When it comes to aviation federal excise taxes two things typically come to mind: (i) fuel taxes; (ii) taxes on “transportation” that up to this point have mainly been mostly the province of Parts 135 and 121 operators. By way of background, Section 4261(a) of the Internal Revenue Code imposes a tax on “amounts paid” for the taxable transportation of any person. “Taxable transportation” is defined in turn in § 4262(a)(1) to refer generally to flights that begin and end in the United States. The customer pays the tax and the operator must remit it to the government (on a yearly, quarterly or monthly basis, depending on the amounts at issue), under IRC Sections 4261(d) and 4299, respectively.
It was long understood that scheduled and charter carriers retained operational control of such flights, and were therefore providing the types of transportation services to which the excise tax applied. This was not often the case for Part 91 flights, however, since the owner, rather than the management company retained “operational control” in the regulatory sense. Management companies and FBOs that provided indirect support services from cleaning to scheduling were for the most part not considered to be in the taxable transportation (defined slightly differently by the IRS as the party in “command, possession and control” of the flight) business.
More recently, however, management companies, brokers and owners have come under greater scrutiny for what makes a taxable “transportation service”. In Chief Counsel Memorandum Number 201210026 (Release Date: 3/9/2012) the Service begins with a look at the concept of “possession, command and control” of the aircraft. A central though not exclusive consideration is who has control of the pilots. This makes some sense in that the pilot is a central figure in the specifics of how and when the aircraft is flown, even if it is the owner/aircraft lessee that chooses the particular mission and the intended date and time. As such, even though a flight may be flown under Part 91, the party with the greatest actual control over the pilots is more likely to be considered in “possession, command and control” of the aircraft, and therefore potentially in the business of providing taxable transportation services.
The issue then, says the IRS, is what are the taxable amounts paid for these services? The Service now considers a wider range of services than historically has been the case into the definition of “taxable transportation”. Classically managerial services including maintenance, cleaning, flight planning scheduling, administrative functions and weather services will now probably be considered to be “amounts paid” for taxable transportation subject to federal excise tax. The rationale is that these services are “reasonably necessary” for the owner to operate the plane and are therefore part of the taxable services, even though they may be indirect costs that are only tangentially related to the actual flights. It’s a question of proximity – amounts paid for a pilot probably belong in this class of services, but cleaning?
A broader class of taxable services means a greater number of people providing those services. Could a charter broker’s commission be “reasonably necessary” to procuring a taxable flight, and therefore subject to federal excise tax? A related concern, too, is who needs to collect what from whom, and does the person handling the customer’s money somehow become a guarantor that the tax makes its way to the Treasury. My broker clients, understandably a little reluctant to ask their providers whether they pay their taxes, have expressed this concern. Upon audit the IRS could theoretically view a charter or aircraft services broker as assuming this burden.
So, the Service’s new posture does raise some questions. While it remains to be seen exactly how the IRS will attempt to assess these taxes a few practical suggestions are in order:
For management companies, review your relationships with your providers. Do you have an in-house staff providing “one stop shopping” to your clients, or are you a network of specialists providing distinct aircraft services. As cumbersome as it may be, perhaps the Owner would be able to contract directly with different providers providing the “less” transportation-oriented, more indirect services.
For charter or aircraft services brokers, consider adding language to your agreements that relieves you of any concerns that taxes are being remitted by the operator. Also consider whether the value you add to the buyer-seller relationship would be considered “reasonably necessary” to the taxable service. This may be of little concern where the operator has its own sales force, but may merit more thought where you operate as any provider’s sole or major source of customers.
This is a complex area of law and your facts and circumstances may differ from others. Contact me for a consultation and assessment of your possible tax obligations and potential planning opportunities.