Taxation of Miles
 

Saw a reference to a chapter headed Taxation of Frequent Flyer Miles in Randy's Official Frequent Flyer Guidebook.

What is the possibility that discussions such as that here on the value of FF miles will ultimately allow the IRS to set a value on miles?

Bruce

I would say very near zero.

The slightly longer answer is that taxing such miles would be an incredible nightmare. Undoubtedly the cost would exceed the benefit.

There are innumerable posts on this. You might want to start with "taxation" or "IRS" and run the search engine.

Boy, I wish I could tell you. If I could, I probably wouldn't because I'd be on a plane to Vegas to get the biggest marker I could and go on a sprts wagering binge. http://www.flyertalk.com/forum/wink.gif.

Seriously, though, I think it will never happen in the near future. Two many powerful interests involved. besides, if Congress is going to not tax internet sales because it's unpopular (no other good reason), there's no way they'd do this.
Plus, the valuation methodology would be nuts. Finally, taxation would kill these reward programs. Think about the value of the benefits we as frequent travellers get.

Take this as a hypothetical.

Traveler A, a platinum SPG member, had earned two free weekends worldwide by staying 10 nights at the lovely Four Points Omaha South for $59 a night. Traveller A decides he or she will take a loved one to the beautiful St. Regis Dana Point, scheduled to open in August. These nights are free, and because of his or her elite status, A and his or her friend/loved one are put in a gorgeous suite, valued at a rack rate of $2500 a night.
Additionally, A bought 2 round trip tickets on Continental to Orange County for $300 each. But, because he or she is a gold member, they are upgraded to FC, the cost of such a ticket being $2500 each.

Thus, arguably, for a cost basis of about $1200, A and his or her guest get about $10,000 in retail value goods for a cost of $1200. If A was in the 39% bracket, this would theoretically be taxable income of about $8800, leaving A with a tax burden of about $4000 just for this trip alone.

As you can see, such accounting would make such a "free" trip no longer free. You would see elite travellers turning down upgrades because they would not be affordable. This would decimate these marketing programs, and all of the associated industries which have built up over the years. Because of the difficulty in accounting for frequent travel benefits and because real taxation of miles and other benefits as income would destroy the industry, I seriously doubt such a plan will be seriously considered.

Of course, I'm not psychic, or I'd be on the plane to Vegas. http://www.flyertalk.com/forum/wink.gif
P.S.
I'm also not an economist, and by no means a tax expert nor a travel expert (if there is such a thing). Nor obviously a spelling expert. But this is my 5 minute take on the question at 11:30 at night with a slight temperature. No legal advice given. http://www.flyertalk.com/forum/wink.gif

[This message has been edited by BoSoxFan45 (edited 05-01-2001).]

I think you could come up with a very easy formula for taxing the value of frequent flyer miles. You could tax them on a worth of 2 cents a mile, or whenever used, the value of the service provided at the lowest advance purchase that the product was offered by the vendor. For example, if you cash in 25,000 miles for a free ticket to go from PDX to BWI the value would be what the lowest advance purchase fare for that market has been using past averages--in this case it would be $198.00. This would be easy to understand, and figure out the tax you would have to pay.

I do not agree that this will never happen. There has allready been movement torwards this with the taxation of miles being sold by the airlines to third parties. It is only a matter of time before taxs on mileage will happen.

Tango, you don't adress what this would mean to the future of these programs.

Also, you offer 2 different criteria for valuation. First 2 cents per. Second, on redemption. But both of these things may happen in separate years.

How do you deal with someone like me, who only uses miles for last-minute trips or other things that are exceedingly expensive? Or how about if I get 50,000 CO miles from a $200 ticket because of bonuses, then convert those into 100,000 Hilton points and stay in Hawaii for a week.

Or do you charge me for the 2000 miles I earn on a last-minute R/T Y fare to DCA that costs me $1500? I have lost money on this. My basis is $1500, but my "income" is only about $40, based on the .02 per mile formula you propose. Do I then get to deduct the other $1460?

This is preposterous. A phenomenal hassle.
Plus a potentially huge expense.

The end result is that I would no longer be a member of a frequent traveler program. I think others would not do so either. I have no need to expose myself to additional tax liability and hassle.

Tax these things, and I likely never come back to this board, and refuse miles. It would hurt the travel industry incredibly much.

I am not in favor of taxation on miles but the IRS has other ideas. Since they are currently taxing the selling of miles, they have opened the door to taxing the usage of miles. The two examples I stated above were just examples. The most likely one to be implemented would be the 2 cents a mile. It would not matter what the "cost/value" the ticket/stay/rental would have cost you but rather the number of miles you used. This keeps it clean and simple.

