In general, air transportation of persons or property for compensation or hire is considered to be commercial transportation for tax purposes, and it is subject to an excise tax of 7.5% of the amount paid for the flight, plus a segment fee (collectively, “FET”). In addition, jet fuel (kerosene) used in such commercial flights is subject to a fuel tax at the rate of 4.4 cents/gallon (including a 0.1 cent/gallon Leaking Underground Storage Tank, or “LUST” tax). Jet fuel used in noncommercial flights is generally subject to a higher fuel tax (21.9 cents/gallon or 24.4 cents/gallon).
Under § 4007 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, there is a tax holiday from March 28, 2020, through Dec. 31, 2020, for (a) FET on “amounts paid” during the tax holiday, and (b) fuel tax on fuel “used” during the tax holiday (except for the 0.1 cent/gallon LUST tax).
Staff from the IRS and an explanation in the Joint Committee on Taxation’s “Blue Book” confirm that the FET tax holiday is based on the date of the payment for the commercial flight, irrespective of when the commercial flight occurs, and irrespective of whether the charter company reports deposits of FET under the regular method or the alternative method. Blue Book, p. 102 (J. Comm. on Tax’n April 22, 2020). Likewise, IRS staff have confirmed to NBAA that the tax holiday with respect to fuel tax is based on when the flight occurs in which the fuel is used, irrespective of when the fuel is purchased or paid for.
The tax holiday on jet fuel presents a tax return reporting problem. Vendors will generally continue to charge the full non-commercial rate on fuel purchased by charter companies, because the vendor does not know whether the fuel will be used in commercial or non-commercial flights. Therefore, the charter company (or the ultimate purchaser) must claim a credit or request a refund of the fuel tax paid for fuel that is used in commercial flights. Currently, the excise tax return (Form 720) and its Schedule C only provide for refunds of the excess of the non-commercial fuel tax paid to the vendor over the commercial fuel tax (4.4 cents/gallon). Therefore, the current form does not accommodate charter companies seeking a refund of the entire amount of the fuel tax, including the commercial fuel tax.
IRS staff indicate they are aware of this problem, and anticipate revising the tax forms to enable charter companies to claim the full credit for fuel tax paid on commercial flights (except for the 0.1 cent/gallon LUST tax). They expect to make this revision prior to the due date of the second quarter Forms 720 in July.
In addition, they are aware that with respect to the four days of the tax holiday in the first quarter (March 28-31), the tax forms for the first quarter did not accommodate charter companies seeking to claim a refund of fuel tax for flights on those four days. Accordingly, they anticipate providing guidance on this additional reporting problem prior to the due date in July of the second quarter Forms 720 as well.
While the CARES Act did not suspend fuel taxes for non-commercial flights (i.e. tax of 21.9 cents/gallon or 24.4 cents/gallon on jet fuel), NBAA has requested that this be considered in future relief legislation. With general aviation operations sharply decreasing by more than 70% due to the COVID-19 pandemic, relief from the non-commercial fuel taxes would incentivize operators to preserve jobs and resume flying once the aviation sector begins to emerge from the crisis. This relief would also help small community general aviation airports, which are reporting that aircraft operations and fuel sales are down by more than 50%.