I have just read [% 2486133 | | Should you earn frequent flyer miles for car rentals? %] by Erica Silverstein and I have a follow-up question that is semi-related to the topic of the article.
How is it that frequent flyer miles got defined as a taxable benefit in the first place? I look at frequent flyer miles in a much different way—as a delayed discount or a coupon for a future purchase. When I buy a TV on sale I pay taxes on the sales price paid, not the full price before the sale. When I get my 10th sandwich free at my local sub shop, I don’t pay taxes. How are frequent flyer miles so different? All that is different is the accounting. Can you explain the logic to me and your readers?
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.