In a recent program manager technical assistance memorandum—these are from the National Office of the Office of Chief Counsel to IRS program executives and managers—the IRS addressed whether premium seating upgrades (such as for premium economy seats) are subject to the air transportation excise tax.
blue seats in economy class passenger section of airplane
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Code § 4261(a) imposes an excise tax (a transaction tax) on the “amount paid for taxable transportation”; the tax is 7.5% of the amount so paid. Now, this excise tax is to be paid by the person making the transportation payment, and § 4291 provides that the person receiving the payment is to collect the tax.
Taxable transportation, as relevant here, basically means transportation by air that begins and ends in the United States.
So, the issue is whether the additional fees paid for premium economy seating constitutes taxable transportation. The memorandum actually starts off by noting that term “premium economy seating” is not uniform throughout the airline industry, but can include, generally, more leg room (compared to a standard seat), a larger seat, additional perks (such as free food and drinks), or a combination of those.
Critical to the Service’s analysis was Treasury Regulation 49.4261-7(c), which provides that, “Amounts paid as additional charges for changing the class of accommodations, changing the destination or route, extending the time limit of a ticket, as ‘extra fare’, or for exclusive occupancy of a section, etc., are subject to the tax.”
Here, the Service determined that the premium economy upgrades constitute an “extra fare,” because everyone needs to have a seat on the plane, and if you purchase an economy ticket, but desire to be transported the destination in a premium economy seat, the passenger “must pay an additional fee to be transported in such manner.” Thus, that additional fee is an added charge for transportation, and is therefore an “extra fare.”
Even if the additional fee for premium economy were not considered an “extra fare” or a change in class of accommodation, the Service held that such fee still relates directly to passenger transportation and is subject to the tax. In sum, the Service concluded that “the additional fee paid by Passenger is subject to the air transportation excise tax, regardless of whether the premium economy seating is located in the economy cabin or in a separate cabin.”
I think it is important to highlight footnote 4 of the memorandum, which notes that “This written advice does not consider or address ‘complimentary’ upgrades to premium economy seating for passengers with status in an airline’s frequent flyer program or redemptions of frequent flyer miles for upgrades to premium economy seating.”
The memo is IRS Document Number PMTA-2019-11, “Taxability of Additional Fee Paid for Premium Economy Seating,” and you can read it here.
Note, this is just a summary of the memorandum, and these advice memoranda cannot be use or cited as precedent.