The possibility that frequent flier rewards and other loyalty programs will soon be taxed has filled the blogosphere just as summer travel takes wing. But the end-of-travel-as-we-know-it scuttlebutt is already heading down the runway before it's even got clearance. Here's the deal: Such a tax is possible but very unlikely in the near future. And any changes will likely include the accounting of such programs under Section 451 of the tax code.
Here's the back story.
The U.S. Treasury's 2013-2014 primary guidance plan (2nd quarter update) includes this agenda item on Page 27, No. 12, under the Tax Accounting section: "Regulations under §451 regarding advance payments received for goods and services, including amounts received in exchange for the sale or issuance of gift cards, trading stamps, and loyalty points that can be redeemed for goods or services." (Section 451, as you know, is named the "general rule for taxable year of inclusion.")
In late May, four travel industry groups—Airlines for America, U.S. Travel Association, the American Hotel & Lodging Association, and the American Resort Development Association—wrote the Treasury that the travel industry has "complied with settled law in the area of loyalty program accounting for decades. These same companies, and those they serve, are now under the threat of wholesale changes to the longstanding tax treatment of their loyalty programs", according to an excerpt from The PointsGuy blog.
"Let us be clear, the IRS' proposal to alter the tax treatment of loyalty programs will impose a significant new tax on existing and future loyalty points that travel customers enjoy and rely upon", the excerpt says. The groups also believe that any changes should come from Congress and not the IRS.
A Treasury spokesperson told AccountingWEB in an email that the groups' letter "makes assumptions about the direction of a proposal that's in the very early stages."
Let's face it, any taxation effort will run the gauntlet of lobbyists and well-muscled trade groups, as this letter indicates.
"Whether it will come to be is a question of whether the IRS will be able to withstand the opposition and if Congress will intervene", says tax attorney Julian Block in New York, a former IRS attorney.
If it happens, it won't be soon, he adds. The IRS likely will request comments from the public. And "many, perhaps most, comments will be asking the IRS something like 'Why do you hate puppies and children?'" Block says.
Let's remember that the tax code allows the government to tax just about anything with some exemptions, such as an inheritance, gift and portion of a home sale.
But Block, who has frequent flier points, already raises questions: If your miles expire after you pay the upfront tax bill for their value, what happens? Do you apply for a refund? And if you use your miles toward a non-travel item, are you taxed on the value of that item?
In the meantime, we'll offer a suggestion: It's summer. Go take a vacation and use up those rewards.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.