Frequent-flier miles are so widespread today that they can almost seem like another form of money. Frequent-flier mile awards have even become an issue in some divorce and estate cases. The federal government has considered taxing frequent-flier miles.
After careful thought and research, the IRS studied the matter and decided the expense of monitoring and enforcing a tax on frequent-flier miles would be too much of an expense for the government. They also took into consideration the fact that imposing a tax on frequent-flier miles would be very unpopular with the millions of travelers (voters) who use their miles every year.
Congress has found one way around taxing the mileage holders directly and openly, and has inflicted a hidden tax on frequent-flier mileage. The tax is imposed on “industry partners” like hotel chains and car rental companies that offer miles to their customers.
When customers cash in their miles for airline tickets, the companies owe tax on the value of the transaction. There is no surtax if the miles are redeemed for hotel rooms, rental cars and so on. The clear purpose of the law is to tax air travel. Some frequent-flier partners, hotels for example, are eating the tax while others are passing it on to consumers.
The moral of the story is, taxes are paid on frequent-flier miles awards, but you may not see it up front.
Randy Petersen of InsideFlyer, published this article for Bottom Line Books.