Abstract

... Since frequent flyer programmes first appeared in the early 1980s, the agencies charged with the administration of their nations’ income tax laws have struggled with the question of whether—and if so how—to tax employees who earn frequent flyer points (or ‘miles’) on employer-paid business trips, and who eventually redeem those points for personal travel rewards (or other personal consumption services or goods). This article describes and evaluates the ways in which three agencies—the Internal Revenue Service (IRS) in the USA, the Canada Revenue Agency (CRA) and the Australian Taxation Office (ATO)—have responded to the tax administration challenge presented by frequent flyer programmes. The rather disheartening end of the story (in all three countries) is that no significant amount of tax is being collected on frequent flyer benefits, even though the benefits are clearly taxable in theory (at least in the USA and Canada; the legal analysis in Australia is more complicated). Back-of-the-envelope calculations suggest that the forgone tax revenue is significant. One industry expert has estimated that US travellers alone earn as many as three trillion frequent flyer points each year.1 If the points are valued at one cent per mile,2 three trillion points are worth $30 billion. Even in theory, not all points are taxable. Points generated by personal consumption expenditures—most significantly, by personal travel and by charging personal expenses (of any sort) on a credit card awarding points based on dollars charged to the card—are not includible in gross income.3 If roughly half of all points are earned by air travel,4 and if about 40 per cent of air travel is for business,5 then the taxable points generated by air travel of US travellers should be roughly 600 billion annually, with a value of about $6 billion. Assuming that value would be taxed, on average, at the rate of 25 per cent, the annual federal income tax revenue lost by the failure of the IRS to enforce the taxation of frequent flyer benefits is in the neighbourhood of $1.5 billion. The revenue significance of the de facto tax-exempt status of frequent flyer benefits is similar to that of a number of well-known legislatively authorized tax expenditures, including the deferral of gain on like-kind exchanges, the exclusion of damages received on account of personal physical injuries or sickness and the exclusion of meals and lodging furnished on an employer’s business premises for the convenience of the employer.6

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