IRS: Checked Luggage Fees Aren't Taxable

Posted by: Justin Bachman on January 28, 2010

Paying to check your luggage is not a taxable event, the IRS has ruled in response to an airline’s query from last spring. That means the U.S. airline industry won’t have to share any of that cash with Uncle Sam. The top five network majors – American, Continental, Delta, United and US Airways – will collect about $1.76 billion annually from checked bag fees alone, according to a Jan. 20 report from IdeaWorks, a travel industry consulting firm. (United executives estimated this week that the company’s recent fee hikes on first and second bags should mean an extra $80 million in 2010.)

Generally, items that are taxable are those paid as a condition to receiving air transportation, according to the ruling. And if you pay to upgrade your seat to first class (or use miles to upgrade) or buy extra miles from an airline, those are taxable revenues. The airlines’ recent efforts to boost ancillary revenues instead of fares – which are taxed – has some in Congress concerned that the government may not be capturing its share of air travel commerce.

The IRS responded to the unidentified airline in September, and released Jan. 15. (UPDATE: American Airlines confirmed Thursday that it had sought the opinion “in order to discharge our responsibilities to both the government and our customers.”) You can read all ten scintillating pages of legal analysis here, although the appeal for anyone who is not a tax attorney or accountant may be limited. However, reading the extensive list of consumer financial hits – described in the communication as “services” – may induce a grin. Here’s a sample:

_ Service D allows customers to be placed on the stand-by list for an alternate flight.
_ Service E provides customers the option of purchasing food and alcoholic beverages while in-flight.
_ Service F provides customers the option of purchasing headsets to be used for in-flight entertainment.
_ Service G provides customers with baggage handling for checked luggage, including overweight and oversized baggage.
_ Service H provides customers with confirmed upgrades, paid for at the time of check-in at the automated kiosks, on certain flights.