The collection of mileage/point usage could easily be done whenver you redeem miles. At the time you claim your reward, you would need to provide your SS number and this information would be forwarded to Uncle Sam. Talk about Big Brother http://www.flyertalk.com/forum/eek.gif

If you participate in any of the telephone offers for "free" mileage or car rental mileage, you are allready paying this tax--just look for it on one of the tax lines in your bill/invoice.

Even though I would hate to pay the tax on miles, and would fight it tooth and nail, the tax bill would still be much less than the value you would get from using the miles.

Also keep in mind that Congress is right now proposing a five-cent tax on each email sent from the US. In most versions of this legislation, bulletin board posts will be legally considered emails. I know this is true, because one of my cousin's friends knows somebody who has a roommate who works on Capitol Hill.

He also said that the email tax will probably pass right through Congress along with the Frequent Flyer Income Tax that is also in its final stages of revision. Since 120000 miles = a $12000 int'l FC ticket, Congress is setting the value at a dime per mile.

http://www.flyertalk.com/forum/wink.gif

There is no tax on the frequent flyer miles themselves, but on the cash value of the ticket that is issued when those miles are redeemed as award travel.

Easy enough of an explanation?

[This message has been edited by ETOPS01 (edited 05-02-2001).]

i wouldn't worry about this one a whole lot right now.. the tax currently payed is the transportation tax charged to those who provide miles in exchange for services, i.e. your long distance provider, car rental agency, etc.. and has little if anything to do with valuation for income purposes.. the existing tax has nothing whatsoever to do with the income tax..

implementing a tax on frequent flyer miles isn't real workable for a multitude of reasons.. already highlighted here is the basis/valuation aspect.. everyone rightly values their miles differently, especially with the recent continental and hilton bonuses providing for literally tens and even hundreds of thousand of bonus miles.. everyone redeems their miles for different things, ranging from upgrades to free trips to goods and services.. the fact that you wouldn't pay $8500 for that first class ticket to australia and yet barely have a second thought blowing 150,ooo miles to get there in first has little if anything to do with the valuation..

the accounting for the miles is another huge problem.. what if i decide to use my miles to obtain an airline ticket for my father or my brother?? the irs doesn't tax gifts.. (ok they do in some instances but not in most).. would they then start taxing me on award redemption that is a gift?? probably not.. would this then open up a huge loophole whereby people would trade awards?? probably..

the frequent flyer miles is sometimes viewed by the irs as a discount on the ticket price against future travel.. with all the bonuses that one could get on a single flight to japan or singapore now this would blow away their whole system of valuation.. i.e. without a discount for the ticket price paid, what is the basis for the miles?? it cost you something to get them, for which a deduction should be allowed..

what about all the miles currently out there?? a recent figure puts this at 3.5 trillion miles.. i'd love to see the irs try and form a basis for these miles.. without a basis they can't really tax the benefit..

when is an award redeemed?? if i transfer 20,ooo starwood points to 25,ooo airline miles have i redeemed an award and should i pay tax on it?? or do i pay tax on the 25,ooo miles when i redeem them for my coach ticket which could have a value of anywhere from $208 to $1800 depending on when i purchased it?? or should i only be responsible for 80% of the value of this ticket because 20% is unearned compensation and thus taxed differently than regular income..

can you imagine the uproar from the airlines, hotels, car rental companies, etc. whose marketing departments would have to come up with all sorts of new programs to keep one loyal?? although it would be nice as free upgrades would probably come back, albeit unconfirmed until the flight attendant comes back to you in seat 56F and invites you to come to the empty first class cabin on your flight lga-pbi.. or maybe the airlines will just take delta's example one step further and remove the first class cabin altogether and not have to worry about miles or upgrades or anything else that might allow them to retain loyalty and instead become a fast bus service..

sorry i rambled a bit.. btw: i'm not an attorney, nor do i have nearly enough knowledge of the ins and outs of the tax code for you to rely on anything i wrote here for much more than what a print out of it might be worth.. although your local congressman would probably love to hear any ideas on the topic you have..

I think one of the primary disincentives to creating a tax on frequent flyer miles is the fact that our legislators are some of the greatest beneficiaries of fat frequent flyer mileage accounts. Our legislators aren't too keen on creating a new tax which will impact them pretty severely.

I feel assured that our miles are in a tax-safe shelter.

One of the problems with such a tax is that the frequent flyer miles are considered to be in the nature of a rebate, which is not taxable.

