Excise tax and frequent flyer miles | KPMG | GLOBAL

Excise tax and frequent flyer miles used for non-transportation redemptions

Excise tax and frequent flyer miles

The IRS today released an advance version of Notice 2015-76 stating that Treasury and the IRS are considering issuing regulations to exclude from the excise tax imposed under section 4261(a), certain amounts attributable to mileage awards (“frequent flyer miles”) that are redeemed for goods and services other than taxable air transportation—for example, redemptions for international air transportation, restaurant gift cards, magazine and newspaper subscriptions, free hotel nights, and items from an airline’s shopping catalog.


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Notice 2015-76 [PDF 38 KB] requests comments on issues to be addressed in the potential regulations, with comments due 120 days after publication of the notice in the Internal Revenue Bulletin (scheduled for November 16, 2015).


Section 4261(a) imposes an excise tax on the amount paid for the “taxable transportation” of any person (defined as transportation by air that begins and ends in the United States). Section 4261(e)(3)(A) provides that:

  • Any amount paid (and the value of any other benefit provided) to an air carrier (or any related person) for the right to provide mileage awards for (or other reductions in the cost of) any transportation of persons by air is treated as an amount paid for taxable transportation. 
  • The Treasury Secretary may prescribe rules that exclude amounts attributable to mileage awards that are used other than for the transportation of persons by air from the tax imposed by section 4261(a).

To date, Treasury and the IRS have not prescribed an allocation method that taxpayers (e.g., credit card companies) and collectors (typically airlines’ mileage awards programs) can apply, to exclude from the taxes imposed by section 4261(a) amounts attributable to mileage awards that are used other than for taxable air transportation. Currently, these taxpayers must pay tax on all frequent flyer miles purchased from an airline mileage awards program and then file a claim for credit or refund for tax paid on those frequent flyer miles that were ultimately redeemed other than for taxable air transportation.

Possible safe harbor, exclusion ratio

Today’s notice states that Treasury and the IRS are considering a possible safe harbor methodology—one that would allow a reduction in a taxpayer’s section 4261(a) tax base for amounts paid for mileage awards based on historical redemption data. 

Notice 2015-76 outlines how a “base period” under the safe harbor would be determined, and then how that base period would be applied to determine an exclusion ratio.  The IRS notice provides an example of how this calculation would be applied.

Notice 2015-76 also sets forth what could be possible procedures for a collector of the section 4261(a) excise tax to report the exclusion ratio to the IRS (by February 1 of the year after the close of the base period).

Comments requested

The Treasury and IRS have specifically requested comments on the following issues:

  • Is the methodology proposed in Notice 2015-76 workable for taxpayers, airlines, and other potential stakeholders and, if adopted, would it be a rule of general application instead of as a safe harbor provision?
  • Would the methodology need to be modified to take into account a longer or shorter period of historical data?
  • Would airlines (or airline mileage awards programs) be willing to share historical data with taxpayers so that taxpayers could verify the tax base upon which the section 4261(a) tax is applied when a taxpayer purchases frequent flyer miles?
  • Would, alternatively, Treasury and the IRS need to provide an allocation percentage that could be applied on an airline industry-wide basis, which Treasury and the IRS would calculate using industry-provided data?
  • How often would an industry-wide allocation percentage, if adopted, need to be updated to reflect current industry data and what is the best method to collect the necessary data?
  • Do Treasury and the IRS need to adopt a methodology not described in Notice 2015-76 and recommendations for alternative methodologies?
  • Would Treasury and the IRS need to provide a mechanism for collectors to make adjustments to the exclusion ratio to correct computational and typographical errors after the collector reports the exclusion ratio to the IRS, and how would this  mechanism work?
  • Are the reporting procedures workable from the collector and the taxpayer’s perspectives?
  • How would overpayments and underpayments of tax resulting from errors in the exclusion ratio, including whether the collector is responsible for underpayments, be addressed?

KPMG observation

Since enactment of the mileage award provision in 1997, guidance has been needed on the issue of providing an allocation methodology for mileage awards.  Not only does this issue affect the airlines as the collector of the tax, but this also affects the credit card companies as the taxpayer.  Affected stakeholders need to review Notice 2015-76 and consider submitting comments that would be useful for Treasury and the IRS to have in crafting an administrable rule that would reflect the economic substance of the transactions and the business practices of the affected stakeholders.


For more information, contact a tax professional with KPMG’s Excise Tax Practice group:

Deborah Gordon | +1 (202) 533 5965 | dkgordon@kpmg.com

Taylor Cortright | +1 (202) 533 6188 | tcortright@kpmg.com 

Michelle Prettie | +1 (202) 533 3484 | mprettie@kpmg.com 

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