The Federal Transportation Tax

In order to fund the air transportation system, the federal government imposes a fuel tax on aviation fuel, or in the alternative, a tax on the transportation of persons or property. Since the transportation tax is about three times as high as the fuel tax, aircraft operators generally prefer to avoid this tax, if possible.

Essentially, the transportation tax applies whenever one person provides air transportation to another person. For this purpose, a person includes an individual or other legal entity, such as a corporation or partnership.

The tax applies only where there is an amount paid for the transportation, directly or indirectly.

 

TYPES OF TRANSPORTATION TAX

 

There are three different kinds of transportation tax, all of which might apply to the same trip:

 

The Percentage Tax: This tax is a percentage of the amount paid for transportation applies to the following kinds of transportation:

(1)

Transportation of persons which begins and ends in either the United States or the 225 mile zone.

(2)

Transportation of persons or property which begins and ends in the United States and which is not a part of uninterrupted international air transportation.

Certain foreign portions of such transportation are excludible, particularly those between the Continental United States and Alaska and/or Hawaii.

 

The Segment Fee: This tax is a flat tax per segment and applies to each segment of the following kind of transportation:

(1)

Transportation of persons which begins and ends in either the United States or the 225 mile zone.

 

The Head Tax: This tax is a flat tax per person and applies to the following kinds of transportation:

*

Transportation of persons which begins or ends in the United States and is not subject to the percentage tax.

 
The tax rates are shown in the attached table.

EXEMPTIONS

As with any law, there are exemptions. In the case of the transportation tax, the two major exemptions are:

The Affiliated Group Exemption: This exemption applies where transportation is provided by one corporation to another corporation which are part of the same "affiliated group" of corporations. The exemption applies to transactions between a parent and subsidiary corporation and to transactions between brother-sister corporations which share a common parent corporation. It does not apply to brother-sister corporations which are owned by an individual. For this purpose, a corporation includes an S-corporation or an LLC which has elected to be treated as a corporation. A non-electing LLC may or may not qualify, depending on the circumstances.

The Small Aircraft Exemption: This exemption applies where transportation is provided in small aircraft which are not operating on an established line. A small aircraft is an aircraft with a maximum certified takeoff weight of 6,000 lbs or less.

In addition, there are certain exemptions which apply to helicopters and to emergency medical services.

CONCLUSION

As can be seen, there is a risk that the transportation tax will apply whenever an aircraft is used by more than one entity. In most cases, such activities can be structured to insure that the tax does not apply.