On August 5, 2011, legislation was enacted to retroactively extend the expired Federal Transportation Excise Tax (FET) to September 16, 2011. In accordance with instructions from the Senate Finance Committee, the IRS is providing a grace period from the prior expiration date of July 23 through August 7 during which relief will be granted for FET that was not collected due to its expiration on July 23. However, beginning on Monday August 8, the IRS expects that airlines will resume collection of FET. The following is a general explanation of the legislation reinstating the Federal Transportation Excise Tax (FET) on August 5, 2011 and does not constitute an opinion regarding any particular transaction or set of facts.
The Federal Transportation Excise Tax (FET) is imposed generally on domestic air transportation service at the rate of 7.5% of the amount paid for such service plus a tax (currently $3.70) for each passenger on each flight. International fights to or from the United States are generally subject to a tax (currently $16.30) for each passenger. FET funds the operation of the FAA.
FET was scheduled to expire on September 30, 2007, but it was extended 20 times for a few months at a time while Congress debated legislation relating to FET and the FAA. This legislation is generally referred to as “FAA Reauthorization.” Before yesterday’s legislation, the most recent extension of FET set July 22, 2011, as the date on which FET expired. Since Congress failed to extend FET prior to July 22, it expired at midnight on July 22.
The disagreement in Congress that led to the expiration of FET arguably can be traced to a change in National Mediation Board rules by Obama-appointees. The Board oversees labor relations in the air and rail industries. The rule change would allow a union to organize at a company upon the majority vote of the employees who cast votes, rather than a majority of all employees. The Republican majority in the House of Representatives felt that this important and contentious change should be considered as part of the FAA Reauthorization legislation and responded by including a provision to the House bill to extend FET (H.R. 2553) that would remove several airports from the Essential Air Services (EAS) program which subsidizes certain rural airports. The Senate refused to accept this EAS provision, and Congress and the public were preoccupied with the debt ceiling stand-off. Therefore, the House bill to extend FET was not adopted by July 22.
FET Extension Legislation Adopted August 5, 2011
Most members of Congress left Washington, D.C. on approximately August 2 shortly after the debt ceiling crisis was resolved. This left Congress in “pro-forma” sessions throughout August with only limited ability to pass legislation. In view of the potential damage to the FAA’s operations and the economy as a whole of cutting off more than $1 billion of tax revenue to the FAA, a deal was reached under which the Senate on August 5, 2011, passed the House bill (H.R. 2553, known as the “Airport and Airway Extension Act of 2011, Part IV”) to extend FET until September 16, 2011. Because it was in “pro-forma” sessions, the Senate adopted the legislation under a “unanimous consent” procedure. The bill was promptly signed by the President.
FET is Imposed Retroactively, Subject to a Grace Period
When FET expired on July 22, air carriers generally stopped collecting FET at 12:01 a.m. on July 23. Based on § 4261(j) of the Internal Revenue Code, it was generally expected that passengers who purchased plane tickets before July 23 for flights on or after July 23 would be entitled to refunds of the FET collected when they bought their tickets. In addition, many people expected that the reinstatement of FET would be accompanied by a transition rule, possibly modeled after the transition rule that applied when FET was previously reinstated in 1997 after a lapse (The Airport and Airway Trust Fund Reinstatement Act of 1997, P.L. 105- 2, § 2(e)(2)).
However, H.R. 2553 was initially passed by the House prior to July 22, with the expectation that it would simply extend the July 22 expiration date with no lapse in FET. For that reason, H.R. 2553, § 2 simply extends the FET expiration date to September 16 and does not provide a transition rule to deal with any lapse and reinstatement. Since the legislation was passed by the Senate under the unanimous consent procedure in a pro-forma session, it was passed by the Senate in the same form as it was passed by the House.
Read literally, the new law would apply FET retroactively to July 23, meaning that all of the airline tickets sold after July 23 at 12:01 a.m. without collecting FET from customers would nevertheless be subject to FET. In view of the obvious administrative impossibility of collecting FET on these tickets, Senate Finance Committee Chairman Max Baucus sent a letter to IRS Commissioner Shulman encouraging the IRS—
to utilize all your discretion and authority to extend relief for passengers and airlines with respect to ticket taxes that were not paid or collected because of the lapse and provide the industry a three day period of time to restart processes to collect the taxes.
In response, the IRS issued a press release on August 5, 2011, explaining that since the reinstatement of FET is retroactive (except for tickets bought during a grace period beginning July 23), there will be no refunds of FET on tickets bought before the expiration on July 22 for flights after that date. A copy of the IRS press release is attached. This eliminated the concern over whether air carriers or the IRS would have to issue refunds to passengers for such tickets.
In addition, the IRS press release explains that airlines have a grace period from Saturday July 23 through Sunday August 7 during which time they will be granted relief with respect to FET that was not collected due to the lapse.
This grace period would appear to apply to FET that was not collected on amounts paid on a cash basis to buy tickets during the grace period from July 23 to August 7, except that if the flight occurred prior to the expiration on July 22, then the grace period would not apply. In contrast, amounts paid to buy tickets before July 23 or after August 7 would be subject to FET, irrespective of when the flight occurs.
The IRS press release explains that the IRS will issue future guidance. The following are several possible issues that the IRS might provide guidance on:
- Will the beginning and end of the grace period (12:01 a.m. July 23 and 12:01 a.m. August 8) be determined under local time or Eastern Daylight Time?
Based on the interpretation of effective date statutes for other tax laws, we would anticipate local time. However, this grace period is left to IRS’ discretion. Therefore, IRS would need to confirm that local time applies.
- Will the grace period be available only to “airlines,” or will it also be available to charter operators and business aviation arrangements such as time sharing arrangements?
The IRS press release discusses the grace period in terms of “airlines.” Charter operators and business aviation arrangements may not have the same sort of administrative difficulty collecting excise taxes from passengers as airlines. On the other hand, some charter situations may present administrative difficulties in collecting FET on amounts that have already been collected during the grace period.
- If the grace period is available to charter operators and business aviation arrangements such as time sharing arrangements, will the grace period only be available to taxpayers that can establish that the lapse in the excise tax extension during the grace period “caused” them to be unable to collect the FET.
It would appear to present an unnecessary level of complexity and confusion to require charter operators and companies in other business aviation arrangements to make the determination of whether the lapse in FET “caused” them to not collect FET from a passenger.
Will FET Expire Again on September 16, 2011?
The current extension of FET is through September 16, 2011. Congress returns to Washington, D.C. in the first week of September and will have about a week to pass another FET extension. Since the current deal to extend FET through September 16 did not resolve the underlying issues regarding FAA Reauthorization, the extension of the September 16 FET deadline may be contentious. Hopefully, with the recent media attention to the problems caused by the expiration of FET and the absence of a debt ceiling stand-off, Congress will not let FET expire again on September 16.