Of course, this applies only if you are paying for the flight that earns the miles. If your employer is, and letting you use the miles for personal uses, the IRS could consider this a benefit of employment and thus taxable.

The e-mail tax thing is an idiot e-mail urband legend thing which is crap. I would hope that you realized that, but thought that this note should be attached just in case people out there are gullible.

Another thing to keep in mind: I recently paid close to $140 in taxes on a ticket. The government is getting their cut of our travel already, technically speaking, taxing our miles would be an illegal form of double taxation.

Like it or not you get double taxed all of the time. I could cite numerous examples but it is to depressing.

An urban legend? Really?

Yes,it was one such message that actually prompted my inquiry:

It was from a Canadian who said that Canada was already taxing miles received from business travel that was tax deductible. Apparently the business just includes a value of the miles as part of your income.

But the IRS doesn't have to tax the flyers, just the business. They can treat it as a rebate to the business which has to be deducted from their deductible expenses. I think that the IRS has actually tried some variant of this in Florida.

Also I had my own hassle with the IRS in deducting miles as a donation. They finally let me claim the donated miles as a deduction, but only after a hassle and proving that I had earned all the miles on my own paid travel. They didn't really allow it, they just said they weren't contesting it as of now.

I don't think taxation of flyer miles earned on tax deductible flights is at all impossible, particularly if it now the practice in other countries.

Bruce

Come on now. This is one of those Urban Folklore things flying around. If you believe this one, you would love the one about forwarding and email to 1000 people and Bill Gates will send you $10,000, or free gift certificates from the GAP. Don't be so gullible.

This is going to happen. A friend of my roomates brother-in-law lives next door to a guy that works just down the street from the Capitol.

They are going to tax FF Miles and all kinds of other rebates. When you go to Kroger and get a 2 for 1 on Potatoe Chips, the second bag will be defined as a freebie, which you then have declare it on your 1040 form as income.

(send this to 100 friends and Bob Dole will send you a dozen Viagra Pills -taxable of course)

How many degrees of separation is that??!!

My Proposal if Congress should attempt to tax FF miles:

When in the course of human events, it becomes necessary for one People to dissolve the Political bands which have connected them with another, and to assume among the Powers of the Earth, the separate and equal Station to which the Laws of Nature and of Nature's God entitle them, a decent Respect to the Opinions of Mankind requires that they should declare the causes which impel them to the Separation.

WE hold these Truths to be self-evident, that all Flyer Talkers are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Elite Statuses.

I have a dream that one day all Flyer Talkers will receive upgrades without begging, that the children of Elite Status members and the children of Airline & Hotel CEOs will hold hands....

O.K., I have no idea where I'm going with this - I may have lost my mind today. Maybe I'm going crazy, maybe I need to do a mileage run or something.

See what the talk of taxes does to me!!



------------------
Ken in Sacramento

Ken: Pleased to see you submitting facts to a Candid World.

Give me your tired, your hungry, your poor;
The wretched refuse of your teeming gate areas;

Then again, congress has been notorious for passing all kinds of legislation then exempt themselves from it (Gee, it was earned on government business...) http://www.flyertalk.com/forum/mad.gif

RAD

If anyone still believes in the $.05/email tax, see http://www.snopes2.com/inboxer/pending/email.htm
(this is the Urban Legend reference site - usually, when my mother sends me an email, the response includes a URL from this site http://www.flyertalk.com/forum/smile.gif )

The funniest place this legend came up was in the Lazio-Clinton NY Senate debate! The moderator asked about it! You gotta love the Internet.

Just a couple of comments.

1) Canada does not tax miles for flights which are tax deductible. This is nonsense.

2) One FT'er mentioned that the cost must outweigh the benefit. Absolutely. There are 100 variables which go into the equation. Think of the Int'l flyer, who earns this 'revenue' in a place other than the USA. There might be a better fit for thirty odd countires which the US has tax treaty agreements with, but what about the rest of the world.

There was a gentlemean from PIT who connected in Toronto on a flight to Edmonton last Wednesday with me. This gentleman would have to file Canadian tax forms, plus a special form outlining himself as a US resident with CDN earned revenue, so that the CDN goverment could pass this info to the IRS for consolidation with his US tax return. God forbid he travel any where other than Canada throughout the rest of the year.

How many million Int'l travellers are there with permanent residence in the US? Just one of 100 detremintal financial adjustments in this analysis

3) As a marketer,my team would develop a different program for loyalty and key customer retention which is non-taxable.

Another resource to go with usoftie's link:

http://www.stiller.com/hoaxes.htm


It debunks those e-mail "warnings", chain letters, etc., More importantly, it tells which ones are NOT hoaxes.

