all say they refund all taxes, fees and fuel surcharges even when they don't refund fares on nonrefundable tickets. "Just the fare itself is not refundable," says a Lufthansa spokesman.
For airlines, refunding the taxes and fees actually showcases to consumers what a large percentage of tickets those expenses are -- an issue that airlines have been harping on for many years. But in the U.S., aviation tax legislation and federal rules say taxes and fees are refunded only when tickets are refunded. When consumers have to eat unusable tickets, government agencies pocket the taxes and fees.
Fuel surcharges domestically are considered part of the fare, and aren't broken out for the consumer to see. U.S. airlines don't refund fuel surcharges on international flights unless the fare is refundable.
Airlines don't disclose how many nonrefundable tickets never get used, but industry officials say the numbers are sizable. That's one big reason airlines overbook flights, after all. The vast majority of U.S. airline tickets -- estimates run as high as 90% -- are nonrefundable.
Most carriers give consumers a year to use up credits on nonrefundable tickets if they cancel their plans before departure and pay a penalty -- now up to $150 for domestic tickets at some U.S. carriers and $250 for international trips. After the tickets expire, airlines record the profit as "other revenue," lumping it with sales of frequent-flier miles and other sources of income.
The Internal Revenue Service, which administers the 7.5% excise tax and $3.50 per-flight-segment fee, says federal rules published in 1989 state that the taxes attach at the time payment is made. Thus when tickets are refunded, taxes get refunded. When they aren't, taxes get paid. "The fact that the transportation takes place at a later date or never takes place does not affect the taxability of the payment," the IRS rules state.
But there is confusion within the government itself. A spokesman for the Department of Homeland Security says that the post-Sept. 11 security fee of up to $10 per round-trip ticket, initiated in 2002, is refundable. "If the ticket purchaser requests a refund of the Sept. 11th security fee collected, the air carrier must provide the requester with a full refund of the fee," says DHS spokesman Christopher White.
Airlines, however, say they don't refund that fee, or any other charged on domestic tickets. By law, they do have to refund some international fees, such as fees charged on international travelers for customs and immigration services -- but only if consumers ask.
The Federal Aviation Administration oversees the collection of Passenger Facility Charges, which airports levy to pay for new terminals and airport improvements. The PFCs get charged every time you board a plane, up to $4.50 per airport and a maximum of $18 on a round-trip ticket. Like the IRS, the FAA says the fee gets charged "at the time of sale," regardless of whether the passenger ever actually uses the facility, and refunds are made only when there's a change in a traveler's itinerary. "Failure to travel on a nonrefundable or expired ticket is not a change in itinerary," the FAA regulation says.
Asked why consumers shouldn't get their money back for services they don't use, an FAA spokeswoman said, "That's the way the regulation is written."
Airline officials say that refunding small amounts on many canceled tickets would likely cause them to incur costs. They also note that airports and agencies often have costs even when travelers cancel.
"The expectation is that you will travel, so the government and airports must staff the airports for that expectation," says American spokesman Tim Wagner. "They do provide the service, whether the traveler shows up or not."
Yet airlines don't pay landing fees for flights that they cancel -- the closest equivalent to the PFCs that passengers pay.
Joakim Karisson, a professor at Daniel Webster College's aviation division who has studied ticket taxes extensively, says ticket taxes and fees, including the federal excise tax, are generally considered user fees because they are designated to pay for specific functions, such as helping to fund the FAA and its air-traffic control functions. None of the money goes into the general tax fund.
He says the argument from government and airlines that services must be provided whether travelers show up or not has merit, as does the travelers' view that user fees ought to be based on actual usage. The bottom line: "I support the principle that user fees should reflect the costs of the services provided, which means, ideally, user fees should not be charged to passengers who do not travel," says Prof. Karisson.
Write to Scott McCartney at email@example.com
URL for this article: