Why Are Miles Seen as a Taxable Benefit?

Dear Tim

Dear Dave

,

The surcharge for earning miles for car rentals isn't because they're taxable to the consumer. Rather it's because the car rental companies pay a 7.5 percent federal excise tax on those miles when they purchase them from the airline programs in which they participate. And the mileage surcharge assessed by the rental car companies is supposed to recover that tax. So, for example,

National Car Rental's

terms and conditions include the following: "National collects a Frequent Flyer Tax Recoupment Surcharge to cover the federal tax on the cost of the miles awarded at time of rental."

Since the excise tax applies to all companies that purchase airline miles for use as sales incentives, you might well wonder why the hotel chains, retailers, financial services companies, and other companies that award miles don't impose a similar surcharge. Perhaps they understand, as the rental car companies do not, that there's something fundamentally unseemly about giving with one hand and taking away with the other.

Separately, the IRS has ruled that, in principle, miles earned for business travel and redeemed for leisure travel are effectively income and should be taxed as such. For practical reasons, though, the IRS has declined to pursue the matter and frequent flyer miles earned by consumers are not taxable.