Dictionary definition: An "excise tax" is a tax that is measured by the amount of business done (not on property or income from real estate).
Aviation Usage: Aircraft operators providing transportation services to paying customers are required to collect a federal excise tax (FET) of 7.5 percent of the amount paid for such services, plus a flat rate for each domestic flight segment.
Playing It Smart: Business aircraft owners run the risk of triggering FET liability if their operations are structured improperly. This could be a six or seven figure mistake that pops up in an IRS income tax audit. The IRS looks for situations where a taxpayer is receiving payment for providing transportation services. As a result, if a company owns an aircraft, has "possession, command and control" of it in the IRS's eyes and makes the aircraft available to others, any payments made for such use are susceptible to FET. Unless properly structured, FET could even apply to cost-sharing arrangements between corporate affiliates. In many cases the solution is very simple -- give the user of the aircraft "possession, command and control" through an operating lease. Payments made from the lessee in that situation to the owner/lessor are not for transportation services, but rather for use of an aircraft. This solution also keeps you in compliance with Federal Aviation Regulations that prohibit a shell entity from having operational control over an aircraft (the so-called "flight department company" problem). The individuals running a company with FET problems can be personally liable for uncollected FET through the "trust fund recovery penalties" law regardless of the limited liability protection normally associated with business entities. FET can apply to private aircraft activity even if it is not commercial or officially charter.