You're my new hero. LOL. http://www.flyertalk.com/forum/smile.gif

If the IRS were to tax this, then taxation of manufacturer coupons would not be far behind. The IRS should leave it alone, and I do not see it happening for a good while, if at all. Just my two cents worth, and hope that they don't tax it either!

In Washington State, Coupons are allready taxed. When you use a coupon on an item, the sales tax is computed on the original price, not the price after the coupon is redeemed.

One other example:

You buy a new car in Washington State and get taxed roughly 8% sales tax. When you sell the car to someone else, that person will again pay 8% sales tax on the transaction. This sounds like double taxation to me since the original amount of the car price was allready taxed when the original owner bought it.

Taxation of Frequent Flyer miles was brought into law in Sweden a few years ago.

If you earn FF miles from a trip that your employer paid for, any benefit you take from those miles is taxable as a fringe benefit. That is the law in Sweden.

Fortunately or unfortunately, depending on your point of view, the law is virtually impossible to enforce.

The coupon is not taxed, but the goods are. You just happen to use the coupon as (partial) method of payment. The coupon is an alternative to cash, check,charge, etc.

You will not see a line item on your receipt with tax against the coupon, only against the goods purchased.



[This message has been edited by NoStressHere (edited 05-06-2001).]

No Stress Here:

If the coupon is issued by the store where you are buying the product, your sales tax is computed on the net price. Otherwise you pay sales tax on the pre coupon price!

When I use a coupon (ET) to bring down the price of a ticket, the federal tax is reduced to reflect the lower cost of the ticket. If the Federal Government adopted Washington States Sales tax apporach, everyone would pay tax on the full amount.

I allready pay Federal Income taxes that I would hope goes to pay for the general cost of operating government. This should include the cost of consular services abroad, Passports, customs and other sevices. As it stands now, I have to pay for these things each and every time I use them.

The tax code is not about fairness or true value, it is about getting revenue from the least path or resistance.

Lets hope they never tax FF miles but to think this will never happen is not being a realist.

No wonder why they are still selling beachfront property in Arizona and Nevada! I still have my five acres in Pahrump, waiting for California to slide off into the ocean.

But seriously, FF miles accrued or redeemed as a direct result of the puchase from the entity providing the service are not taxable as they are a portion of the purchase contract,therefore included in the purchase price. However, any benefit derived by a third-party transaction, (i.e. Capital One or other type of mileage program separate from that of the vendor, or one for which no consideration was offered read 'price was paid' such as Greenpoints, Milespree, etal.) is taxable at the time a service is provided (read 'ticket is issued') as no direct relationship between the purchaser and service provider exists. The service is being purchased by the third-party provider and not the person receiving the benefit.

I am not going to pull out my Financial Accounting Standards Bulletins, but this has been covered in a FASB Statement within the past couple of years.

Re: Five cent tax on e-mails. I know, how completely moronic. If I hear this one more time from a purported "expert" who has the inside track, I think that I will throttle the poor moron on the spot.

-And a nail left in a can of Coke will dissolve overnight! Hot water freezes faster than cold water! There was this guy, and, and, he was attacked by an albino alligator from the NYC sewer. I swear! My uncle's neighbors' dog was once pet by this lady who knew the guy that was attacked!

If the coupon is issued by the store where you are buying the product, your sales tax is computed on the net price. Otherwise you pay sales tax on the pre coupon price!

yep.. this makes some sense.. think about it this way.. if the store offers you a coupon, the price is actually lowered, i.e. they receive only $0.75 instead of the full $1.00 they have marked the item as selling for.. so you are only charged SALES TAX on the $0.75 because this is what is being paid in total for the good.. on theother hand, if the manufacturer is giving you a coupon for the same $0.25 off the product, the store is still being paid $1.00 for the product (actually closer to $1.08 with processing fees figured in) it's just split between you and the manufacturer.. since making the manufacturer pay the sales tax would impose a ridiculously high overhead on their processing cost of the coupons, i.e. they would have to have a database of sales tax rates in each county or division of a state and figure it out based on that leading to a reduction in coupons, they simply have you pay the sales tax the the full purchase price of the product as this is what the storw will forward on to the taxing authority..

You guys are WAY too serious. http://www.flyertalk.com/forum/tongue.gif

The email tax legend is, of course, the Granddaddy of all Internet-borne folklore. Variants of "Bill 602P" have been around at least as long as the Usenet (anyone remember alt.folklore.urban and alt.folklore.college?).

I'm still LMAO at Hillary and Lazio providing such serious responses to it!